NICs Bill in Lords - “Taxing employment makes no sense”, argue opposition peers

The Bill proposes raising employers’ NICs to 15%, lowering the secondary threshold to £5,000, and increasing the employment allowance to £10,500. 

The Liberal Democrats tabled an amendment to the motion to give the Bill a second reading which was rejected by 61 to 46. The amendment read that “while recognising the need to rebuild public services and finances, this House regrets that the Bill risks worsening pressures in the NHS and social care by placing costs on GPs and dentists, social care providers and hospices; increases burdens on small businesses, early years providers, universities and charities; and penalises part-time work, and puts jobs and economic growth at risk”.

On 8 January, the Conservatives forced a vote on the government's motion proposing that the Bill be committed to a Grand Committee, rather than having its committee stage taken on the floor of the House. This was also rejected, albeit narrowly. Brief exchanges from that debate can be found below.

National Insurance Contributions (Secondary Class 1 Contributions) Bill Debate - 6 January 2025
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The Financial Secretary to the Treasury, Lord Livermore, began the debate by asserting that Labour has kept its manifesto commitments by not increasing taxes for working people; however, it has taken very ‘difficult’ decisions on spending, welfare and tax to rebuild public services. He recognised concerns raised about the wider economic consequences of the measure, but noted that the Office for Budget Responsibility (OBR) expects the Budget will increase the size of the economy in the long term.

Baroness Kramer (Lib Dem Treasury spokesperson) believed the government has taken a ‘wrong’ approach in hiking employer’s national insurance contributions (NICs) to fill the funding gap and suggested many sectors including small businesses, childcare providers, GP surgeries and pharmacists will be “badly injured” by the increase. She said: “Surely the Government must recognise that the knock-on effects will undermine their ambitions to revive the NHS”.

Baroness Neville-Rolfe (Con) considered the government’s business-related measures in the Budget, including the NICs rise, ‘negative’, and cited the British Chambers of Commerce that suggests more than half of firms are planning to raise their prices in response to tax hikes. She invited the Liberal Democrats to join the Conservatives in opposing the Bill’s committal to Grand Committee, saying: “The Floor of the House is the revising Chamber that can be relied on to delve into vital detail and the perverse effects of such legislation. There is huge concern across the country and we should be debating this Bill, which can be amended—unlike money Bills—in Committee in this Chamber”.

Raising concerns for the hospitality and retail sectors, the Baroness also believed the measure would “risk more insolvencies and empty shops on the high street”. Referencing the OBR, she argued that the national insurance change will reduce labour supply by 0.2% and urged the government to update the members with their latest view of the policy impact.

Lord Macpherson of Earl’s Court (Crossbench), former Permanent Secretary to the Treasury, would have preferred to see the government increase income tax or VAT instead, saying: “It is much better to raise a large tax a little than lots of small taxes a lot”. While suggesting that the Budget did not go ‘far enough’ to stabilise the public finances, he raised concern about the impact of the tax increase too.

The Crossbench peer set out his thoughts on how national insurance could develop in the future, offering four suggestions. First he argued that NI rates are “too high” and income tax rates “too low” which, he thought, disproportionately benefits rentiers and capitalists at the expense of the workers. Second, “if governments remain determined to keep income tax and national insurance separate… it is anomalous that national insurance is not chargeable on interest income, dividends or rents. It is also anomalous that employees cease to pay national insurance at pension age.”

Next, Lord Macpherson noted the lower NI rates paid by the self-employed: “There may have been some logic for the self-employed paying lower national insurance when we still had income-related benefits to which they were not entitled, but those days are very long gone”. He warned that the government’s decision not to increase self-employed NI rates could encourage workers to find ways of ‘recasting’ their employees as self-employed. He asked the Financial Secretary about the steps the government is taking to prevent this. Finally he encouraged the government to consider a health and social care levy paid by employees, employers and the self-employed.

Citing HMRC’s estimates, Lord Forsyth of Drumlean (Con) suggested that 940,000 businesses will lose an average of £800 per employee “at a time when the economy is stagnant”. He agreed with Lord Macpherson about merging income tax and national insurance, adding that the tax commission that he chaired for George Osborne in 2006 also recommended this. 

“If you tax something, it is usually because you want less of it. Taxing employment makes no sense at all. If you want to tax something and to look at other sources of revenue, deal with the unfair competition from Amazon and other online retailers with our high street retailers”, stated Lord Forsyth.

The Lord Bishop of Southwark urged the government to consider an ‘emergency’ grant to local authorities for the fiscal year 2025-26 to address shortfalls arising from the increased costs to the SEND (special educational needs and disability) transport sector. He argued that many drivers and passenger assistants who support children with special needs are working part-time and their employment will be ‘caught’ by the provisions of this Bill for the first time.

Lord Eatwell (Lab) applauded the government for choosing a taxation strategy that will “enhance the efficient use of labour and produce vital increases in productivity”. He claimed that, according to the OBR, firms will pass most of their higher costs to employees, leaving 24% of the cost to be ‘borne’ by employers. He added that combined with new employment rights and a higher minimum wage, the increase in employers’ NI will encourage investment in training and equipment and boost productivity.

Similarly, Baroness O'Grady of Upper Holloway (Lab), a former TUC general secretary, suggested businesses can ‘absorb’ the increase by raising productivity and investing in new skills and technology.

Lord Frost (Con) emphasised the need for more simplicity in the tax system, and argued against tax increases: “The last thing we need is more taxation”. He acknowledged the huge strain on the public services, but believed the solution is to “get the boot off the private sector and allow it to generate wealth”.

Baroness Noakes (Con), a former ICAEW President, described the NICs policy as “highly regressive”, quoting Institute of Fiscal Studies analysis showing that the policy disproportionately impacts employing people at the bottom end of the wage scale. She said: “The NI changes mean that the cost of employing somebody on the minimum wage will rise by 3.2%, compared with 2.5% for those on median wages and 1.8% for those earning twice the median wage”. She provided a Centre for Policy Studies calculation that the tax burden on labour (known as the tax wedge) for someone on the minimum wage will rise to 21.3%.

Many peers warned of the impact of the NICs increase on particular employers. Lord Scriven (Lib Dem) urged the government to provide an exemption for sectors including GPs, hospices and care providers. Baroness Sater (Con) voiced concern about the NIC's increase for the charity sector urging the government to reimburse or exempt the sector. Lord Udny-Lister (Con) believed the increase would further put pressure on local authorities which are already underfunded.

Baroness Moyo (Non-Affiliated) believed that the measure requires urgent reconsideration for several reasons. She claimed that the increase risks harming job creation and adds “inflationary pressure”, as well as sending a negative signal to private sector investors and businesses. 

Another Conservative peer, Baroness Bray of Coln cited the Chartered Institute of Taxation’s concerns that the NICs rise may lead businesses to turn to alternative employment models such as outsourcing, offshoring or increasing reliance on self-employed contractors.

Baroness Bennett of Manor Castle (Green) supported the Liberal Democrats' amendment and said that the increase in NICs will lead to “stalled real wage growth and higher prices” for workers and incur additional costs for the public and third sectors. She suggested that the government could instead introduce a wealth tax or equalise capital gains tax with income tax.

Lord Mackinlay of Richborough (Con), a chartered tax adviser making his second speech since taking a seat in the House of Lords last October, considered paternity and maternity benefits, linked to NIC contributions, among its few direct advantages, saying: “Beyond that, it has become just A N Other tax, just part of the tax pool. To call it anything else is, I think, disingenuous.”

He expressed concern about the tax gap, saying there were ‘lots of places’ where it could be tackled. He especially highlighted issues with cash businesses where potential fraud occurs through underreporting sales, profits and wages, resulting in lost VAT, income tax and national insurance contributions.

Lord Mackinlay concluded his remarks by saying: “We have a tax code that is becoming more complex and rates that are becoming excessive, and that will mean that behaviour will go against tax collection. But then, this Cabinet has never run a business, so I am not surprised that it has reached for this, the worst of the tax levers.”

Lord Londesborough (Crossbench), a former entrepreneur, claimed that the NIC increase could reduce pay increases and bonuses and decrease working hours for part-time staff in sectors such as hospitality and retail - leading to a slow rate of job creation. 

Disapproving of the increase, Lord Altrincham (Con) asked if the minister could confirm that there will be no need to raise tax further this year.

Viscount Trenchard (Con) was a second peer to cite the CIOT, arguing that due to the changes employers will seek to secure the services of workers by contracting them on a self-employed basis rather than as employees. He suggested that this would increase ‘false’ self-employment.

“Over the past 18 months or so, while doing research for a book I have been writing, I have studied the available literature on the impact of taxes on economic growth,” stated Lord Moynihan of Chelsea (Con). “The clear consensus is that the taxes that hit the economy the worst are taxes on business and the business taxes that have the most negative impact on employment are—surprise, surprise—employment taxes.”

To the contrary, Lord Layard (Lab) suggested that the Bill is both ‘necessary’ and ‘desirable’ and referenced findings that “at a given level of income, high-tax countries are happier than those with lower tax”. He gave the Nordic countries as an example of the former. He continued: “But, even if you leave them out, high-tax countries are no less happy than low-tax countries with the same income”.

Replying to the debate, Lord Livermore acknowledged that the Bill would require some employers to contribute more. On the impact assessment, the FST responded that the tax information and impact note was published on 13 November. The latest forecasts for tax revenues were also published alongside the Office for Budget Responsibility’s October Economic and Fiscal Outlook. 

In response to the suggestion of combining income tax and NI he said that the government has no plan to do so. In response to concerns about the impact on public sector employers he said that the government has set aside funding to protect the spending powers of the public sector and will provide a real-term increase in core local government spending powers in 2025-26.

Defending the government’s decision to raise employer NICs, he argued that, in contrast to the previous government’s choice to freeze income tax thresholds, Labour has protected “working people” and kept their manifesto commitments not to raise their income tax, their national insurance or VAT. 

Debate on motion that the bill be committed to a Grand Committee - 8 January 2025
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The minister, Lord Livermore, stressed that the government believes that Grand Committee is the most suitable and efficient choice for this Bill to be scrutinised: “Every national insurance contributions Bill since 2006 that has not been fast tracked has been considered in Grand Committee. The Grand Committee has proven to be entirely capable of providing the detailed scrutiny that a Bill such as this requires… This Bill, while significant, follows the same technical nature, and the government believe that there is no reason for treating it differently from its predecessors.”

Baroness Williams of Trafford, for the Conservatives, said she was surprised that this Bill which is the “concern of millions of people around the country”, should be given “less prominence than consideration on the Floor of your Lordships’ House”.

Baroness Kramer (Lib Dem) said: “Disputing where Committee stage is debated is very much a second-order issue, especially when, to make progress on the substance, we will have to try to find some common ground”. She argued that, under the previous Conservative government, significant Bills were debated in the Grand Committee without opposition and a change in government is no ‘reason’ to oppose it now, therefore the Liberal Democrats would support the government.

The Conservative amendment was disagreed to by 228 to 226 and the government’s motion agreed.

The Bill will now be debated in Grand Committee. Amendments cannot be voted on in Grand Committee but can be divided on when the Bill returns to the floor of the House at Report Stage.