Peers pass levy axing bill – but now what, they ask?

Interestingly, this bill repeals a key policy of then-Chancellor Rishi Sunak yet all eyes are now on Sunak as a potential replacement for outgoing PM Liz Truss – so it is not beyond possibility (though unlikely) that this repeal Bill could itself be repealed. But as of today, the expectation is that the levy will be axed.

The Act implemented two measures: a temporary 1.25 per cent national insurance (NI) increase for employers and employees in the current tax year; and then from April 2023 a new Health and Social Care Levy of 1.25 per cent on earnings, which would have affected not just those of working age but also those of state pension age. The Bill repeals that Act, with the reversal of the temporary NI increase taking effect on 6 November.

The Bill does not reverse the increase in the rate of tax on dividend income which accompanied the year’s NI rise. This increase is to be retained by the Government. The Bill also does not affect NI thresholds.

Second reading debate

Government spokesperson Viscount Younger of Leckie said it is right to reverse the levy ‘given the financial pressure on households’ and overall funding for health and social care services will be maintained at the same level as if the levy were in place. Viscount Younger said reversing the levy delivers a tax cut for 28 million people worth, on average, £330 every year. It also delivers a tax cut for nearly a million businesses, he claims.

Lib Dem Baroness Brinton, who is a vice-president of the Local Government Association, said ‘the words and the figures do not agree’ when Viscount Younger claims overall funding for health and social care services will be maintained at the same level as if the levy were in place, suggesting smoke and mirrors in the funding of the new Adult Social Care Fund.

Labour’s Lord Sikka wonders whether the promise of the same funding as if the levy was in place means the investment or funding will be the same in real terms or just nominal terms. Sikka also wants no more austerity measures for the NHS. The peer made a sideways point that at the end of 2021, the EU divorce bill stood at £36.7 billion (that was after paying £10 billion in 2020). Despite ministers telling us at the time of the Brexit referendum that vast amounts would be saved by coming out of the EU and that this would boost the NHS, he said.

Sikka said no evidence has been provided to support the view that the repeal of this levy will ‘somehow promote growth’. It is wrong that the poorest tenth of the population will gain just £7.66 a year, the second-poorest tenth will gain £37.36, yet the richest tenth will gain £1,802 a year from the repeal of this levy. In a scathing attack, the peer said the gains to the poorest have already been wiped out by government-engineered inflation, wage freezes, higher energy, food and water bills, and higher mortgage charges and rental costs. And let us not forget the stealth taxes that the Government have imposed by freezing personal allowances and income tax thresholds, he added. He closed his contribution by saying ‘the recipients of dividends and capital gains, generally the richest in the country, use the National Health Service and social care but will pay zero national insurance’.

Looking at the context of the levy Crossbencher – and former Treasury Permanent Secretary -  Lord Macpherson of Earl’s Court highlighted the OBR’s Fiscal Risks and Sustainability published in July 2022 that shows health and social care projections rising from 9.7 per cent of national income in 2026 to 10.2 per cent in 2031, to 11.9 per cent in 2041 and to 13.7 per cent in 2051. At the same time much of the tax base is eroding, which makes him conclude that ‘in the end the best way of raising revenues is to rely on the big taxes: income tax, national insurance and VAT’. He said: “We can all fantasise about getting more tax from the rich, and I certainly support having a go at that, but actually it needs to come from the taxes that everybody pays.” With this in mind, he finds it ‘inevitable’ that the health and social care levy will be resuscitated at some point but he would like it based on the income tax base and not the national insurance base, for fairness reasons. He said the whole issue would be made much simpler if national insurance and income tax were fully integrated.

The Lord Bishop of London also wondered if the recently announced £500 million for the health plan for patients is additional funding, or will it be absorbed into the cost of maintaining the level of spending in the department after cutting this levy.

Lord Lipsey, Labour, wonders what will happen to the Government’s scheme to introduce a cap on what individuals must pay for social care.  Lipsey is no fan of the cap, worrying it is a simple way of taking money from the poor and giving it to the rich.

Although no fan of the levy, Baroness Bennett of Manor Castle, Green Party, said we have an extraordinarily parlous state of public health as huge numbers of people, particularly those over 50, are unable to take paid employment, even though they wish to, because of their health conditions. If we do not provide funding for the NHS and social care, that situation will surely only worsen, she warns.

Lord Davies of Brixton, Labour, said either you make social care an integral part of national insurance or it is paid for by a separate social care tax, which could be spread more widely on the tax base.

Baroness Kramer (photographed below), Lib Dem, said this levy is now so complicated, confusing and different from standard national insurance, and yet still remains less progressive than normal income tax. Kramer said the levy was a rather cynical strategy to find a more palatable way of taxing, tugging at the heartstrings of our affection for the NHS and social care.

Lord Tunnicliffe, Labour, said peers should back this Bill because it will put money back into the pockets of working people, at a time when they need it most. The peer also took aim at the Government for refusing to reform GPs’ prohibitive pension arrangements and wondering why they opt not to return to the profession or commit to extra hours.

Viscount Younger of Leckie closed the debate by answering the query of many peers about the amount that the Treasury has set aside in place of the levy. It will be in cash or nominal terms, he said. This is because the budgets were announced last year at the spending review and are now fixed on that basis until 2024-25, he said. On whether an alternative rise in income tax would have been better, the Viscount said the tax cut is designed to support people and businesses. On Lady Brinton’s point as to why we are not increasing spending on health and social care, he said that the Government is committed to taking a responsible and disciplined approach to spending.

And on Sikka’s point as to why the additional rate of NI is so low and why it is not a progressive tax, Younger said the personal allowance is set at £12,570 this year, with income tax rates increasing from 20 per cent to 40 per cent for earnings above £50,270 per year - which is the higher rate threshold - and to 45 per cent for earnings above £150,000 per year. After the levy is reversed, employee NI rates will decrease to 12 per cent, and to two per cent for earnings above £50,270 per year. Taking NI and income tax together, this means an overall progressive rate structure of 32 per cent, and then 42 per cent. Sikka replied that the rich are sitting on a bigger share of income, which is why they pay more.

Younger said unearned income is generally excluded from liability for NI as it is not derived from paid employment. But Sikka says at least 20 per cent of NI contributions go to fund the NHS. People who are enjoying unearned income in the form of capital gains and dividends use the National Health Service too, but they are paying zero, said Sikka.

The full session is here.

By Hamant Verma, CIOT Senior External Relations Officer