Unhappy peers rail against ‘crazy’ National insurance increase

The Levy will be introduced in two stages:

• In 2022/23 the rate of primary Class 1 NICs for employees charged on their earnings, the rate of secondary Class 1 NICs for employers charged on their employees’ earnings, and the rate of Class 4 NICs for the self-employed charged on their trading profits, will be increased by 1.25 percentage points.
• In 2023/24 a separate levy set at 1.25 will be introduced, replacing this temporary increase in NICs rates. Liability to the levy will be extended to individuals in employment who are over State Pension age. At present pensioners are not liable to pay NICs on any earnings they receive from employment.

The Health and Social Care Levy Bill would provide for the temporary increase in NICs rates for 2022/23, and their replacement with the levy from April 2023. The Bill also makes provision for the Treasury to determine the allocation of the receipts from the levy between health care and social care, and the amounts to be split between England, Wales, Scotland and Northern Ireland. NICs is not a devolved tax. The Bill extends and applies to the whole of the UK. The levy is expected to raise an additional £11.4 billion a year for health care and social care, for the next three years.

This report focuses primarily on tax-related comments from the debate, rather than comprising a summary of the debate as a whole. While the Bill passed all Lords stages there was only discussion at second reading.

Conservative speakers (including Treasury Minister)

Treasury Minister Lord Agnew opened second reading debate by telling peers that the Bill will tackle the NHS backlog, put the adult social care system on a sustainable long-term footing and end the situation in which those who need help in their old age ‘risk losing everything to pay for it’. Agnew insisted that all net revenues generated by the temporary increase in NICs rates will be ring-fenced and paid to the NHS before the levy comes in. Existing NICs reliefs and allowances will also apply to the levy.

Agnew claimed 40 per cent of all businesses will not be affected by the tax increase due to the employment allowance. When it comes to individuals, those earning more will pay more: the top 14 per cent of taxpayers will pay around half the revenue raised. Conversely, at least 6.2 million people earning less than the NICs primary threshold will not pay the levy at all. He believes the only alternative would be to ‘borrow indefinitely’ when national debt is the highest in peacetime.

Lord Forsyth of Drumlean, who chairs the House of Lords Economic Affairs Committee, said the Bill will not fix social care but will ‘massively’ increase the regressive nature of the taxation system. Forsyth said this is a missed opportunity to merge NICs with income tax for a ‘simpler, fairer, flatter tax system in our country’. He said: “If you are an average worker on an average wage and are paying the basic rate of income tax at 20 per cent, and you work that little extra to create that extra £1 of value, 20 per cent of that disappears in income tax, 13.25 per cent disappears in national insurance and your employer has to give up 15.05 per cent. In other words, 48.3 per cent of every £1 disappears—and we wonder why our productivity is low when those are the incentives? I do not believe that NICs was the right tax to use to achieve the purpose that the Government intend.”

Lord Hannan of Kingsclere also argued for merging NICs with income tax. He said it was ‘craziness’ to tax jobs while the economy is trying to recover from COVID-19. He said we should be ‘honest’ and merge NICs with income tax ‘and stop the pretence that it is somehow a hypothecated tax paying for social care’. He said: “Of course, governments will never do that, because they will never admit the amount they are actually taking in income tax – so they pursue the strategy of having lots of little taxes to add up to one big one as a way of disguising the overall tax burden.” And he remarked that it is in the nature of taxes to go up. He said: “So let us be clear what we are talking about; it is going to be a ratchet, where there is constant pressure for higher budgets, higher caps and so on.”

Former health secretary Lord Lansley said the increase would further reinforce “the misplaced belief on the part of the general public that the NHS is funded out of national insurance contributions and it is therefore a contributory tax. The extent of their national insurance contributions has no impact, and should have no impact, on their access to the NHS.” He complained that NICs is a tax on jobs. He remarked that the NHS needs a four per cent per annum increase in real terms to keep pace with demand, but social care is getting nothing like that, but the increase in demand for social care is very like that for the NHS.

Baroness Altmann did not agree with the minister that NICs is an appropriate mechanism for care funding. There will be no contribution from pensioners’ pensions, buy-to-let landlords or capital gains, she said. This hardly spreads the burden widely or fairly across society, she continued, adding that it may be rather better than the current costs falling entirely on those who are so frail or unwell that they cannot look after themselves and do not qualify for NHS help until they have used up most of their savings or assets to get public funding. But it will not stop people selling homes to pay for care. Indeed, if domiciliary care takes home value into account, it will increase the numbers of those who need to pay for care by selling their homes, ‘although I do not believe that is an important yardstick in this debate’.

This NICs change is a regressive tax, which breaks a manifesto commitment and penalises the lowest earners and businesses already struggling to recover from the pandemic, Altmann said. She suggested the Government consider introducing incentives for families to save for future care needs. I do not mean just insurance but actual savings, a tax incentive for those with pensions, such as tax-free withdrawals to keep money earmarked for their later life, in case they need care, and incentives for people to earmark their ISAs for care, she said.

Baroness McIntosh of Pickering said by raising the levy on NICs, the Government is taking money out of care and hospital care. Who are the largest employers in the country at the present time? The NHS and local authorities, she said.

Labour speakers

Shadow Treasury minister Lord Eatwell was worried that this is a ‘grudging and perhaps temporary hypothecation – a temporary uplift in NHS spending sufficient to buy political time as NHS waiting lists reach all-time highs’. Eatwell said he was concerned that basing the levy predominantly on the NICs base rather than any other tax base will solely impact individuals whose income is mainly made up of earnings or profits, as opposed to other forms of income such as property income, pension income or savings. He was also unhappy that the levy does not cover income from buy-to-let properties.

The Labour spokesperson cited HMRC concerns that ‘there may be an impact on family formation, stability or breakdown as individuals, who are currently just about managing financially, will see their disposable income reduce’. He noted the tax authority’s view that behavioural effects are likely to be large, including decisions around whether to incorporate or not, and business decisions around wage bills and recruitment. And he wondered whether it was really a good idea to raise the tax burden to ‘the highest-ever sustained level’ when the economy is struggling to recover from the pandemic?

Lord Hunt of Kings Heath said this was essentially a tax increase on younger and low-paid workers so the wealthy can retain more of the value of their properties to pass on to their children. He said it is a tax on employment that will hit businesses and will not, as yet, solve the underlying pressures in social care.

Lord Lipsey observed: “If we did not have a national insurance contribution system, no one would even think of inventing it. This debate has been a succession of hammer blows to the structure of national insurance, which is not paid on unearned income such as rent, is paid at a higher rate by the poor than by the rich, and is not paid by the elderly, who in this case will be the main beneficiaries. It is a nonsense tax, which makes it odd that even this Government should choose it as their preferred way of funding increased spending on health and social care.”

Lord Whitty objects to the ‘ill-thought-out’ basis of the Bill: “[because of] its misuse and possible distortion of the national insurance system; its regressive burden and unfairness, in terms of its impact on low-paid workers, jobs and the young; its jobs-threatening impositions on employers; and its ambivalence on whether this is a temporary or permanent structure for our taxation system, with its half-baked and probably temporary hypothecation.”

Lord Hain highlighted that the new £86,000 cap on the amount anyone in England will have to spend on their personal care over their lifetime would cover only care costs and not ‘so-called hotel costs’, which may be ‘very, very high’. He said the new levy is simply ‘totally inadequate’ to fund plans necessary to reform adult social care if Britain is to claim to be a civilised society.

Lord Sikka claimed that before the pandemic, the poorest 10 per cent of UK households paid 47.6 per cent of their income in direct and indirect taxes, compared to 33.5 per cent by the richest 10 per cent of households. (NB. While ostensibly the case on ONS figures, this is not all it seems.) This regressive Bill does not provide any relief for the ‘people at the bottom of the pile’.

The peer highlighted that after this tax increase, dividends will be taxed at marginal rates of 8.75 per cent, 33.75 per cent and 39.35 per cent, compared to marginal rates on earned income of 20 per cent, 40 per cent and 45 per cent: “So the tax privileges of the rich continue.” At the same time, those receiving unearned income in the form of capital gains and dividends will pay zero national insurance, because it is not charged on unearned income. He said that by taxing capital gains at the same rates as earned income, the Government could have raised an additional £17 billion a year, plus NICs of £8 billion. By taxing dividends in the same way as earned income, another £5 billion a year in revenue could have been raised, plus the increase in NICs possibly hitting between £600 million and £1 billion.

Lib Dem speakers

Lib Dem health spokesperson Baroness Brinton was concerned that local authorities might well be required to fund support for social care increases via council tax increases of five per cent per annum for three years. That is another deeply regressive tax that puts a very specific burden on the lowest paid in our society, she said. The Baroness said that the 2019 Lib Dem manifesto had proposed raising additional revenue, ring-fenced to be spent only on NHS and social care services, through income tax. This would be generated from a 1p rise in the basic, higher and additional rates of income tax.

Baroness Tyler of Enfield welcomed the fact that the levy will be payable on dividends and pension earnings, ‘which is a step forward’, but said there is no getting away from the fact that this tax will impact hardest the lowest earners and youngest, as well as hammering small businesses. She highlighted that increasing national insurance increases the tax gap between employees and the self-employed, and the gap between the tax that people pay on their employment income and the tax that they pay on income from renting out property. She said the Government should raise more from the giants in the digital economy—'the Facebooks and Googles of this world’— so that they can ‘start making a proper contribution to health and social care’.

Lord Shipley called the levy a tax on work, saying it is more regressive than income tax because the rate charged reduces at higher earning levels. Those earning under £967 per week pay national insurance contributions of 12 per cent, but those earning over that level pay only two per cent on earnings. The former leader of Newcastle-upon-Tyne Council said we could not go on imposing high council tax rises year after year to help meet the cost of adult social care: “Council tax rises impact disproportionately on poorer people.” He suggested the Government look at the call made recently by the Housing, Communities and Local Government Committee in the House of Commons to look at a proportional property tax to replace council tax and business rates.

Baroness Kramer, the party’s Treasury spokesperson in the Lords, remarked that one of the reasons the party have gone in the direction of a hypothecated tax is to ‘keep the Treasury’s sticky fingers off the additional money’. She complained that the Government talk constantly about levelling up, but they plan to put a tax on those with the lowest incomes, while excluding the sources of income of many of those with the highest incomes. The Government intends to reimburse government departments for the increase in NICs for those whom they employ directly, but many departments, and local government, contract out services. She asked for more details about this, but Lord Agnew said he could not give her a clear answer on that now. More detail will be available in the Budget and the spending review, he said.

Other speakers

Crossbencher Lord Macpherson of Earl’s Court remarked that this is not a forced tax rise of the sort that followed crises in 1976, 1992 and 2009 but a discretionary one. The Government is choosing to spend more, so they are taxing more, he said. The former Treasury permanent secretary said the levy should be paid by everyone, old as well as young, and should be payable on all income. He said housing already receives substantial privileges, which further entrench the bias in favour of property investment over equity investment. He was also concerned that the levy further increases the differential in tax between employees and the self-employed.

Employers’ NICs is a ‘tax on jobs’, said Macpherson. “Tax more employment and you get less of it. That is why Margaret Thatcher abolished the national insurance surcharge in the 1980s.” The Chancellor has announced over £40 billion of tax increases this year and nearly two-thirds of these will be borne by business in the form of high corporation tax and national insurance; this is not the ’business friendly’ approach that we need post-pandemic, he complained.

Green Party peer Baroness Bennett of Manor Castle credited the Liberal Democrats in the House of Commons for uncovering that NHS and social care workers will be paying 12 per cent of the £7.4 billion expected to be raised from employees through the tax — £900 million. That does not include self-employed healthcare workers and social care workers, so the real figure is even higher — call it £1 billion, she said. These are often low-paid workers, carers and nurses, far too many of whom we regularly hear are dependent on food banks to feed themselves. They are having money taken from them so that possibly a little more money goes into the system, said Baroness Bennett.

Bennett cited the Green Party manifesto of 2019, which calls for merger of employee NICs, capital gains tax, inheritance tax, dividend tax and income tax into a single consolidated income tax, with all income treated the same way for tax purposes. This would end the injustice of people who work for their income being taxed more lightly than those whose income is derived from wealth, frequently arrived at by accident of birth or blind luck, she said.

Lord Desai, a non-affiliated peer, said: “Houses are a very good investment because you have an unrealised capital gain. My question is: how do you tax unrealised capital gains? That is the essence of the problem: making sure that people do not have to sell their house but pay part of its unrealised capital gain.”

The Lord Bishop of Carlisle said there are real questions about whether the funding allocated will be enough and whether this hypothecation will last.

Ministerial response

Closing the debate for the Government, Lord Agnew of Oulton said we need a broad-based tax, such as income tax, VAT or national insurance, to raise the sums needed for such a significant investment. The NICs system already directs a ring-fenced proportion of receipts to the NHS. He could not offer a ‘cast-iron’ guarantee that the hypothecation will remain in perpetuity. This also ensures that businesses contribute to the NHS, which is fair and reasonable, because they need a workforce that benefits from the NHS, he argued. Lastly, NICs apply on a UK-wide basis, he said.

Noting that some Lords asked about intergenerational fairness, the minister said that if we were to raise the sums required just for (he presumably meant ‘from’) those over 40, the levy would need to be 60 per cent higher, at around two per cent. This would be a much larger burden on working people. Furthermore, around half of all the funding raised by the levy will go towards health and social care services that benefit working-age people. Lower-income households will be large net beneficiaries from the package, with the poorest households gaining the most as a proportion of income. He said this is a permanent increase in taxation for a permanent challenge.

Agnew could not give Lord Hunt an estimate of how much a person would really have to spend before they reach the £86,000 cap, saying more detail will be set out in the Budget and spending review in the next two or three weeks.

Agnew closed the debated by claiming: “The reality is that the highest-paid in this country are paying the largest contribution to this tax and indeed PAYE itself. I accept entirely what he says about the impact being disproportionately greater on poorer people, but that is why we have designed the structure to protect as many people as possible. As I mentioned in my opening comments, some six million people will not be subject to this at all, and we have kept 40 per cent of smaller businesses out of it. Those on higher earnings will pay a lot more, and that is an important principle.”

The Bill passed its second and third readings without a vote.

The full session is here.

By Hamant Verma, CIOT's Senior External Relations Officer