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Mr. Field: We have had a hypothetical debate about the abolition of the upper earnings limit, but there is a slightly more relevant and recent point and it would be interesting to have an idea of how the Government would treat the issue. Four or five years ago the decision was made to invest in the national health service and it was decided that there should therefore be an increase of 1 per cent. right the way through national insurance, effectively abolishing the upper earnings limit in respect of that 1 per cent. additional element. Will my hon.
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Friend say what safeguards were put into place then and how they might differ if the Government get their way in the Bill?

Mr. Gauke: My hon. Friend makes an interesting point, which leads me to this observation. I will not dwell on the point, but a certain Labour Government had been elected on a pledge that they would not increase the rates of income tax. They then increased national insurance contributions and said, “Well, that’s not income tax.” Given that precedent, if at a future election a party—it could be either party—made a pledge not to increase income tax, could anything stop it increasing national insurance contributions above the upper earnings limit or abolishing the limit? That is an interesting point, which relates back to what my hon. Friend the Member for Gosport (Peter Viggers) said. There is a suspicion that a door is being left open. We know from yesterday’s Institute for Fiscal Studies report that the Government’s public finances are in a mess; there is an £8 billion black hole.

Madam Deputy Speaker (Sylvia Heal): Order. I hope that the hon. Gentleman will not stray far into that report.

Mr. Gauke: I am grateful, Madam Deputy Speaker; I think that I probably said what I wanted to say. Clearly, there is a concern about public finances, and in such circumstances suspicions may grow.

I should also say—I assure you that I will make this point very briefly, Madam Deputy Speaker—that although the Government have made a commitment not to increase the upper earnings limit above the point at which higher rate income tax is payable, they also made a commitment at the last general election to have a referendum on the European constitution.

Mr. Field: You will be glad to know, Madam Deputy Speaker, that I am not going to respond to that point.

The issue is not whether there are commitments, important though they are against the backdrop of a general election and thereafter, but whether there is a proper means of scrutiny on the Floor of this House instead of necessarily going upstairs into Committee. Will my hon. Friend confirm that the risk of going down the route proposed by the Government is that we will not have the opportunity for scrutiny that we have had in the past in relation to changes in the national insurance regime?

Mr. Gauke: My hon. Friend is being very helpful. That is exactly the issue. I do not particularly want to debate the rights and wrongs of abolishing the upper earnings limit—nor, I suspect, is it in order to do so—but if that were to happen, or even if it were merely to be increased substantially, would the House have the opportunity to scrutinise it properly? We have such an opportunity under the existing legislative framework, but we will not if the Bill is passed in its current form. That is an important point. I stress that we object not to Parliament’s ability to change the upper earnings limit—of course Parliament should have the right to do that—but to its not being able to do so by regulation, even by the affirmative procedure.

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We have set out two alternative approaches—they do not run together—for ensuring the scrutiny that we want. In amendment No. 8—which is mirrored by amendment No. 9 because we need to change two Acts in this process, one relating to England, Scotland and Wales and one relating to Northern Ireland—we suggest that there should be no increase in the upper earnings limit in excess of the retail prices index in September of the previous year. When we tabled a similar amendment in Committee, the Financial Secretary said that the reference date for national insurance contributions is December, not September, so we have rectified that error. She also said that December was not feasible because it would cause various IT costs and so on. That was essentially her argument against the link with the RPI. This is similar to the Rooker-Wise approach whereby thresholds for income tax increase in line with the RPI for September in the previous year. If the higher rate income tax threshold rises along with inflation, based on the RPI in September, and the upper earnings limit rises along with inflation using the same measure, they should continue to go hand in hand, which would enable the Government to fulfil their objectives.

Neither of our sets of amendments aims to prevent the Government from achieving their stated policy objective of aligning the point at which the upper earnings limit exists and the point at which one starts paying higher rate income tax. The Financial Secretary might argue that they do not quite reflect the provisions that relate to income tax and the Rooker-Wise amendment. If so, would she object to the principle of the amendments, given that her objection to the equivalent amendment in Committee was essentially that December was the wrong date and that it should be September? Now that we have rectified that problem, does she have any objections to the amendment?

The wording of amendment No. 10 is replicated in amendment No. 11. Depending on what the Financial Secretary says, we might well press amendment No. 10 to a Division. We might press for a vote on amendment No. 8, too, but I will wait to hear what she says before reaching any conclusions.

Amendment No. 10 is a development of an amendment that we tabled in Committee to probe the Government. At that point, we proposed to allow the upper earnings limit to be increased as long as it did not exceed the level at which higher rate income tax becomes payable.

The Financial Secretary advanced two arguments—two technical points—about why that would not work. The first was that national insurance contributions are calculated weekly whereas income tax is calculated annually. She construed our amendment—possibly a little harshly, but I concede that there was an ambiguity in it—as meaning that the relevant income tax level of, for example, £43,000 a year would be treated as a weekly limit. That was not our intention, and I believe that we have ended any ambiguity on that point.

I concede fully the right hon. Lady’s second objection, which was that national insurance contributions are determined by regulation before the beginning of a tax year. Income tax is not formally determined until the
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Finance Bill is enacted. Our proposal in Committee that the national insurance contribution upper earnings limit should not be raised above the point at which higher rate income tax becomes payable did not work because at the point where a regulation would have to be passed the Finance Bill would not have already gone through, even though an announcement would have been made in the Budget and there may be Budget resolutions.

We accept that argument, which is why we have come back with a different solution. It is not the most elegant piece of drafting that has ever come before the House, but it attempts to address in good faith an entirely legitimate concern. We propose that within six months of the regulation setting the upper earnings limit—in other words, six months into the financial year—the Treasury will be required to review whether the upper earnings limit is above the level at which higher rate income tax is payable. If it is, we would then require the Treasury to bring forward regulations to reduce the upper earnings limit below the higher rate of income tax as existed at that time for the following year.

That proposal would cause considerable inconvenience to the Treasury, and I make no apologies for that. The purpose of the amendment is to provide a deterrent to prevent any Government from activating the mischief to which I referred earlier. A Government would be able to raise the upper earnings limit through primary legislation, but if the limit were increased by regulation higher than the Government said that they intended, they would have to go through the embarrassment of producing a further order stating that they were wrong and that the upper earnings limit would be brought down the following year.

The Financial Secretary to the Treasury (Jane Kennedy): The hon. Gentleman is making a thoughtful speech and I am listening carefully to his suggestions. Does he accept that a review is already conducted in the late summer or early autumn in the form of the pre-Budget report?

3 pm

Mr. Gauke: I accept that a review takes place. However, amendments Nos. 10 and 11 deal with circumstances in which a Government raise the upper earnings limit with intent, not accidentally. One can imagine a meeting in the Treasury around this time of year in which the view is expressed. “We need to raise a bit more revenue—how are we going to do it?” Someone then comes up with the bright idea of increasing the upper earnings limit. An investigation takes place to ascertain how that can be achieved and what is to prevent it from being done through regulation.

Until now, the ratio to which I referred earlier prevented that, but, in future, that protection will not exist. Someone could therefore say, “Let’s bung up the upper earnings limit from £43,000 to £50,000 or £60,000 and we’ll get the extra revenue.” If the amendments were accepted, and Ministers and officials considered that proposal, another bright spark in the Treasury—where there are many bright sparks—would say, “Hold on. We’ll have to go through the review in early October and introduce a further regulation,
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which means that, next year, the upper earnings limit will be reduced.” That would be an uncomfortable experience.

The amendments would be effective if an error or a misalignment by a small amount occurred, but they apply mainly in the case of a brazen breach of a commitment made by Government. As I have said, they would not be binding for ever, but they would cause some inconvenience that should dissuade a Government from taking a path that hon. Members of all parties do not believe any Government should follow. That is the essence of our case. I stress again that it would not prevent the upper earnings limit from being changed, but it stops that happening by regulation and inadequately.

Let us make a comparison with income tax, which is similar to national insurance contributions. We know from the evidence-taking session that the Government have no proposals to merge them. We all acknowledge that there are great similarities between them, but a comparison of the parliamentary scrutiny that both get shows that national insurance contributions already get substantially less consideration. That will be reinforced if the Bill is passed in its current form. Our amendments attempt to rectify the problem to some extent and without jeopardising the Government’s stated objectives.

We offer two alternative routes. Unless some mechanism is put in place—restoration of the ratio or either of the two amendments—the Bill will be dangerous and leave our taxation system open to abuse from a Government, whether the current one or a future Administration. We will therefore press one of the amendments to a Division, depending on the Financial Secretary’s comments.

Mr. Jeremy Browne (Taunton) (LD): I am grateful for an opportunity to speak briefly in the debate because there is a reasonable amount of consensus, which is perhaps reflected in the absence of a fevered atmosphere in the House.

My party supports the overall principle of simplification in the tax system. We regret, however, that the simplification has been given something of a bad name by the proposals before us, because it has been achieved as a by-product of an increase in overall tax revenue of about £1.5 billion. The public respond well to the idea of being better able to understand the tax burden that is placed on them, but not when a degree of sleight of hand is deployed to relieve them of some of their income in the process. The Budget left millions of losers: more than 5 million people were net losers. I always object when people talk about the abolition of the 10p rate of income tax. In my view, the 10p rate was not abolished; it was doubled in the budgetary proposals. That is the context in which we are having this conversation today.

National insurance is, in the view of most people who look at their payslips, to all intents and purposes a different form of income tax. We can debate at great length why it is different because of how it is calculated and when it is collected, but when people look at the total amount of their pay before taxation, I think that most would agree that the two amounts taken off at the bottom of their payslip have a broadly similar effect.

The 7.5 per cent. multiplier acts as a useful restraint on the Government and perhaps prevents some sleights
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of hand—or, to go a bit further, potential abuses—that might otherwise take place. The view that I took in Committee, and continue to take today, is that removing that multiplier at the upper limit—the 6.5 to 7.5 per cent. band—will present certain hazards of which we should be mindful. The hon. Member for South-West Hertfordshire (Mr. Gauke) ran through them for our benefit this afternoon.

The hon. Gentleman has effectively tabled two amendments on this matter. Amendment No. 8, which links the increases to the rate of inflation, is the better of the two, and my party would be minded to support it for the reasons that he gave, and because we wish to see proper scrutiny and some restraint placed on this Government and future Governments in this regard. I understand the motivation behind amendment No. 10, but I am perhaps slightly less optimistic than he is about the effectiveness of a process that would involve the Treasury conducting a review of itself before taking any action. My inclination is to believe that such a review would conclude what those who had set up the review wished it to conclude, at its inception.

Mr. Gauke: I should like to make a point in defence of amendment No. 10. Does the hon. Gentleman agree that it is a question of fact—I believe that there is sufficient certainty for this to be practical—whether the upper earnings limit exceeds the point at which higher rate income tax becomes payable? If that were simply a question of fact, and not one of interpretation, it would be unfair to suggest that the Treasury would not look at the matter with complete integrity. This is therefore a test that has sufficient certainty at the very least. This is not a complicated matter; it is a question of doing some sums. Given that we should set the requirement that the Treasury do the sums, I am confident that it would come back with the correct answer.

Mr. Browne: I am genuinely grateful—I am not merely expressing the customary courtesy of the House—to the hon. Gentleman for that intervention. It was most useful. I take his point that, if we were measuring something that was a matter of fact—a number—the review would have much less scope for flexible interpretation.

The hon. Gentleman was good enough to refer earlier to a comment that I made in Committee—that if the Government of the day wanted greater flexibility at the top of the range, they could achieve that by increasing the number at the bottom of the range. The 7.5 per cent. multiplier would therefore go higher up the scale, if one wished to see it in those terms. I regret that the Government are seeking extra leeway in regard to placing a tax burden on people earning about £40,000, but not seeking to establish a corresponding loosening of the tax burden on those at the lower end of the scale who would benefit the most from being able to spend a greater proportion of their own money as they saw fit.

That said, I do not think that this Bill is the most controversial item of legislation that we will consider in this Session of Parliament— [Interruption.]—or even this week. It is worth scrutinising properly, however. We looked at it in detail in Committee and I continue to take the view that, although the Government are not
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seeking to abuse their position, the safeguards in the amendments provide a useful way of ensuring that that remains the case in the future as well.

Peter Viggers: The attitude of the hon. Member for Taunton (Mr. Browne) to the Bill is fairly friendly, but mine is not. I believe it to be a nasty little Bill, whose effect will be to impose taxation of £1.5 billion on those earning between £37,000 and £43,000. It was introduced as an afterthought—or rather to give the appearance of being an afterthought—to the Budget. The amendments so ably spoken to by my hon. Friend the Member for South-West Hertfordshire (Mr. Gauke) would be effective in helping in one way, but the main thrust of the damage will remain.

Mr. Browne: To clarify my earlier point, one may or may not believe that the changes in taxation are objectionable—I happen to think that there is some sense in not having a huge dip in the marginal rates of someone earning £38,000; the rates are more advantageous than for someone earning £28,000—as one can legitimately debate them. However, I was saying that the Bill to enable the Government to make those changes is not necessarily as objectionable as the hon. Gentleman might find the changes themselves.

Peter Viggers: Indeed, but for this Government, harmonisation is always harmonisation up in respect of taxation rather than harmonisation down or evenly.

The origin of the lower and upper earnings limit and the six and a half and seven and a half multiple limit on the size of the UEL lies, of course, as my hon. Friend the Member for South-West Hertfordshire pointed out, in the transition from national insurance contributions to an earnings-related contributory system in the mid-1970s. When national insurance contributions were first introduced in 1911, they were flat rate and continued to be so until world war two, although they were varied by age and sex. Partially earnings-linked graduated contributions were added to the structure in 1961, but it was not until 1975, as my hon. Friend said, that national insurance contributions became fully related to earnings. As part of that reform, lower and upper earnings limits for contributions liability were introduced.

A lower limit was required for practical and administrative reasons and to concentrate contributions and benefits on people who depended substantially on income from work. The lower limit was linked to the level of the basic retirement pension and an upper limit was required to prevent excessive burdens and the acquisition of very high benefit entitlements. Those limits had been set in statute and considerable thought was given to them, as my hon. Friend noted, in the 1975 legislation. At that time, the Government deliberately set themselves a longer-term framework within which national insurance contributions were to be levied.

The press notice put out by the Treasury at the time of the Budget is worth citing:

which is, of course, what we are facing now. It continues:

By setting a framework that made it necessary for the Government to come back to the House with primary legislation before raising the national insurance contributions upper earnings limit, the Government deliberately set themselves a structure that would be self-inhibiting in preventing them from raising taxes lightly—because national insurance contributions are indeed a tax.

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