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My hon. Friend has pointed out the deliberately cumbersome legislative programme that would be necessary were the seven and a half times limit to be broken. For us to agree, as the legislation proposes, that it should be possible for the Government to come back by way of affirmative resolution would make it so much easier for them to increase the burden of taxation on individuals in this country.
The amendments proposed by my hon. Friendof those, I prefer amendment No. 8are well judged. Amendment No. 10 would oblige the Treasury to audit its own procedures, which might introduce a rod for its own back, had it not fulfilled the requirements of those procedures. I do not share my hon. Friends confidence that the Treasury could do that and create, as it were, a burden for itself. I much prefer amendment No. 8, which I strongly support.
Jane Kennedy: I thank the hon. Member for South-West Hertfordshire (Mr. Gauke) for tabling the amendments. I also compliment the House business managers, who arranged for this debate to take place after the debate on Holocaust memorial day. That allowed me to come and listen to one of the best debates I have heard for a long timeafter this one, of course.
The amendments are prompted by concern that the Bill will somehow reduce parliamentary scrutiny of secondary legislation setting the upper earnings limit, by abolishing the restriction. As Opposition Members described, that restriction limits the raising of the upper earnings limit to seven and a half times the primary threshold. The hon. Gentleman advanced his case in a spirit of helpfulness, for which I am grateful, and broadly based his arguments around the premise that Britain should be protected from a Government who might be motivated to use the upper earnings limit as a tax-raising opportunity, if it were not tied in some way to the lower limit.
It is perhaps worth noting that there was once an upper earnings limit for employersMembers will know that national insurance contributions are paid by employees and by employersbut in 1985 the Government abolished it. The abolition of that upper limit and the introduction of that principle netted the
Government £1 billion at 1985 prices. It is also worth noting that that proposal was not in their manifesto. I make those remarks gently.
The point that the hon. Gentleman made and the principle that he put forward are valid for debate, and I am sure that we would be advancing those arguments were I in his post, but we should take a moment to describe what happened. Historically, the lower earnings limit was set at a quarter of average earnings, whereas the upper earnings limit was set at one and a half times average earnings. That ratio was broadly maintained, but greater flexibility was introduced when the lower earnings limit was statutorily linked to the basic category A state pension. Its uprating then followed the switch from the link with earnings to that with prices.
Treasury Ministers announce the NICs rates and thresholds for the forthcoming year at or around the pre-Budget report. The Government Actuarys Department then produces a report on the impact on the national insurance fund of the changes announced, particularly whether the balance of the fund will be 17 per cent. of benefit expenditure, because the fund cannot borrow.
The report is then laid before Parliament, and a set of regulations and an order, which make the changes to national insurance rates and thresholds, are laid in January, or thereabouts. I think the next measure to be debated will be dealt with in February. The Department for Work and Pensions then lays regulations, which change the contributory benefit rates at the same time. Decisions made in this context are often scrutinised not just publicly but in the House. The timing of the regulations gives employers and payroll providers time to prepare for 6 April. I made that point in Committee, and I note that the hon. Member for South-West Hertfordshire has accepted some of the case that I made then. Like the hon. Member for Cities of London and Westminster (Mr. Field), who is not in the Chamberno doubt he has been called awayhe was keen to ensure that proper scrutiny took place.
We are not attempting a sleight of hand or a Macchiavellian move. Our intention is to align the lower earnings limit for national insurance contributions with lower tax rates, and to align the higher limit with higher tax rates. Our purpose is to simplify the tax process, not to use it as a potential for future tax increases.
All income tax changes are discussed at length in the Budget and Finance Bill debates. National insurance contributions have always been arranged by means of regulation, and over time that has proved an effective way of allowing parliamentary scrutiny. Although such scrutiny never seems adequate to those in opposition, I assure the hon. Member for South-West Hertfordshire that a Minister feels well scrutinised as a result of statutory instrument debates. If on occasion they do not last as long as they might, that may be because the issues are not as controversial as people fear that they might be if the Government abused the process.
A strong case has been made for amendment No. 8, which aims to restrict the rise in the upper earnings limit. I realise that the hon. Member for South-West Hertfordshire has changed the proposed date in response to what I said in Committee, but we have
similar problems with this amendment. We would not be able to align the upper earnings limit for 2009-10 with the point at which higher rate income tax becomes payable, which we announced that we would do in the 2007 Budget. The limit could not be raised by £800 plus the retail prices index. That would remove the main purpose of our Bill, and a significant simplification of the tax and national insurance contributions system would be lost.
Accepting the amendment would cost about £700 million, which is no mean matter. That would restrict the Governments ability to take further action on, for instance, child poverty and lifting pensioners out of tax, as proposed in the personal tax package announced in the 2007 Budget.
The hon. Member for Gosport (Peter Viggers) described this as a mean little BillI paraphrase his commentsand spoke of the tax hit on those earning at or above the upper earnings limit. I can reassure him that the large majority of taxpayers will be no worse off, as the reduction in the basic rate of income tax from 22p to 20pthe lowest rate for more than 75 yearswill compensate for the increased amount of national insurance that they will pay.
Peter Viggers: I think the Financial Secretary said that no one would be worse off, but the statistics show that 5.3 million people will be worse off. She told the Committee that 3.5 million people would be worse off by less than £3 a week, which meansif my arithmetic is correctthat 1.8 million people will be worse off by more than £3 a week. Is that correct?
Jane Kennedy: I did not seek to imply that nobody would be worse off, but the vast majority of taxpayers and pensioners will be better off as a result of the reforms in the 2007 Budget. Most employees earning at the upper earnings limit or above will be better off, using the 2008-09 tax year as an example. The loss of the starting rate band means that they are better off by £232 per annum. The raising of the upper earnings limit to £770 means that they are better off to the tune of £390 a year. The reduction of the basic rate to 20 per cent. means that they are £673 worse off. So overall they are £51.60 a year better off.
There are groups that are worse offabout 300,000 taxpayers at the upper earnings limitand I have answered questions recently that make that clear. We anticipate, however, that the vast majority would be better off or no worse off as a result. Our intention in making the changes was to introduce a much simpler personal tax systemone of the simplest in Europe and the developed world.
Amendment No. 10 would also amend clause 1, and is an alternative to amendment No. 8. It would allow the upper earnings limit to be set without the current restrictions and subject to approval by both Houses of Parliament. However, it would then introduce the review, which we have had exchanges about. Under the amendment, after the regulations came into force the review would examine whether the upper earnings limit calculated on an annual basis exceeds the level of earnings at which higher rate tax becomes payable. If there is such a difference, the Treasury would need to make new regulations by the following January that
would apply from the following April. Broadly, that is what the amendment asks us to undertake.
In principle, I have no objection to the Treasurys reviewing its work. It conducts such work thoroughly and there should be no reason for anybody to doubt the integrity of any review, but the amendment is unnecessary. The upper earnings limit and the level of the higher rate tax threshold will be announced at the time of the pre-Budget report. Announcing the levels then is necessary in order for changes to national insurance contributions legislation, guidance and software changes to payroll systems to be put in place for the next tax year. The regulations that set the level of the upper earnings limit will already be subject to affirmative resolution. I have argued that that is a perfectly proper means of parliamentary scrutiny.
The change suggested by the amendment would be inconsistent with the Bills objective, which is to allow alignment of the upper earnings limit with the level at which higher rate tax is paid. The change proposed in the Bill should not give any cause for concern in terms of parliamentary scrutiny. We have the necessary parliamentary controls in place because the regulations will be subject to careful scrutiny under the affirmative procedure. The Bill provides the correct balance between allowing appropriate scrutiny and not putting pressure on limited parliamentary time for other legislative objectives. I therefore hope that the hon. Member for South-West Hertfordshire will withdraw the amendment.
Mr. Gauke: I am grateful to the Financial Secretary for her thoughtful response. That has been characteristic of the tone throughout the progress of the Bill; we have managed to maintain a reasonably cordial and thoughtful approach. However, I must respond to one or two points. On her comment that the employers upper earnings limit was abolished in 1985, I am running the risk of asking a question when not knowing the answer, but I do not know what the process was and whether it was done through primary legislation. The essence of my argument is that if steps such as those we are discussing are to be taken, that must be done through primary legislation. I should add that I was probably 13 at the time, so I do not feel too responsible for what was done then. If my right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke) were present, he might be able to tell us more.
I shall deal with the Financial Secretarys arguments on amendments Nos. 8 and 10. She makes the case that national insurance contributions were debated on a large number of occasions, but again, they were all during Committee. She says that such contributions have always been handled by regulation, but that has always been done within the framework of the restrictions that I described.
The Financial Secretarys argument on amendment No. 10 was essentially that it is unnecessary and that there is no cause for concern. I shall not repeat my arguments as to why there is a cause for concern, because we will not reach agreement. She also said that
it was inconsistent with the objective of aligning the national insurance contributions upper earnings limit with the point at which one starts paying higher rate income tax. The purpose of amendment No. 10 is to ensure that they are aligned. As long as they are aligned, the procedure set out in amendment No. 10 will not come into play, so I am not convinced by her argument.
I am often convinced by the remarks of my hon. Friend the Member for Gosport (Peter Viggers), with whom I served on the Treasury Committee for some months. I always listen closely to his remarks. The fact that they coincided with the comments made by the hon. Member for Taunton (Mr. Browne) is neither here nor there. He particularly liked amendment No. 8.
The Financial Secretarys arguments against amendment No. 8 seemed to be that the Governments objectives in increasing the upper earnings limit could not be fulfilled. I acknowledge that point, but I can see no reason why the Government could not table a further amendment in the other place to enable them to do what they need to do for 2009-10I believe that was the year to which she referred. There is no need for legislation for 2008-09, because the ratio would still apply. I do not find her arguments on amendment No. 8 convincing. Given the mood of the House and the comments of my hon. Friend the Member for Gosport, I am inclined to press amendment No.8, rather than amendment No. 10, to a Division.
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