As I say, I will ensure that any other points that I have not taken up fully or not taken up at all are covered in writing to noble Lords. I hope that I have explained that we are spending an extra £2.5 billion on uprating pensions and other benefits in 2015-16, enabling us to protect key benefits. The order protects pensioners, many of whom have worked hard all their lives and are no longer in a position to increase their income through work, and also benefits disabled people, reflecting our commitment to protect those who are least able to increase their spending power. These are the principles behind the order, and on that basis I commend it to the Committee.

Motion agreed.

Guaranteed Minimum Pensions Increase Order 2015

Motion to Consider

7.16 pm

Moved by Lord Bourne of Aberystwyth

That the Grand Committee do consider the Guaranteed Minimum Pensions Increase Order 2015.

Relevant document: 20th Report from the Joint Committee on Statutory Instruments.

Motion agreed.

Automatic Enrolment (Earnings Trigger and Qualifying Earnings Band) Order 2015

Motion to Consider

7.16 pm

Moved by Lord Bourne of Aberystwyth

That the Grand Committee do consider the Automatic Enrolment (Earnings Trigger and Qualifying Earnings Band) Order 2015.

Relevant document: 20th Report from the Joint Committee on Statutory Instruments

Lord Bourne of Aberystwyth (Con): My Lords, I am pleased to introduce this instrument, which was laid before the House on 19 January. I am satisfied that it is compatible with the European Convention on Human Rights.

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The order amends the automatic enrolment figures that will set minimum savings levels from April of this year. The automatic enrolment earnings trigger sets the automatic entry point to determine who saves in a workplace pension. The qualifying earnings band then determines how much people save and sets employer minimum contribution levels. These figures must be reviewed annually; indeed, this is the fourth such annual debate we have had.

Given that automatic enrolment is in its fourth year, I think that it is a good time to take stock. To date, more than 5.1 million workers have been automatically enrolled by around 43,000 employers. Automatic enrolment has been a significant success, with opt-out remaining significantly lower than expected, but there are still important challenges ahead. Next year, small and micro employers will be brought into automatic enrolment for the first time. It remains as important as ever that automatic enrolment and the figures we are debating today remain easy to explain, understand and administer. It is also important that we target the right people. There is a balance to be struck between those who should save and those who can decide to save. As such, the Government decided that the timing was right to conduct a formal consultation as part of this year’s review. We wanted to learn about employers’ experience of live running and to test whether it remained right to maintain alignment between the earnings trigger and the income tax personal allowance in the light of proposed increases to the allowance and lower than expected earnings growth. The earnings trigger is key to targeting and striking the balance that I have outlined.

Automatic enrolment is a tailored policy. It does not force pension saving on to everyone, regardless of earnings. Our overall aim in setting the figures in this instrument is to maximise the number of people saving who can afford it, while excluding those who cannot. The new state pension full rate of nearly £7,900 per year is a significant factor in determining who should save. The Pension Commission suggested that for those earning around £10,000 a year, a sensible replacement rate in retirement would be 80%. As my honourable friend set out in another place, once you disregard national insurance, those earning under £10,000 will already receive around an 80% replacement from the new state pension. Therefore, this order does not amend the earnings trigger and it remains frozen at £10,000 for 2015-16.

As part of the consultation and review, we considered some alternative options for setting the trigger, including increasing it in line with the income tax threshold, as we have done in previous years. This option has the benefit of administrative simplicity for some but, given the above inflation rises to the tax threshold, we did not believe it was the right approach in 2015-16.

In the recent debate in the other place, it was suggested that the trigger should be lowered. We disagree. Automatic enrolment should continue to exclude low earners for whom saving, on top of the pension they will get from the state, may not make economic sense, and they should be relied on, instead, to opt in. It is important to stress that we are not excluding people from pension saving; people earning under the threshold

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can choose to opt in or join a pension scheme. It has also been argued that we should enrol everyone and rely on opt-out instead. Again, there is a balance to be struck. As I told noble Lords earlier, opt-out is currently somewhat unusual. The risk of having a much lower threshold is that opt-out will become much more common and start to undermine the principle of automatic enrolment. Opt-out also comes with an administration overhead. Employers have to refund moneys and unwind membership. High opt-out rates increase nugatory work, so we firmly believe that it is better not to enrol people who are likely to walk away.

I am aware from previous debates on this issue that noble Lords will be interested in the impact that this instrument will have on the number of women savers. Freezing the trigger at £10,000 represents a real-terms decrease in the trigger, resulting in around 20,000 extra people being brought into automatic enrolment in 2015-16. Fourteen thousand, or 70%, of these are women.

The automatic enrolment earnings trigger does not exist in isolation. It is the entry point to pension saving that works alongside the qualifying earnings band. The band sets a minimum definition of pensionable pay. If you earn £10,000 a year, you will pay pension contributions on anything over £5,824. The qualifying earnings band also needs to cap minimum employer contributions for higher-paid staff and let existing arrangements cater for this market. The Government believe that aligning the qualifying earnings bands with the national insurance lower and upper limits remains the right approach.

The Secretary of State has a lot of discretion to determine the right level for the automatic enrolment thresholds and what factors to consider. This year, we consulted on these factors and on a number of options for setting the earnings trigger. Freezing the earnings trigger in 2015-16 strikes the right balance between administrative simplicity for employers and ensuring that the right people are brought into pension savings. Continuing to align the qualifying earnings band with national insurance thresholds ensures that people continue to build meaningful pension pots. It is straightforward to administer and caps minimum employer contributions for higher-paid staff. I commend this instrument to the Committee.

Baroness Drake (Lab): My Lords, each year with some predictability, I am sorry to say, I contribute to the debate on the relevant statutory instrument to express my concern that in linking the earnings trigger for auto-enrolment to the income tax threshold it is being set too high, and that too many women are excluded such that only one in three workers targeted for auto-enrolment is female. So many women are excluded because their earnings are below the level required to trigger the new employer duty to auto-enrol a worker into a pension scheme.

Given my persistency in raising this issue, it would be lacking in grace not to say that I am therefore pleased that the Government have chosen to freeze the trigger at its current level and not increase it further. I understand that as a consequence 20,000 people, 70% of whom would be women, will no longer be excluded from auto-enrolment when they otherwise would have

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been. Therefore, the Government’s decision to break the link between the earnings trigger and the income tax threshold is welcome.

I am also pleased that the Government’s decision supports the argument that it is wrong always to say that simplicity for employers, by linking the trigger to the tax threshold, is worth the price of excluding yet more thousands of women from the benefits of auto-enrolment.

I also welcome the Government’s decision that it is not right to maintain the alignment between the earnings trigger for auto-enrolment and the income tax threshold in the light of the proposed increases and the relatively low earnings growth. Low earners are likely to have lower earnings growth, and the UK has a greater concentration of low-wage jobs than some other advanced European economies, so the earnings trigger remaining linked to a rising income tax threshold would exclude even more workers over time. Those excluded, who are mostly women, would suffer a loss in lifetime pay because they would not have received the employer contribution, but they would still lose out due to any general reduction in wage levels that flowed from the cost to the employer of automatic enrolment contributions. Those are my positives, and they are three or four things that I welcome.

However, I remain concerned that, even with the freeze on the trigger at £10,000, far too many people will still be excluded from auto-enrolment. I would have liked to have seen it decreased under Section 14 of the Pensions Act 2008, as is permissible. I do not agree with some of the arguments which have been deployed by the Government for retaining it at its current level. The Government have argued that low earners for whom saving on top of their state pension does not make economic sense, and because the state pension gives them a high replacement income in retirement, should be excluded from auto-enrolment, but earnings are not static for many workers—men or women. They can change significantly over a lifetime. Most low earners go on to earn more—a point confirmed in the Johnson review commissioned by the Government. Therefore, auto-enrolment would be beneficial because it would increase persistency of pension contributions over their working lives.

Millions of women have a life pattern in which periods of full-time work are interspersed with periods of part-time work when caring responsibilities are at their greatest. But the effect of a high earnings trigger is a policy which asserts that women should not be auto-enrolled when they are working part-time and caring. That is in fact the consequence, and the figures confirm it. Almost half of those in the lowest earnings group are in couples where one works part time and the other full time. Most very low earners are women who live in households with others on higher earnings and they are receiving working tax credits. As the Johnson review confirmed—it is his analysis as much as my observation—these are precisely the people who should be automatically enrolled in saving, yet they are excluded.

The Government argue that if people on low earnings are auto-enrolled, they will build up their pots in pennies, not pounds, and that anyway the state pension gives them a sufficient replacement rate. But the problem

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with that argument is that pension savings are no longer reserved for pensions or replacement income. Freedom of choice means that the purpose of private pension saving is wealth accumulation. People can do what they wish with their money. There is now a complete separation between pension saving and securing a replacement income, which makes the Government’s support for a high earnings trigger even more tenuous. Why should low earners not be allowed to accumulate assets to build up their pot of wealth for their personal use? Why should an asset accumulation facility be available only to the better off?

Talking about “pennies, not pounds” resonates with that outdated and now unacceptable argument that women working part time are doing it only for pin money. It is possible to lower the earnings trigger below £10,000 without running up against the pennies argument. If, for example, the lower value of the qualifying earnings band is £5,824 and the earnings trigger is £8,000, then on a default contribution of 8% this would produce pension savings of £174 per annum. Taking a nominal value, this would produce £1,740 after 10 years and £5,220 after 30 years. For persistent low earners, that is a pot worth having, and it is arrogant to apply an analysis that because you are on low pay, asset accumulation even of that modest pot—which to them will not be modest—should not be available. That is simply a base case. It assumes a persistent low earner with no other changes but ignores that many employers are contributing above the minimum statutory level and that most low earners go on to earn more. I am sure that, over time, the employers’ statutory minimum contribution will rise. Excluding so many low-paid workers from auto-enrolment is another example of the weakness of public policy in assisting low-paid workers to accumulate capital or assets.

7.30 pm

The Government argue that a lower auto-enrolment earnings trigger will increase opt-out rates, but there is no clear evidence that setting a trigger at, say, £8,000 will produce significantly higher opt-out rates. Attitude surveys do not necessarily confirm what actual behaviour will be—that is a speech in itself. For women who move from a full-time to a part-time job with another employer when they become carers, the higher trigger will take them out of the previous pattern of persistent saving.

The Pensions Minister in the House of Commons, Steve Webb, referred to the attitude surveys on pensions and said that they indicated that at about £5,000 the opt-out rates would be 30%. I was surprised that it revealed that that level would still deliver a participation rate at 70%, so at an £8,000 earnings trigger the participation rate is likely to be much higher. The evidence on these financial decisions also shows that when you apply inertia, participation rates are higher than the evidence produced by attitude surveys.

As a consequence of raising the auto-enrolment earnings trigger, we can go through the years—this is in the impact assessment from the department—showing the number excluded from auto-enrolment: 600,000 as a result of the trigger in 2011-12, 78% of them women; in 2012-13, another 100,000, 82% of them women; in

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2013-14, another 420,000, 72% of them women. In 2014-15, the increase to £10,000 excluded another 170,000, 69% of them women. At least some of those excluded, even if not all, could be re-embraced by a modest reduction in the earnings trigger to, say, £9,000 or £8,000 a year. That could still pick up more than half a million low-paid workers into auto-enrolment in pensions.

The population targeted to benefit from workplace pension reform now comprises approximately two men for every woman, which, as I consistently say, breaches a basic principle that the private pension system should work for women. If you maintain a higher earnings trigger, although women can go from full-time employment to lower pay during their working life, thousands of women are carved out of the UK private pensions system. I will continue to argue that with passion, because it is such a weakness in the design of the private pension system to set an earnings trigger that delivers one woman auto-enrolled for every two men.

To end on a positive note, I am pleased that the trigger has been frozen and that the Government have not maintained the alignment between the earnings trigger for auto-enrolment and the income tax threshold. At the very least, I hope that they do not consider raising the trigger for a few years to come.

Baroness Sherlock (Lab): My Lords, I thank the Minister for his explanation of this order and my noble friend Lady Drake for a characteristically forensic and impressive contribution. Like her, I welcome the fact that the Government have seen the light—there is more rejoicing in heaven over one sinner returned, et cetera. I am delighted that they have accepted our long-standing argument that the trigger threshold for auto-enrolment should not simply be tied to the personal allowance, as it has been hitherto under this Government.

We on these Benches have argued for many years that the problem with the approach taken by the Government is that it undermines the basic consensus on which auto-enrolment was built: that it should be a mass pension system encompassing as many people as possible, a point made clearly by my noble friend Lady Drake. It should encompass the low-paid as well as the better off, women as well as men and those in multiple part-time jobs as well as those in single, steady employment in one job. Viewed from that perspective, the Government’s tying of the auto-enrolment threshold to the personal allowance has had significant weaknesses.

When we debated these orders last year, my noble friend Lady Drake built a completely damning indictment of the effect of the Government’s approach to setting the threshold, which I suspect may have contributed to their change of heart. We recalled last year that the original idea proposed by the Pensions Commission, chaired by the noble Lord, Lord Turner, and of which my noble friend was such a distinguished member, was that the qualifying earnings band should start at the primary threshold for national insurance purposes and finish at the NI upper earnings limit. The previous Government said in their 2006 pensions White Paper that they would adopt broadly that approach, so the lower and upper limits of the qualifying earnings band were set at £5,035 and £33,540 respectively, with provision for them to be increased in line with earnings.

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When this Government brought in the Pensions Act 2011, though, they introduced an earnings trigger for auto-enrolment at a level higher than the lower equivalent of the qualifying earnings band, and every year since then we have seen more and more people excluded. For 2011-12 the trigger was set at £7,475 rather than the planned threshold of £5,035 and 600,000 people were excluded, 75% of them women. The next year 100,000 people were excluded, 82% of them women. In 2013-14, 420,000 people were excluded, of whom 72% were women. Last year, when the threshold rose to £10,000, it excluded another 170,000 people, of whom 69% were women. So although I genuinely welcome the decision to freeze the threshold, and the confirmation from the Minister that the measure will bring 20,000 more people into the system, 14,000 of them women, does he accept that by tying the threshold to the personal allowance for the last four years more than 1 million low-paid people, most of them women, have been excluded from auto-enrolment?

I want to ask the Minister about the coverage of women by auto-enrolment. Can he remind the Committee how many people the Government now estimate will be covered by auto-enrolment, when it is fully rolled out? Does he accept the figure given by my noble friend Lady Drake that one in three of the target enrolment population are now women? If so, do the Government regard that as a problem? Last year I noticed that the Government had offered the defence that so many women are affected because they work part-time and are likely to earn less than men, so they are disproportionately represented. That is true, of course, but it is not a defence; it is simply a description. Do the Government regard it as a problem that so many women are excluded?

The other defence offered by the Minister was that workers paid below the earnings trigger, as the Government have set it, were likely to be able to achieve their target replacement rates through the new state pension if they remained low earners. Presumably, therefore, it is not beneficial to direct income from working life into workplace pension savings—and, presumably, that applies particularly to low-paid women. But, as has recently been widely discussed, when it kicks off in 2016 only 45% of those who reach state pension age will get the new state pension, so there is a significant issue there.

I will not detain the Committee any further at this point. Labour invented auto-enrolment but the Government deserve credit for having rolled it out. We all think it is a good thing. I am very pleased that the Government have broken their ill advised link between the trigger threshold and the personal allowance, but I look forward to hearing from the Minister a better account of how the Government will ensure that the benefits of auto-enrolment can reach the masses for whom it was designed.

Lord Bourne of Aberystwyth: My Lords, I thank noble Lords who have participated in this debate on the clearly important issue of auto-enrolment and the trigger. I shall seek to deal with the points made by the noble Baronesses in the order in which they were raised. The noble Baroness, Lady Drake, was extremely

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gracious—at least initially—in welcoming the change, and I welcome her welcome. I appreciate that the noble Baroness, Lady Sherlock, would want to go on a historical journey rather than review the current good news in the present order, but 20,000 more people being brought within auto-enrolment, 70% of whom are women, is of course good news.

On the issue raised by the noble Baroness, Lady Drake, of whether the trigger should be set at a lower limit, such as the national insurance limit—I think that she used £8,000 as another example—it is worth restating that this does not prevent people opting in to a pension. Auto-enrolment means that they will not be automatically enrolled, but it does not stop them saving. If they are above the national insurance limit they can opt in to their scheme and their employer will be obliged to contribute the 1%, as they currently are. Those figures are on an upward trend. I will ensure that I write to noble Lords about the percentage figures in future years because they are set to go up for employees and employers. That is an important point to nail. Also, if your earnings go above the threshold in a particular year, you will of course be automatically enrolled. The assumption is then that you can opt to stay in the pension, even if your earnings dip. You are not automatically de-enrolled; if you want to stay in, you can. That is a significant point to make, and one that I am perhaps able to clarify here.

On the fluctuating income argument, if you are above automatic enrolment in a particular year you can stay in the scheme if you want to do so, provided that your income does not dip below the national insurance limit. You could even stay in then, but you would not be entitled as a right to the employer contribution—although, anecdotally, quite a few employers pay it if an employee is in the scheme. It is a relatively low cost and while that is not a statutory obligation, it is happening. There is some good news there. We have clearly broken the link with the income tax threshold, so there is of course no question about whether we can break it. We will look at the experience of this.

We should restate that auto-enrolment has been a massive success. It has been supported by all parties; I pay tribute to the support that has been given. The priority now is to make sure that small and micro-employers are brought within the system. As noble Lords would expect, we will look at the evidence on how it is progressing. In answer to the noble Baroness, Lady Sherlock, on how many people will be covered by automatic enrolment, we estimate that 8 million to 9 million will be newly saving or saving more. I will write to her on the percentage of women; of those, I think that it is roughly 3 million.

Baroness Drake: I think that the Government’s figures will show that their estimate is now 37%. Allowing for error, I am not far wrong with one-third.

Lord Bourne of Aberystwyth: I think that is borne out. I will write with a more detailed figure if we have it. I thank the noble Baroness for her helpful intervention.

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As I was just saying, we believe that it is roughly 3 million, which I think would be consistent with the figure that she presented.

With that, if there is anything that I have missed I will write to noble Lords who have participated in the debate. I thank them for the general support and welcome for what we have done this year and commend the order to the Committee.

Motion agreed.

Employment Allowance (Care and Support Workers) Regulations 2015

Motion to Consider

7.43 pm

Moved by Lord Newby

That the Grand Committee do consider the Employment Allowance (Care and Support Workers) Regulations 2015.

Relevant document: 21st Report from the Joint Committee on Statutory Instruments

Lord Newby (LD): My Lords, I am pleased to introduce the two regulations and the order standing in my name on the Order Paper. I can confirm at the outset that the provisions in them are compatible with the European Convention on Human Rights.

The changes to the NICs rates and thresholds and the extension of the employment allowance covered by these three instruments were announced as part of the Chancellor’s Autumn Statement on 3 December last year. In the Budget on 23 March 2011, we announced that for the duration of this Parliament the basis of indexation for most NICs rates, limits and thresholds would be the consumer prices index instead of the retail prices index. I can confirm that the basis of indexation used to calculate the changes follows that approach. The exceptions to this are the secondary threshold and the upper earnings and upper profits limits.

I will start with the Social Security (Contributions) (Limits and Thresholds) (Amendment) Regulations. These are necessary in order to set the class 1 national insurance contributions lower earnings limit, primary and secondary thresholds and the upper earnings limit for the 2015-16 tax year. The class 1 lower earnings limit will be increased from £111 to £112 per week from 6 April this year. The lower earnings limit is the level of earnings at which contributory benefit entitlement is secured. However, NICs do not need to be paid by the employee until earnings reach the primary threshold.

The class 1 primary threshold will be increased from £153 to £155 per week from 6 April. The secondary threshold is the point at which employers start to pay class 1 NICs. In line with the commitment in Budget 2011, this is being increased by RPI from £153 to £156 per week.

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From this April, the income tax personal allowance for people born after 5 April 1948 will be increased above indexation from £10,000 to £10,600, and the point at which higher-rate tax is payable will be increased from £41,865 to £42,385 in the 2015-16 tax year. As I mentioned, the upper earnings limit is not subject to CPI indexation. This is in order to maintain the existing alignment of the upper earnings limit with the point at which higher-rate tax is paid. The upper earnings limit will be increased from £805 to £815 per week from 6 April.

Employers have to pay NICs at 13.8% on earnings above the secondary threshold. In the Autumn Statement, the Chancellor of the Exchequer announced a zero-rate earnings band for employers’ NICs for earnings of employees under the age of 21 from 6 April. The introduction of the zero-rate earnings band for employees under the age of 21 is expected to benefit about 340,000 employers, helping to support the jobs of almost 1.5 million young people currently in employment.

The zero-rate earnings band applies only to earnings up to the equivalent of a new threshold called the upper secondary threshold, which is to be set at the same level as the upper earnings limit for the 2015-16 tax year. These regulations introduce the upper secondary threshold and set it at the same level as the upper earnings limit of £815 per week from 6 April.

Finally, these regulations also set the prescribed equivalents of thresholds and limits that I have mentioned for employees paid monthly or annually. Apart from the introduction of the zero-rate earnings band for employees under the age of 21, there will be no other changes to NICs rates in the 2015-16 tax year. Employers will continue to pay contributions at 13.8% on all earnings above the secondary threshold. Employees will continue to pay 12% on earnings between the secondary threshold and the upper earnings limit, and 2% on earnings above that.

The social security order sets the class 3 contribution rate for those paying voluntary contributions and the class 4 profits limits for the self-employed, as well as providing for a Treasury grant.

Starting with voluntary class 3 contributions, the weekly rate will increase from £13.90 to £14.10 a week for the 2015-16 tax year. Moving on to the self-employed, today’s order also sets the profit limits for class 4 contribution liability. The lower profits limit on which these contributions are due will increase from £7,956 to £8,060, in line with the increase to the class 1 primary threshold.

At the other end of the scale, the upper profits limit will increase from £41,865 to £42,385 for the 2015-16 tax year. This is to maintain the alignment of the upper profits limit with the upper earnings limit for employees. The changes to the class 4 limits will ensure that the self-employed pay contributions at the main class 4 rate of 9% on a similar range of earnings as employees paying class 1 contributions at the main rate of 12%. Profits above the upper profits limit are subject to the additional rate of 2% in line with the 2% paid by employees on earnings above the upper earnings

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limit. For completeness, I mention that the weekly rate of class 2 NICs, which are also paid by the self-employed, will increase from £2.75 per week to £2.80 per week from 6 April.

From 6 April, class 2 contributions will be due only if taxable profits for the 2015-16 tax year are at or above the small profits threshold of £5,965. This threshold replaces the class 2 small earnings exception and, along with the class 2 rate, was set in the National Insurance Contributions Act 2015.

The Government need to ensure that the National Insurance Fund can maintain a working balance throughout the coming year, which the Government Actuary recommends should be one-sixth of benefit expenditure for the year. The re-rating order provides for a Treasury grant of up to 10% of benefit expenditure to be made available to the fund for the 2015-16 tax year. A similar provision will also be made in respect of the Northern Ireland National Insurance Fund.

Lastly, I turn to the regulations relating to the employment allowance for employers of care and support workers. The Government wish to support individuals and families with the cost of care. These regulations will allow employers of care and support workers to claim the NICs employment allowance. As a result, they will be able to reduce their employer NICs bill by up to £2,000 a year. Claiming the NICs employment allowance is quick and simple. Employers, or their agents, simply tick a box in their payroll software to confirm that they are eligible for the allowance and wish to claim, and their employer NICs liabilities will be reduced accordingly. Employers need to tick the box only once and this will be transferred to future years as well.

In the first six months since its introduction, the NICs employment allowance has already been enjoyed by more than 850,000 businesses and charities. We estimate that a further 20,000 employers of care and support workers will benefit from the extension of the allowance. I commend the order and regulations to the Committee.

Lord Tunnicliffe (Lab): My Lords, I thank the Minister for introducing the regulations and order. This is something of an annual feast, and I commend him for the speed at which he read out his speech. The same three statutory instruments were debated yesterday in the Seventh Delegated Legislation Committee of the other place, where the Opposition put their traditional questions and got detailed responses. I am going to give everyone encouragement by saying that I do not intend to ask exactly the same questions to receive exactly the same answers. I commend the Commons report of the proceedings to anyone present who is interested in those detailed questions.

I have a couple of questions on the first of the three instruments that we are considering—the Employment Allowance (Care and Support Workers) Regulations. Three questions asked in the Commons were detailed in nature, but the fourth question asked by my colleagues in the other place was: why have the Government made this change? They introduced the NICs employment

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allowance to aid small businesses, and we did not oppose that. At the time, there was a debate about the care issue. The Government resolutely set their face against that but then, rather suddenly, they changed their mind. I am genuinely curious as to which road to Damascus the Government went down to come to this conclusion. It is not a conclusion that we particularly dissent from but we are interested in whether there is any further logic behind the reasoning.

As far as I can see, the only problem with these regulations is that the decision to make the change seems to have been reasonably recent. I worry a little, as do my colleagues in the other place, about the extent to which it might induce tax avoidance, which both sides of the House are firmly against. It seems to me that the simplicity with which this allowance can be claimed, as the Minister outlined, is essentially, in tax avoidance terms, also its intrinsic weakness. The difference between a personal servant and a care worker seems somewhat semantic. I have read the regulations, and of course the employer or the person being cared for has to fall within the definition in them. Nevertheless, those definitions could be rather nudged by people who are seeking to avoid NICs. I would value some further comment from the noble Lord as to the extent to which the Government expect this to be used for tax avoidance, because somebody is going to use it. It is inevitable that any new tax or national insurance regulation will be exploited by tax avoiders. Somebody will use it. What are the Government going to do to make sure that does not happen? What additional resource is that likely to cost HMRC?

The other thing about this is that, as far as I can see, it does not have an impact assessment and I am curious as to what the Government’s assessment is of the cost of this move. They estimate 20,000 may qualify for it and stress that it could be up to £2,000 per annum. I can do the arithmetic and I think that is £40 million per annum. I do not think there is an expectation that all will be at the maximum by quite a margin. I would value the Government’s estimate of the cost of this policy move.

Lord Newby: My Lords, I am grateful to the noble Lord, Lord Tunnicliffe, for his welcome of these SIs. He asked me a number of specific questions. Why did the Government change their mind? We saw the error of our ways. We listened to our stakeholders and they thought that this was a very strong idea, so we decided, in line with our general commitment to reducing the cost of care and helping with care needs, that we would make this change.

The noble Lord asked whether this opens up a big new scope for avoidance. Given the scope of the change, we do not anticipate that it will really broaden the scope for avoidance. HMRC uses its routine compliance checks to identify and tackle potential avoidance and we have an anti-avoidance rule in the primary legislation. The incentive for avoidance here is relatively small and we think that the benefits of introducing the scheme more than outweigh any small potential for avoidance.

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The noble Lord’s final question was about the cost. We estimate it will cost about an extra £10 million a year. I hope I have answered his questions and that he will now be happy to support the measures.

Motion agreed.

Social Security (Contributions) (Re-rating and National Insurance Funds Payments) Order 2015

Motion to Consider

7.58 pm

Moved by Lord Newby

That the Grand Committee do consider the Social Security (Contributions) (Re-rating and National Insurance Funds Payments) Order 2015.

Relevant document: 21st Report from the Joint Committee on Statutory Instruments

Motion agreed.

Social Security (Contributions) (Limits and Thresholds) (Amendment) Regulations 2015

Motion to Consider

7.58 pm

Moved by Lord Newby

That the Grand Committee do consider the Social Security (Contributions) (Limits and Thresholds) (Amendment) Regulations 2015.

Relevant document: 21st Report from the Joint Committee on Statutory Instruments

Motion agreed.

Childcare Payments (Eligibility) Regulations 2015

Motion to Consider

8 pm

Moved by Lord Newby

That the Grand Committee do consider the Childcare Payments (Eligibility) Regulations 2015.

Relevant document: 20th Report from the Joint Committee on Statutory Instruments

Lord Newby (LD): My Lords, the regulations before the Committee today were laid on 13 January under powers set out in the Childcare Payments Act 2014, which introduced the new tax-free childcare scheme. They were announced by the Chancellor of the Exchequer at the 2013 Budget and will provide financial support to working families with their costs of childcare. Once the scheme is in place, the Government will meet 20% of eligible working families’ childcare costs up to an annual maximum of £2,000 for each child. Support will be delivered through childcare accounts, into which a parent will deposit their funds to pay for childcare and into which the Government will add a 20% top-up payment.

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The regulations before us today were published for consultation between 14 July and 3 October last year, and I would like to put on the record my thanks to all those organisations and individuals who responded. As I will explain in a moment, the Government listened to the suggestions which were made and introduced some small but important changes to the way in which some of these regulations operate.

There are 18 regulations in all, but I am pleased to say that I do not intend to describe each of them in detail. However, I would like to give an overview of who will qualify for support once the new scheme is introduced. First, a person must be in the UK, over the age of 16 and have responsibility for looking after a qualifying child. It does not matter whether they are the child’s biological parent; they simply need to be responsible for their care. Secondly, the person responsible for the child must be in paid work, either for an employer or self-employed in their own business. If they have a partner, both partners will need to be in work. Providing support to the self-employed with their childcare costs is a significant, perhaps the most significant, advantage of the new scheme over the one it replaces; namely, the employer supported childcare scheme. As its name implies, that scheme was available only to people in employment.

The third eligibility condition is that the person’s income, and that of their partner if they have one, must be below the level which would make them liable to pay income tax at the additional rate of 45%. This currently applies to individuals with an income of more than £150,000 per year. Finally, someone will not be able to qualify for this scheme if they are already in receipt of support with their childcare costs from other government-funded schemes, most notably tax credits, universal credit and employer supported childcare. These are the eligibility conditions as they are set out in the Act. However, it is essential that the Government should retain the necessary flexibility to make adjustments to these conditions to ensure that the scheme remains properly targeted where it is most needed. This is why some of the detailed rules determining eligibility for support are set out in these regulations rather than in primary legislation.

I would like to draw the attention of noble Lords to some specific aspects of the regulations. First, regulation 5 sets out what is meant by a “qualifying child” for the purposes of the scheme. In broad terms, this is any child under the age of 12 or, in the case of a disabled child, under the age of 17. Regulation 9 defines what is meant by being in paid work for the purposes of the scheme. This is that a person will meet this condition if they receive as little as what someone would earn if they worked for one day a week at the prevailing rate of the national minimum wage, equivalent to around £52 a week, or £676 a quarter. Regulation 10 defines income in the case of self-employed parents. This broadly follows the well-established approach used for income tax purposes and is based on the net profit they generate from their business over the relevant period.

I will turn briefly to the ways in which the regulations have been amended following the consultation. Two significant amendments were made to the regulations

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as they apply to self-employed parents. The first concerns the requirement to generate a specified amount of profit every quarter. The point was rightly made that this had the potential to exclude self-employed people in very seasonal businesses where they are able to make a profit only at certain times of the year. To address this, the regulations were amended to give self-employed parents the option of meeting the minimum income level across a full tax year rather than in each quarter, as had been the case originally.

The second change applies to newly self-employed parents and again concerns the minimum income rule. The point was made that it is very common for new businesses not to make a profit immediately and that therefore it would be unreasonable to require them to reach the minimum income rule straightaway. The regulations were therefore changed so that someone starting out as self-employed will not be required to reach that level in their first entire year of trading. This will mean that they will not be disqualified from using the scheme as they struggle to make a profit when they are starting to establish their business.

A further change to which I would draw your Lordships’ attention concerns parents who are about to return to the workplace. The point was made during consultation that such parents need sufficient time to put suitable childcare arrangements in place before they start working. As originally drafted, the regulations provided a seven-day window during which a person could apply to open a childcare account in anticipation of starting a new job. The argument was made that seven days is simply too short to allow parents to make adequate childcare arrangements before they take up work after an absence. The regulations were therefore amended to allow someone to be treated as being in paid work where they have accepted the offer of a job up to 14 days before they actually start work. This will help to smooth the transition back to work and encourage parents back to the workplace.

Finally, I would like to refer to the position of those with responsibility for disabled children. As both the noble Earl, Lord Listowel, and the right reverend Prelate the Bishop of Sheffield rightly pointed out at Second Reading of the Bill, such parents can face significantly higher childcare costs than other parents. The Government are keen to ensure that this is reflected in the way that the new scheme will operate.

As I said at that time, the Exchequer Secretary to the Treasury made a commitment in another place to consider whether it would be possible to increase the maximum amount which families with disabled children could receive from the Government. I am glad to confirm that the Minister has honoured that commitment. She has said that such parents will be able to receive up to double the amount of support that other parents will be entitled to. This will mean that they will be able to receive support of up to £4,000 a year for each disabled child, rather than £2,000 a year as is the case for other parents. This change, which has been warmly received by the childcare sector as a positive step for disabled children and their families, does not feature in the regulations which we are considering but will be brought into effect by a separate instrument. However, given the interest shown in the matter at Second

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Reading, I thought that it would be appropriate to mention it now. I beg to move.

Lord Tunnicliffe (Lab): My Lords, I thank the Minister for explaining the regulations. I particularly thank him for the way in which the Government have reacted to the consultation by introducing some detailed changes. I also thank him for what he has said about disabled children, in giving us notice of further regulation to follow. I have only one or two points to make about these regulations, which we are not going to oppose as we see value in more money being put into the whole issue of childcare. First, I have a couple of detailed questions about them and then some questions about whether the right balance has been achieved in terms of the distributive effect that the Act has.

Of the two questions about implementation the first is about NS&I, which has been the chosen instrument for these accounts. If I have read the impact assessment properly, I believe that there could be 2 million such accounts. I understand that when NS&I introduced what I think were called pensioner bonds in the new year, it processed 30,000 accounts and its systems failed. Can the Minister assure me that by the time this scheme is introduced, the NS&I systems will be robust enough to cope with the volume?

Secondly, the choices that people will have to make between this, the current scheme which is being phased out and other potential state sources of support are really quite complex. The Government acknowledged this by assuring us during the debate on the primary legislation that there would be an online calculator to help individuals. I wonder whether the Minister can give us some indication of progress on the online calculator. I think that these regulations are expected to be rolled out in the autumn which, in terms of delivering things, is relatively close.

The substance of my concern is in regulation 15. The Minister does not have to look it up; it is the £150,000 regulation. These regulations existed in draft when the original primary legislation was debated.

I think this is the order that specifies that it will be £150,000. That is a large figure. Perhaps this is because of the paucity of my friends, but I do not know a lot of people on £150,000. Indeed, the figure could rise to £300,000 in a household with an affluent wife and an affluent husband together. That seems to be a pretty high figure. I wonder why the Government have chosen such a high figure, because of the subsequent distributive effects.

In effect, the order was debated when the primary legislation was debated in the other place. I draw attention to the Public Bill Committee in the other place on 16 October 2014, when Vidhya Alakeson, then deputy chief executive of the Resolution Foundation, said in evidence;

“Our analysis shows that 80% of families that will benefit from tax-free child care are in the top 40% of the income distribution. The evidence on how parents respond to child care investment is reasonably limited, but we know from self-reported surveys that parents with a family income of more than about £60,000 a year are not predominantly making work decisions and suchlike on the basis of the affordability of child care. The vast majority of this funding is targeted at those families, which suggests to me that you are unlikely to see much of a change in

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behaviour, but you will get a cost shift from parents to Government”.—[

Official Report

, Commons, Childcare Payments Bill Committee, 16/10/14; cols. 100-01.]

Does the Minister accept the Resolution Foundation’s analysis that 80% of the benefit will go to the top 40% of households? If not, does he have some Treasury-based analysis to counter that claim? I know of no other analysis. So far, the Government have not revealed any analysis that they have done; there is certainly no distributive analysis in the impact assessment. Therefore, I have to take the Resolution Foundation’s statement as the best analysis available.

The scheme will cost, say, £600 million a year—it varies by year in the impact assessment, but it is £600 million-plus. Well, 80% of that is half a billion pounds, which is a not inconsiderable sum. Is it true that half a billion pounds is being directed at the top 40% of households? Was that the Government’s intention, was it a mistake or do they not know?

The position that we took in the other place during the passage of the Bill is that if the upper limit had been lower, money would have been saved that could have been used to increase the percentage relief to those who qualify. Therefore, the distributive effect would not have been this apparently amazing situation where half a billion pounds is going to the top 40% of the income distribution. The Minister’s colleague in the other place, Priti Patel, was pressed on the matter of distributional analysis. At the end of one of her responses—before she was interrupted—to the Public Bill Committee on 21 October, 2014, which is now some time ago, she said:

“Officials are discussing with colleagues across Government the possibility of considering the matter in more detail and of carrying out distributional analysis of all Government child care support. Much child care support is outside the Treasury’s remit and lies with the Department for Education, and many of the schemes that exist have been touched on in the Committee”.—[Official Report, Commons, Childcare Payments Bill Committee, 21/10/14; col. 164.]

That seems to me like a promise of a report about the distributional analysis of government childcare support. Am I right in interpreting it as such a promise? If so, when do the Government intend to produce such a report, which I think we would all find very interesting?

8.15 pm

As I said, the Opposition will not be resisting these regulations. We find them surprising. We find the very high figure that directs this money at such households sad. We are sorry that the Government have not pondered on representations that have been made on the various scales and introduced a lower figure, but nevertheless we will not oppose it. However, our view is that we should go much further. When a Labour Government is elected, we intend to extend free childcare from 15 to 25 hours a week for working parents with three and four year-olds, paid for by an increase in the bank levy. We intend to introduce a legal guarantee that parents of primary school-age children can access childcare from 8 am to 6 pm through their local school and we intend to reinvigorate Sure Start, returning the way local services work together to shift from sticking-plaster services to radically early help. We believe

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those reforms will direct appropriate public money, properly funded, at the real places of need with relation to childcare.

Lord Newby: My Lords, the noble Lord asked me a number of questions about these regulations. First, is NS&I up to it, given the teething problems with the pensioner bonds? NS&I is up to it. It is an established provider of payment processor services within government. It manages the premium bonds. The difference between this and pensioner bonds is that those bonds suddenly became available and there was a great rush. These provisions will be introduced on a phased basis and there will be no incentive for hundreds of thousands of people, even if the phasing worked that way, all to want to do it within an hour or two of each other.

The noble Lord asked about the online calculator. As he pointed out, the scheme is due to be introduced from the autumn. The online calculator will be introduced in good time before implementation. It would be of no particular benefit to anybody if the calculator were available now, but it will be available well before the scheme is implemented.

I think the main burden of the noble Lord’s comments is about whether the £150,000 cut off is appropriate. It is worth pointing out two aspects of the context here. First, this scheme replaces one that has no limits to the income at which people can benefit. It also does not cover the self-employed, many of whom will not be high earners. In that respect, it is a more inclusive and fairer scheme. The other element of context is that the Government’s overall system of childcare support remains focused on people with lower incomes. Families in receipt of tax credits already receive more generous support with childcare costs than under universal credit. Support will be intended to cover up to 85% of the cost of childcare and will be available regardless of the number of hours worked. It is not a scheme about helping the wealthy. There is a question about where you put the cap. The only two logical places would be at the thresholds for the 40% or 45% tax rate. Any other limit between those two would involve a disproportionate amount of effort and administrative change. The Government took the view that, given the history of this scheme and the fact that the cap on those who can benefit is being reduced, the 40% threshold was too low. We want to support people with childcare at incomes above that level. Therefore, we went for this limit. An intermediate limit would have been complicated and confusing.

The noble Lord’s final question concerned what had happened to the commitment given by my colleague in another place, Priti Patel, to carry out a cross-departmental distribution analysis of all childcare support. I reassure him that officials across government are currently examining the feasibility of carrying out distributional analysis across all childcare support schemes, but this is taking time because of the complexities involved.

Motion agreed.

Committee adjourned at 8.21 pm.