It is always a pleasure to follow the hon. Member for Aberdeen North (Kirsty Blackman). The two of us often seem to be in the Chamber at a similar time discussing tax issues.
These measures have been a long time in process. Back in the Budget of 2016, there was talk of a consultation on trying to align more closely national insurance with tax treatment. I note that, today, the Exchequer Secretary to the Treasury said that this is a form of simplification of the tax system. I might disabuse him of those thoughts by telling him to look more closely at the new rules regarding post-employment notice pay within payments in lieu of notice as part of termination payments. Far from being simple, it is actually rather complex.
As I said at the very start, these proposals have been making their way through this House in various forms. There were some delays because of the unexpected election in 2017, but they did find their way into a draft Bill in December 2016—the National Insurance Contributions Bill. Some proposed changes came through in the 2017 Budget, which included the scrapping of class 2 national insurance for the self-employed—currently £3 a week—and a corresponding increase in class 4 national insurance contributions for the self-employed. They were highlighted as fairly controversial at the time, but I did not share that view. I was quite supportive of the increase in class 4 national insurance because of the generosity, as I saw it, of the new state pension that came into play. That slight increase in the class 4 national insurance rate was, I felt, a fair quid pro quo for the quite substantial increase in the new state pension, but, for whatever reason, that measure was not taken through. I had some serious concerns about scrapping class 2 national insurance, and I will explain why.
The lowly paid self-employed person may not hit the threshold for class 4 national insurance contributions, which is, I believe, something above £8,500, but are more likely to have paid class 2 national insurance contributions and so would be ticking up a national
insurance record into the future. Given that WASPI women have concerns about where they find themselves today, I was worried that this House and future Members of this House—I will probably be long, long gone—would face a raft of new people saying, “Where’s my pension. I have been self-employed all these years.” They would then be told, “Ah, but you didn’t pay any national insurance; you didn’t pay class 2, and you certainly weren’t earning class 4.” I was pleased to see that that idea disappeared and that we are back to what was the old system.
We have had this £30,000 threshold for tax-free redundancy payments—let me put it in easy terms—for quite some time. It could be argued that we have been at that level of £30,000 for too long. I did a bit of research before today and found that the last time that the £30,000 threshold was raised was with effect from 6 April 1988. It must have been considered to be the right rate at the time—it was an increase in rate from £25,000 to £30,000. I did not manage to find out when the £25,000 rate was first implemented, but it must have been deemed at the time to have been the right rate for what was a tax-free settlement, or payment, for years of service within a company. It was obviously deemed to be the right amount for people to adjust to a new work situation, or to act as a bridge towards retirement for people who were getting towards the end of their normal working life, which was perhaps more traditional in those days of the ’80s. I know the hon. Member for Bootle (Peter Dowd) raised some of those points in his speech.
Having consulted the Office for National Statistics for inflation increases since 6 April 1988, I found that £100 then is now worth £266 today. Applying that inflationary increase from 1988—no more, no less—that £30,000 would inflate to £79,800, or in broad terms £80,000. However, I do understand—for the record I am a member of the Chartered Institute of Taxation and a chartered accountant—that there is probably a perception that the £30,000 settlement payment has been a target to hit rather than a proper target for any other reasons. Hence we now have this fairly complicated formula for payments in lieu of notice. Changes came in on 6 April 2018, including this whole concept of post-employment notice pay. It was really to recognise the difference between contractual payments in lieu of notice and non-contractual payments in lieu of notice. I will not bore the House for too long with the formula that applies, but it is a fairly beefy one: it is basic pay multiplied by the number of days from the last day of employment, divided by the number of days in the last pay period, minus the amounts paid on termination—a formula given the letter T. Therefore, far from it being a tax simplification measure, the PILON rules have added quite a layer of complication to a figure of £30,000 that, in due course, should have been given adjustment for inflation in any effect.
We are now left with PILONs—new PILONs assessment of what they are actually worth—holiday pay, and any restrictive covenants being included within that £30,000 limit that is tax free and national insurance free. Above that, we have the normal rules of tax and—in complex speak—employers’ class 1A national insurance coming into play. What we are likely to see in terms of adjustment, in answer to the hon. Member for Aberdeen North, is an increase in employer contributions to pension schemes as part of a settlement on the way out, which is not any bad thing. There is nothing wrong with that.
We have a very powerful and strong message to tell about auto-enrolment. It must be the right thing for all employees now. We are now running into millions, and there will be a fund approaching tens, if not hundreds, of billions in due course, and that must be to the good, as people accumulate their own pension funds. We will look back at auto-enrolment and see it as one of the most successful and vital measures that any Government could have implemented. It is like any other measure. It sounds expensive—it means a percentage off salaries, which will always be unwelcome particularly in times of low inflation, and it means that people might see their take home salary go down—but there will be a lot of thanks from many employees in due course that these funds have been accumulated. If, in trying to circumvent, in an entirely legitimate way, paying the class 1A national insurance on these amounts—for normal employees over £30,000—employers provide more funding to a pension scheme, then that is something as a quid pro quo that the Treasury should actually support.
These measures should have come into play in April 2019. They were deferred last year for a further year, which is mentioned on page 42 of the official Red Book. Therefore, far from saying that these things have come out of the blue and have not been considered, they have been consulted upon since 2016. They nearly got somewhere, but were deferred for another year. Therefore, in terms of planning and getting that together, there is plenty of time for employers to make any due adjustment. I have really concentrated on part 1 of the Bill.
Let me turn to the sporting side of things and the £100,000 limit. There have been a lot of discussions on this subject, because we are talking about huge figures, especially when the very well-known sports stars have their testimonials. When there are millions of pounds involved, these people—who are already very wealthy—often decide to give all the money to charity, which is a laudable ambition. I suppose that the one downside of this type of legislation is that it is possible for the employer in such cases to suffer the national insurance on an amount that the recipient has never actually received because he or she has decided to put it through their tax return as a very generous donation to charity.
This subject brings out the debate about certain limits in our tax regime that have not been touched for a very long time. What was the purpose of the £30,000 threshold? There was a reason for it in 1988, but does it still apply in the modern employment market? Perhaps people do not work as long for the same employer now; that feature is probably slightly different today from how it might have been in 1988. What should the figure be? Does it deserve flexing up? We could have a similar debate across other bits of the tax code—perhaps including inheritance tax.
Lots of parts of the tax code have fallen behind inflation. They were originally there for a reason. Some were introduced when the Labour party were in government, but now that we are in government perhaps there is a debate to be had about what these things were for in the first place, as part of the tax simplification process. But if there is any fear or threat that there has been manipulation of the tax and NI system, it is right that these payments should be part of the normal weft and weave of what we are doing with national insurance. I therefore have
no difficulty supporting the Bill, and I wish the Exchequer Secretary to the Treasury every success in its progress to the House.
3.21 pm