The Financial Secretary to the Treasury (Lord Livermore) (Lab)

My Lords, it is a pleasure to open this Second Reading debate on the Bill. It legislates for reforms announced in the Budget in November. That was a Budget to build a stronger, more secure economy that had at its heart three deliberate pro-growth choices. First, by choosing to maintain economic stability, getting inflation and interest rates down, we helped to give businesses the confidence to invest and our economy the room to grow. Secondly, by choosing to reject austerity, we protected £120 billion of additional investment in growth-driving infrastructure. Thirdly, by choosing to back the fast-growing companies of the future, we supported the investment, innovation and economic dynamism that will increase growth in the next decade and beyond. But these are choices that need to be paid for. That is why the Budget contained a series of reforms to the tax system to ensure that it keeps pace with a fast-changing economy. Those reforms include changes to pension salary sacrifice, contained in the Bill we are debating today. The Government spend over £500 billion each year on various reliefs within the tax system. That is more than double the entire annual NHS budget and nearly five times the annual budget for education. The size of this spend means the Government must always keep the effectiveness and value for money of tax reliefs under review. This Bill addresses just one of these reliefs: pension salary sacrifice, the cost of which was set to treble to £8 billion a year by the end of this decade. That increase has been driven most by higher earners, with additional-rate taxpayers tripling their salary sacrifice contributions since 2017. This includes individuals sacrificing their bonuses without paying any income tax and national insurance contributions on them. But while those on the highest salaries are most likely to take part in salary sacrifice, others are completely excluded. For example, the majority of employers do not offer salary sacrifice, including many small businesses. Groups who are most likely to be undersaving for retirement, such as those on the national minimum wage and the UK’s 4.4 million self-employed workers, are also completely excluded from using salary sacrifice. The status quo is neither fair nor fiscally sustainable. We cannot afford to allow the cost of pension salary sacrifice to balloon, benefiting predominantly higher earners. In this, we agree with the approach taken by the previous Government. In their 2015 Summer Budget, the then Government said: “Salary sacrifice arrangements … are becoming increasingly popular and the cost to the taxpayer is rising”. Two years later, the previous Government introduced reforms to salary sacrifice. The Finance Act 2017 removed the tax advantages of salary sacrifice for the majority of benefits in kind—for example, living accommodation or private medical insurance. The noble Lord, Lord Hammond of Runnymede, told the other place: “The majority of employees pay tax on a cash salary, but some are able to sacrifice salary … and pay much lower tax … That is unfair”.—[Official Report, Commons, 23/11/16; col. 907.] The previous Government commissioned research in 2023, which included a proposal to cap pensions salary sacrifice at £2,000. This Government are now taking forward that reform to ensure that the tax system is kept on a sustainable footing. Although some tax experts have called for pension salary sacrifice to be abolished entirely, the Government are taking a more measured and pragmatic approach. The Bill contains two main elements. First, it introduces a cap of £2,000 under which no employer and employee national insurance contributions will be charged on any pension contributions. The cap protects ordinary workers using salary sacrifice and limits the impact on employers while ensuring that the system remains fiscally sustainable. The majority of those currently using salary sacrifice will be unaffected. Indeed, 95% of those earning £30,000 or less who currently make pension contributions through salary sacrifice will be entirely unaffected. It is forecast that 87% of salary sacrifice contributions above the cap will be made by higher rate and additional rate taxpayers. Individuals can also continue to save as much as they wish into their pensions, either through salary sacrifice or outside of it, both of which will be fully relievable of income tax. Secondly, we are introducing this change with a long implementation period so that it will come into effect in 2029-30. This gives employers and employees over three years to prepare and to adjust. I am pleased that business and industry bodies have already welcomed this lengthy implementation period. HMRC is also engaging with industry stakeholders to ensure this change operates in the most effective way. That will continue as we approach implementation. Saving into a pension, including via salary sacrifice, will remain hugely tax advantageous under these changes. The Government currently provide over £70 billion of income tax and national insurance contributions relief on pension contributions each year. That spend will be entirely unaffected by these changes. Employees’ pension contributions, including those made via salary sacrifice, will continue to be fully relievable from income tax at the employee’s marginal rate. For example, if a basic rate taxpayer were to put £100 into their pension, it would cost them just £80 of their take-home pay, with the Government providing the remaining £20 in tax relief. For a higher rate taxpayer, that same £100 pension contribution can cost them as little as £60 because they also receive relief at their marginal rate of tax. For employers, all pension contributions they make for their employees outside of salary sacrifice will remain exempt from both income tax and national insurance contributions. This makes pensions one of the most tax-efficient ways to invest in their workforce. For example, if an employer contributes £1,000 to an employee’s pension, this is worth £150 in forgone employer national insurance contributions. Since the Budget in November, it has been suggested by some that these changes will negatively impact the overall level of pension saving. We do not believe this to be the case. Salary sacrifice existed in the 2000s and early 2010s, yet there were significant falls in private sector pension saving during this period. In 2012, only one in three private sector workers saved into a pension. The key factor that has led to an increase in saving in recent years is not the complicated national insurance reliefs available to some employees, but rather automatic enrolment, introduced in 2012, which has reversed the collapse in workplace pension saving. As a result of automatic enrolment, over 22 million workers across the UK are now saving each month. Evidence also shows that pension contributions have risen in line with regulatory requirements, not with the growth of salary sacrifice. The majority of employers reducing their tax bill by offering pension salary sacrifice did not use the savings to increase pension contributions. Overall, the Office for Budget Responsibility has made it clear in its economic and fiscal outlook that it does not expect a material impact on savings behaviour as a result of the tax changes made in the Budget. These are fair and balanced reforms. They protect lower and middle earners, give employers many years to prepare, preserve the incentives that underpin workplace pension saving, and ensure that the tax system is kept on a sustainable footing. The Bill builds on reforms by the previous Government to the salary sacrifice system and legislates for proposals first put forward in 2023. It also forms part of a wider package of reforms to ensure that the tax system keeps pace with our fast-changing economy. As a result of these and other reforms, the Government were able to take a series of pro-growth choices at the Budget last year to maintain economic stability, to reject austerity, to protect investment and to back the fast-growing companies of the future. These are the right and responsible choices to strengthen our economy for the long term. I beg to move.