Lord Livermore (Lab)

My Lords, it is a pleasure to close this Second Reading debate. I am grateful to all noble Lords for their expertise, their contributions and questions, particularly at this late hour. The Bill before your Lordships’ House legislates for reforms announced in the Budget last November. It was a Budget to build a stronger, more secure economy that had at its heart three deliberate pro-growth choices: to maintain economic stability, to protect £120 billion of additional investment in growth-driving infrastructure, and to back the fast-growing companies of the future, but, as I have said previously, these choices need to be paid for. That is why the Budget contained a series of reforms to the tax system to ensure it keeps pace with a fast-changing economy. Those reforms include the changes that we are debating today. As several noble Lords mentioned this evening, the Government spend over £500 billion each year on tax relief. The size of this spend means they 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 that was set to treble to £8 billion a year between 2017 and the end of this decade. That growth has been fastest among higher earners, with additional rate taxpayers tripling their salary sacrifice contributions since 2017. But while those on the higher 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 therefore neither fair nor fiscally sustainable. We simply cannot afford to allow the cost of pension salary sacrifice to balloon, benefiting predominantly higher earners. The Bill therefore contains two main elements: first, to introduce a cap of £2,000 under which no employer and employee national insurance contributions will be charged on any pension contributions. Some 95% of those currently making pension contributions to salary sacrifice earning £30,000 or less will be entirely unaffected. Secondly, we are introducing this change with a long implementation period so that it comes into effect only in 2029-30. This gives employers and employees over three years to prepare and adjust. The noble Lord, Lord Leigh of Hurley, asked about the Government’s commitment not to increase taxes on working people. As he knows, the Budget in November kept our manifesto promise not to increase income tax, national insurance or VAT. It contained a series of reforms to the tax system to ensure it keeps pace with our fast-changing economy. The cost of pension salary sacrifice was set nearly to triple to £8 billion between 2017 and the end of the decade—as I said before, benefiting mainly higher earners. The noble Baroness, Lady Neville-Rolfe, spoke extensively about the impact on employers. The Government are taking a pragmatic, balanced approach by introducing a cap which protects ordinary workers and limits the impact on employers while ensuring that the system remains fiscally sustainable. The majority of employers—some 61%—do not offer this kind of salary sacrifice arrangement. Of the employers which do, most sectors, including retail, hospitality and leisure, have salary sacrifice contributions well below the £2,000 cap and are largely protected. Everyone using salary sacrifice will still benefit from the tax advantages available up to the £2,000 cap, this includes employers, which can make up to £300 of employer national insurance contribution savings through salary sacrifice per employee. These changes will not be implemented for over three years. In comparison, the previous Government gave just one year’s notice from announcing their changes to salary sacrifice in 2016 to implementing them from 2017. The noble Baroness, Lady Neville-Rolfe, also spoke about employers potentially stopping offering salary sacrifice schemes. The Government do not expect significant numbers of employers to stop offering salary sacrifice arrangements. Everyone using salary sacrifice will still benefit from the tax advantages available up to the £2,000 cap. The noble Baroness, Lady Altmann, asked about the cost to employers. The majority of employers do not offer salary sacrifice arrangements, and most sectors, including retail, hospitality and leisure, have salary sacrifice arrangements well below the cap. Everyone using salary sacrifice can still benefit from up to £300 employer national insurance contribution relief under the cap, and the full national insurance contributions relief is available on employer pension contributions outside of salary sacrifice. The Government are working closely with employers and the payroll industry to operationalise the change in the most effective way. The noble Baronesses, Lady Neville-Rolfe and Lady Kramer, and the noble Lord, Lord de Clifford, spoke about the impact on small businesses. Small businesses are far less likely than larger businesses to offer pension salary sacrifice. Only 10% of employees in SMEs have pension contributions through salary sacrifice exceeding the cap, compared with 18% of employees in larger firms. The noble Baroness, Lady Neville-Rolfe, also spoke about the impact on retail, hospitality and leisure businesses. As I have said already, most firms in this sector have salary sacrifice contributions well below the £2,000 cap and are therefore largely protected. The noble Lords, Lord Londesborough and Lord de Clifford, spoke about the impact on low earners. Higher earners are most likely to be using salary sacrifice and the majority of those currently using salary sacrifice will be unaffected by the changes. The Bill impacts only employees who use salary sacrifice to make pension contributions, which is around 35% of employees. Those earning at or near the national living wage cannot use salary sacrifice at all. The noble Lord, Lord Londesborough, also asked about basic rate taxpayers. The £2,000 cap is worth up to £160 a year for basic rate taxpayers. Those earning below £30,000 making pension contributions through salary sacrifice are overwhelmingly protected, with only 5% making pension contributions above the cap. The noble Baroness, Lady Neville-Rolfe, asked about individuals earning around the £50,000 mark. The Government are taking a pragmatic, balanced approach by introducing a cap which protects ordinary workers and limits the impact on employers, while ensuring that the system remains fiscally sustainable. Everyone can still save up to £2,000 via salary sacrifice free of national insurance contributions. Amounts sacrificed above £2,000 will continue to be fully relievable from income tax, but we must continue to ensure that the £500 billion of tax reliefs provided each year are effective and provide value for money. The noble Lord, Lord Leigh of Hurley, asked about the profile of the costings, also mentioned by the noble Lord, Lord Ashcombe. The costings reflect independent OBR scrutiny and use the best available data on current salary sacrifice and bonus sacrifice behaviour. Employees will respond to the changes in a number of ways. One way is that many employees will switch to making ordinary pension contributions, some of which will be to relief at source schemes. Where an employee contributes to a relief at source scheme, they will initially pay higher rate and additional rate income tax on their pension contributions and then reclaim this through their self-assessment tax return in the next year. This creates a temporary timing effect. Beyond the forecast period, this effect becomes very small. The noble Baroness, Lady Maclean of Redditch, asked about indexing the £2,000 cap. The Government have no plans to index the cap, but we will keep the £2,000 level under review to ensure that it continues to meet its objectives and remains fair across the labour market. This is consistent with the approach to other pension tax reliefs, including the annual allowance. The noble Baroness, Lady Altmann, and the noble Lord, Lord Londesborough, asked about the costings of this policy and about the savings generated from this change. The costings for this policy have been scrutinised and certified by the Office for Budget Responsibility in its economic and fiscal outlook. They already account for changes in employer behaviour, including employers providing higher employer pension contributions to replicate the national insurance contribution benefits of salary sacrifice. We remain confident of these costings. The noble Baronesses, Lady Neville-Rolfe and Lady Kramer, and the noble Lord, Lord Leigh of Hurley, suggested that this was designed only to meet the fiscal rules in 2029-30. The reality is that the Government are giving employers sufficient time to prepare and adjust their systems by implementing the changes from April 2029. That is over three years’ notice before the changes take effect. We are also engaging with employers, payroll administrators and other stakeholders on the administration of the cap to provide certainty ahead of implementation. On that specific point, also raised by the noble Baronesses, Lady Neville-Rolfe and Lady Altmann, and the noble Lords, Lord Leigh of Hurley and Lord Fuller, about the administration of this policy, HMRC is engaging with a wide range of stakeholders in the payroll, employer and software developer industries to work through exactly how the cap will be implemented. This will be vital to ensuring it is implemented in the least burdensome way possible for employers. Engagement will also help inform the secondary legislation, in which the detail of the operability will be set out and further consulted on. My noble friend Lord Davies of Brixton spoke about how salary sacrifice is just one part of the pension landscape, and I say that to the noble Baroness, Lady Neville-Rolfe, who did not mention during her contribution that saving into a pension, including via salary sacrifice, will remain hugely tax advantageous even under these changes. The Government currently provide over £70 billion of income tax and national insurance contribution 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 employers, all pension contributions 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. The noble Baronesses, Lady Neville-Rolfe, Lady Altmann and Lady Kramer, spoke about the impact on pension savings. The Government do not believe that these changes will negatively impact the overall level of pension saving. Salary sacrifice existed in the 2000s and early 2010s, yet there were significant falls in private sector pension savings during this period. In 2012, only one in three private sector workers saved into a pension. As I said in my opening, the key factor that led to an increase in saving in recent years is not the complicated national insurance reliefs available to some employees but rather automatic enrolment, which the noble Baroness, Lady Neville-Rolfe, spoke about, and which has reversed the collapse in workplace pension savings. As a result of automatic enrolment, over 22 million workers across the UK are now saving each month. The Office for Budget Responsibility has also 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. The noble Baronesses, Lady Altmann and Lady Kramer, spoke about the impact on individuals who are currently undersaving. The groups that we know are undersaving for their pension, including low earners, women and the self-employed, are the least likely to use salary sacrifice. Workers on the national living wage are excluded entirely from salary sacrifice, and so are the 4.4 million self-employed people across the UK. By contrast, these changes overwhelmingly affect higher and additional rate taxpayers. In 2030, 87% of affected salary sacrifice pension contributions made from earnings will be from higher and additional rate taxpayers. The noble Baroness, Lady Altmann, also mentioned the Pensions Commission. There is cross-party agreement on the importance of the work of the Pensions Commission as it examines questions of adequacy and fairness. The Government will not prejudge the commission’s work. The Budget in November contained pro-growth choices to maintain economic stability, reject austerity, protect investment and back the fast-growing companies of the future, but these are choices which need to be paid for. That is why this Bill reforms pension salary sacrifice to ensure that our tax system is kept on a sustainable footing. The Bill protects lower and middle earners, gives employers many years to prepare, and preserves the incentives that underpin workplace saving. These are fair and balanced reforms. They build on the steps already taken by the previous Government to reform salary sacrifice and strengthen our economy for the long term. I beg to move.