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Clause 8 relates to the way in which the earnings trigger and the qualifying earnings band are reviewed each year. The Committee will recall that we have now made a distinction between the threshold at which someone is auto-enrolled and the band of earnings on which the auto-enrolment duties form. In our conception, they are now two different numbers and the clause relates to the basis on which the two are set.
The 2008 Act introduced earnings-related uprating of what was then a single threshold. We have obviously deviated those two numbers from each other so we now have two numbers to set. However, the previous Bill locked in rises in that threshold to average earnings—in fact, the average earnings basis used to update the additional state pension. One of the issues that our auto-enrolment review advised us was that we needed a bit more flexibility to move away from the lock in earnings, so the clause replaces the earnings-related uprating power under section 14 of the 2008 Act with the power of the Secretary of State to review. He can and, indeed, should have regard to several factors when he undertakes the review, such as the level of prices, the level of earnings, the level of the basic state pension, tax and national insurance thresholds, and other relevant factors.
It is important to have flexibility. We need to keep the thresholds up to date and relevant. The employer duty starts next year. We could not reliably calculate all the figures we need now, and clearly the financial landscape changes. The basis on which tax allowances are set, national insurance thresholds are set and pensions are set are constantly moving feasts and if we tie the auto-enrolment thresholds to a single feature of the system that is doing something else, there is a danger that we will have the wrong number—the number that does not best serve our purposes.
The Johnson review suggested that the trigger should be in line with the PAYE tax threshold. We argued that there was a good reason for that, but that the lower limit of qualifying earnings should link to the primary threshold for national insurance and that the upper limit should rise in line with average earnings. Although we welcome those recommendations and recognise that there is a lot of sense in them, we do not want to be bound by them rigidly from one year to the next. The clause therefore provides that we review the thresholds annually to ensure that the right group is auto-enrolled. The Committee will see, however, that the clause also provides a power for an annual debate on the measures, which will be subject to affirmative procedure. The Secretary of State will review the threshold rates, having regard to the factors in the clause and other relevant factors, and he will bring to the House recommendations, which must then be debated.
Is the Minister concerned that the possibility for allowing a rate other than either the PAYE limit or the national earnings lower limit introduces an element of complexity? How do employers feel about that? How will the Minister ensure that employers are aware of the level if it is different from the other two that I referred to?
The figures that the hon. Lady mentions are on the list of factors that the Secretary of State must have regard to. He must also have regard to other relevant factors, one of which is risk of confusion by having different thresholds. The irony is that we are putting right in the Bill precisely what she refers to. The £5,035 uprated figure is not the same as anything in the system, so we are taking out a number that does not match anything. The figures in the Bill match—certainly, the £7,475 matches the PAYE threshold—and the Secretary of State will be mindful of that.
The Secretary of State’s decision will be taken well ahead of the start of the relevant financial year and there will be a communication strategy, because firms will have a duty to follow the measure, just as they have a duty to apply national insurance and tax above particular thresholds. There will be a process for notifying employers of thresholds of this sort. We have indicated the general principles that will apply in the clause, but we want to keep flexibility in place. The clause gives us annual flexibility within a framework rather than the rigid provision in the 2008 Act, so it is a better and more flexible approach.
I have a couple of questions that build on what my hon. Friend the Member for Nottingham South said. The Minister has discussed the different ways in which the trigger can be changed in line with prices, earnings, tax and national insurance thresholds, and state pensions. What notice period will people receive? How far ahead of time will they know what the thresholds are? Perhaps I should know this, but will the Minister confirm whether the provisions relate both to the threshold at which people are automatically enrolled and the earnings on which it falls?
Most importantly, we discussed today how the threshold for automatic enrolment will be linked—certainly in the next time period—to the PAYE threshold. I have reservations about that, which were expressed in my earlier amendment, especially if the PAYE threshold increases, as relates to the amendment on which we have just voted. The advantage of the link is that at least it is not complicated—although neither was our proposal to link both to the national insurance threshold. Will the Minister elaborate on how he and the Secretary of State will decide how to increase the trigger and qualifying earnings band? Can he give some certainty about administrative ease and fairness so that we know that the level at which people are automatically enrolled will not rocket?
I shall take the hon. Lady’s questions in order. On the notice period, the uprating will be done in January for April, which is the usual process of uprating for the following year. Most payrolls use payroll software, which all the figures will go into. The Pensions Regulator will issue guidance to those employers who must comply with the duty, and he will ensure that they know what the figure is. I stress that employers are used to getting new numbers at the start of a new financial year for all sorts of reasons; this will be another number—or not, as the case may be.
The clause covers both the review of the earnings trigger and the qualifying earnings band. The hon. Lady asked whether we could go mad and jack up the figures by huge amounts and exclude many people. All we know at present about the tax allowance is the rate that the Chancellor announced for 2012; we do not know anything beyond that and I cannot pre-empt what he will announce. However, there is a coalition agreement commitment to head towards a tax threshold of £10,000. The Johnson review specifically states that he does not think that a nominal tax allowance of £10,000 by the end of the Parliament—not today, it is important to stress that—is out of the spirit of the sorts of thresholds that he considered to strike the right balance between not excluding too many people and keeping down the burden on firms.
An increase from £8,000 to £10,000 for the PAYE threshold is an increase of 25%, which is a big leap compared with what we expect to happen to average earnings over the period of this Parliament. They are pretty stagnant at the moment and I do not expect them to go up by any more than, say, 10%.
I make no apology for a significant increase in the tax-free threshold—that is the basis on which I stood for election. The hon. Lady is right; it will have a significant impact, but we should bear in mind that we are talking about nominal, not real earnings. The lower earnings limit, or the primary threshold which I think she wanted to use, would be linked to nominal average earnings over three or four years, and who knows by how much they will increase—it could easily be by 4% or 5% a year for three or four years. [ Interruption. ] Well, if inflation is about 4% at the moment, and real earnings growth returns and headline inflation comes down, I would have thought that nominal average earnings growth in that territory is not implausible. We can argue 3.5% or 4% or whatever, but my point is that it is wrong to compare £10,000 with current figures. The nominal increase is of about 20% over another three years or so. Yes, it will go up the income scale—that is the point of the income tax policy, to take people out of income tax.
We are not proposing to stick rigidly to that in clause 8 but we are instead giving ourselves the power to do an annual review. To answer the hon. Lady’s question, therefore, each year we will look at the relevant premises of the system and at what would be a threshold that strikes the right balance between burdens on business and excluding people who we might want to keep enrolled. If for tax, national insurance or pensions policy reasons, the thresholds do something, we would not be bound, as we were previously, only to index the number we first thought of—that is the flexibility we have in the clause and which I think the House wants. However, an impact assessment will be done to inform the affirmative resolution debate, so there is plenty of scope for scrutiny and assessment, which is only right and proper, because the decision is important.
We do not envisage an annual review of that specific issue—clause 8 concerns an annual review of thresholds—but we have a statutory duty, once NEST is rolled out and everyone has been auto-enrolled, to get going by 2017 on a review of issues such as transfers.
To encourage my hon. Friend, we have already, earlier this year, called for evidence about the regulatory difference between defined-contribution, contract-based and trust-based pensions, and one of the issues arising is that of transfers and small pots. In response, we have decided that in the autumn we will produce a document setting out some vision thinking on options for transfers. The issue she raised is important, and we are very much seized of its urgency and are not kicking it into the long grass.
Clearly, although I am straying on to a probable later debate, we do not want to unsettle the architecture of auto-enrolment just as we are about to implement it. We could tweak 1,001 things, but one of the pleas we have heard from employers, the industry and, to some extent, consumers is, “Please stop fiddling with it—get it in, get it up and running, and then see how it’s going,” which is what we will do. I commend clause 8 to the Committee.