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Mr. Timms: The amendment would extend the 10 per cent. starting rate for savings income from a band of £2,440 to a band of £37,400. I will respond to the amendment, although I will also comment on what we have now clarified as Conservative policy.
Responding to the points raised by the hon. Member for Henley, it is certainly the case that, although low interest rates have greatly helped families with mortgages, for example, they have reduced the returns for savers. The Government are not at all dismissive of that. I can understand why the amendment has been tabled and I agree that savers need help in difficult times, but I do not agree with the approach set out in the amendment.
The hon. Member for South-West Hertfordshire has helpfully clarified that this is a one-year proposal and the Conservative party would not be committed to it for future years. However, because of the way that income is ordered when an individual’s tax liability is calculated, with tax on savings income being calculated after income from other sources, such as employment, self-employment and pensions has been taxed, the effect of the amendment would be to make the 10 per cent. savings rate disproportionately valuable to savers with higher incomes. That would cost the Exchequer about £250 million.
The concern about disproportionality is even greater in relation to the proposal to abolish tax on savings—we have clarified that that is the Conservatives’ policy. When that proposal was first announced in January, there was some confusion among Conservative Front Benchers about how it would affect higher rate taxpayers. The shadow Chief Secretary said that it would not help higher rate taxpayers, while the shadow Chancellor said that it would. I believe that the shadow Chancellor was right. Indeed, the example that the hon. Member for South-West Hertfordshire just gave—a rather puzzling example about a single mother working part time, earning £100,000 a year—
Mr. Gauke: £10,000.
Mr. Timms: Ah, but the hon. Gentleman said £100,000. It makes more sense to refer to someone earning £10,000. Nevertheless, on the basis of his proposal, there would be a benefit for higher rate taxpayers as well. The amendment does not go that far, but it would cut the basic rate on savings to 10 per cent. and would suffer from a similar drawback of being disproportionately valuable to savers with higher incomes.
There are more effective ways of targeting support—particularly for savers who are likely to be facing the greatest difficulties, such as pensioners. That is why the Budget announced three measures to support older people in particular. First, from October this year, we will raise the ISA limits for those aged 50 or over. More than 18 million people hold ISAs, so that will provide support to many savers through the tax system. That is one particularly successful measure of a raft of measures that the Government have taken to increase saving in the economy.
Mr. Gauke: I have two brief points to make on ISAs. One is on the rather complicated system of different limits depending on one’s age. Can the right hon. Gentleman explain why he has done that? Secondly, how much does he think a person can benefit from the reduced tax as a consequence of the increase in the ISA threshold? Given current interest rates, does he agree that the most it can be is about £30 or £40 a year?
11.30 am
Mr. Timms: I have not done that calculation, but the figure that the hon. Gentleman suggests may well be right. Of course, his argument a few minutes ago was about the need to increase the incentives to save. Raising the ISA limit in such a way will be a significant incentive.
Secondly, HMRC is launching a tax back campaign, which will contact 2.7 million pension credit recipients. The campaign will encourage pensioner savers to reclaim any tax that they have overpaid on savings and, where possible, register their account to receive income from their savings tax free in the future. Again, that will help pensioners with savings.
Thirdly, and perhaps most significant, the Government will increase the capital disregard in pension credit and housing and council tax benefit for pensioners to £10,000 from this November. That will significantly increase the generosity of pension credit for those who have savings. More than half a million low-income pensioner households will benefit by £4 a week on average, those on the lowest incomes by up to £8 a week.
Mr. Todd: Those measures are certainly welcome. Will the Minister expand a little on the assumed interest rate that is taken into account in calculating the entitlement for housing benefit, when savings that are vestigial that lie within that limit are taken into account? That issue concerns many pensioners whom I represent.
Mr. Timms: I am aware of the matter, and it has been raised from time to time. It is not accurate to describe that as an assumed interest rate. The assumption that is made is that if someone had a significant capital sum—in the future we are talking about over £10,000—it would be perfectly appropriate for them to use some of that, as well as the interest earned, to meet their expenditure. It would not be right to ignore entirely the benefit of that sum in meeting to expenses.
Mr. Bone: Is the Minister introducing a new concept? I never realised before that the disregard was more than a calculation of the assumed interest. Instead, it says to a pensioner, “You are too rich. You must use some of your savings.” Is that the new policy?
Mr. Timms: No, it is simply a recognition of the fact that people with savings are able to draw on them to meet their needs—that is, after all, the purpose of savings. That has always been the case, and the basis of the pension credit capital disregard.
That package is much more effective in supporting savers at risk in the current difficulties than the approach suggested in the amendment. In 2011-12, the Government package will cost £190 million a year—not much less than the amendment suggests, and the package will be much better targeted at those who most need the help.
Mr. Atkinson, I have a few remarks on the clause stand part. Clause 2 will raise the basic rate limit from last year’s £34,800 to £37,400 this year, a rise of £800 over indexation. Taken together with the £130 above-indexation increase to the personal allowance made by the next clause, it means that nobody will pay a higher-rate tax on incomes below £43,875. It is an increase in the higher-rate threshold, which will support middle-income families during the global downturn. It also takes the higher-rate threshold for 2009-10 to the same level as the upper earnings and profits limits for national insurance, the point at which somebody stops paying the main 11 per cent. rate of national insurance and starts paying the additional 1 per cent. rate.
In 2011-12 the threshold at which someone starts to pay national insurance will be aligned with the tax-free personal allowance. The levels at which individuals start and stop paying the main rates of tax and of national insurance will be aligned for the first time—a simplification that will be widely welcomed.
One feature of the broad-based fiscal consolidation announced in the pre-Budget report last year included increasing the rates of national insurance by 0.5 per cent. Alignment of the national insurance primary threshold and the income tax personal allowance will mean that those with incomes of less than £20,000 and subject to the full standard rate of national insurance will gain more than they would lose from the rate rise at that point. Looking at all the changes since April 2008, no one with an income of less than £40,000 will be worse off.
The Budget changes build on the pre-Budget report, securing further consolidation targeting the 2 per cent. of individuals with the highest incomes—those most able to contribute—while protecting those with lower incomes. I invite the Committee to support clause 2.
Mr. Gauke: I shall respond principally to the Minister’s remarks on amendment 1 and our policy on savers. Let me be clear—it has been clear throughout—that our policy to benefit savers was to benefit only basic rate taxpayers and pensioners on modest incomes. That has been the position all the way through, and I hope that that is clear, notwithstanding the remarks of the Minister.
On the package referred to by the Minister, I do not intend to spend a great deal of time on the issue of ISAs, Mr. Atkinson—I am sure that you would warn me off from doing so. To be fair, the Minister has a point about the increase in the ISA limits being a symbolic message of encouragement to saving. However, I note that he did not disagree with my numbers—in practice, it is likely to be around £30 or £40 per person in the current climate.
Mr. Timms: May I press the hon. Gentleman on his earlier point, that the position of his party is clear on whether higher rate taxpayers will benefit from the measure or not? His point was the point made by the shadow Chief Secretary. However, the shadow Chancellor told the BBC’s “Money Box” programme on 10 January:
“Of course that’s entirely true—that if your entire income is savings and you’re a higher rate taxpayer, then you benefit like other people do from the fact that the basic rate goes to zero—and we never said otherwise. Indeed I’ve made that point as well.”
So, the shadow Chancellor is telling us that higher rate taxpayers will benefit from his proposal.
Mr. Gauke: I have the Q and A that was circulated internally. We have made it clear that the policy is targeted at basic rate taxpayers. We shall continue to have a tapering system. Indeed, in that interview on “Money Box”, some of the criticism that my hon. Friend the shadow Chancellor was getting was that the policy would not benefit some pensioners who were earning somewhat more. The policy is clear.
The tax back campaign raises two important points, one of which is how our policy would help the lower earners—pensioners who do not receive enough from their savings to pay the basic rate of income tax. There are a large number of such people, who do not always get their tax back and do not always go through the process to reclaim. That is not to say that we do not welcome the Government’s initiative to encourage more people to get their tax back—indeed, I raised the point with the Minister this time last year, asking what the Government were doing about it, and the Low Incomes Tax Reform Group has campaigned on the issue for a long time. None the less, a reasonably substantial number of people—in particular, a reasonably substantial number of pensioners—are not getting their tax back in the way that they should and I suspect that that will continue to be the case. Our policy would help those people.
Mr. Bone: Will the Minister give way—sorry, the shadow Minister? Surely, the situation is this; if those people were not paying any tax under the Conservative policy, we would not have the Revenue spending all the money on a campaign that must be costing a considerable amount of taxpayers’ money.
Mr. Gauke: Indeed. My hon. Friend is right that our policy would be a lot simpler to administer and that there would not be a need to campaign for pensioners to reclaim the tax that they had overpaid. So he is absolutely right, and his suggestion is clearly helpful.
I note the comments made by the Minister with regard to the national insurance contribution rises. I do not intend to get into a lengthy debate on that issue. I noted that the Minister chose his words very carefully when he discussed who would be gaining and who would not be losing. However, the fact remains that the NI contribution increase that is designed to come into effect immediately after the election will make those people who are earning £20,000 worse off.
I also note the Minister’s comments about the alignment between the upper earnings limit of NI and a higher rate of income tax, which was part of the package announced in 2007. I would be grateful for clarification—this is a genuine question—about a point he made that slightly confused me, which was about the lower earnings limit. As I recall, the original proposal in 2007 was that the point at which one started paying NI contributions and the point at which one started paying income tax was going to be the same. However, that got rather confused by the compensation package for the 10p rate and the increase in the personal allowance. However, there was not an equivalent increase for the point at which one starts paying NI contributions, so that we lost that very simple two-tier system. From what the Minister has said—maybe I have missed a point—the implication is that by 2011 we will be back to that system.
Mr. Timms indicated assent.
Mr. Gauke: The Minister is nodding in assent, but I would still be grateful for a little clarification on that issue. Subject to receiving a response to that point, however, I will be seeking leave to withdraw amendment 1.
The Chairman: Order. Before the amendment is withdrawn, does the Minister want to respond to that point?
Mr. Timms: I am happy to do so. I can confirm that, as we announced in the pre-Budget report, we will align the national insurance primary threshold to the level of the income personal tax allowance, with effect from April 2011.
Having said that, however, I would be grateful if the hon. Gentleman explained the mechanism for achieving the effect that he has described to the Committee, which is that the abolition of income tax on the first part of people’s savings will not benefit higher rate taxpayers. For example, take someone who has earnings of, say, £30,000 and savings income of £20,000, so that their total income puts them into the higher-rate tax band. Presumably someone in that position would benefit from the zero rate that the hon. Gentleman’s party proposes, so that there would be a benefit to higher-rate taxpayers, as the shadow Chancellor said on “Money Box”. I cannot see what mechanism there could be for avoiding the effect that the shadow Chancellor said—rightly, I think—would apply.
I am glad that the hon. Gentleman broadly welcomes the tax back campaign. Let me just make the point that, as we will discuss further when we consider a later clause, 62 per cent. of pensioners pay no income tax, thanks to the very substantial rises in age-related personal allowances that this Government have introduced. A much, much higher proportion of pensioners are out of tax altogether than was the case in 1997.
11.45 am
I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 2 ordered to stand part of the Bill.
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