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Clause 3

Personal allowance for 2009-10 for those aged under 65
Question proposed, That the clause stand part of the Bill.
The Chairman: With this it will be convenient to discuss new clause 2—Personal allowances for 2009-10 for those aged over 65
‘(1) For the tax year 2009-10 the amount specified in—
(a) section 36 of ITA 2007, and
(b) section 257(2) of ICTA,
(personal allowance for those aged 65 to 74) is replaced with “£11,490”.
(2) For the tax year 2009-10 the amount specified in—
(a) section 37 of ITA 2007, and
(b) section 257(3) of ICTA,
(personal allowance for those aged 75 and over) is replaced with “£11,640”’.
Mr. Timms: The clause increases the personal allowance for those aged under 65 by £130 above indexation. Over the last year we have announced a number of changes to personal tax which focus support now on low and middle income households while consolidating the fiscal position in the medium term, targeting those who can afford to pay more while protecting those with the lowest incomes.
In May last year, we announced an in-year rise in the personal allowance worth up to £120 to all basic-rate taxpayers. Most people saw the benefit of that change from last September. In the pre-Budget report, we announced further support for families, reflecting their difficulties at the moment. We rolled forward the increase in the personal allowance, and increased it by a further £130 above inflation. For 2009-10, that means that the tax free personal allowance will increase from £6035 to £6475. The clause makes that change.
The package of measures announced in the pre-Budget report, of which clause 3 is an important element, provides support to all low and middle-income families for the current period, and will mean that some 23 million taxpayers with an income under £40,000 will be, on average, around £145 a year—nearly £3 a week—better off in April 2011, compared to April 2008. Changes since the Budget last year will mean that 800,000 low-income households will be completely taken out of tax. The changes brought in by the clause will also fully compensate about 90 per cent. of households who would have otherwise been paying more net tax from the removal of the 10p tax rate, as we were discussing a few minutes ago.
New clause 2 would raise the age-related allowances for those aged 65 and over by £2,000 from its current level this year. The hon. Member for South-West Hertfordshire said earlier that this was part of a package that he estimated as costing £4 billion. I think that this particular part of it would cost some £1.2 billion. I guess from what he is saying that he envisages it being a one-year only increase in the age-related allowances, with the expectation that the age-related allowance would be reduced again in the following year. That would be an unusual thing to do; changes of this kind to age-related allowances really ought to be on an enduring basis, rather than a temporary basis. It is a significant downside to what he is proposing.
Mr. Atkinson, if I am able to catch your eye at the end of this short debate, perhaps I will say some more about new clause 2, but I commend clause 3 to the Committee.
Mr. Gauke: On clause 3, I note the increases in personal allowances. The Minister has stated that he also acknowledges that this does not succeed in compensating a number of those who have lost out as a consequence of the 10p rate being abolished. I am sure that point has been noted by his own Back Benchers.
On new clause 2, the Minister said that he could see difficulties in an increase in personal allowances being for one year only. I note that comment. As I have made clear, this policy is for this year and personal allowances would need to be looked at again next year were we in a position to control what those allowances might be and consider the appropriate approach. I was rather struck by the irony that a Minister was querying whether it was appropriate to use the personal allowance on a temporary basis to address a particular problem. Those of us who recall last year’s debates will know that the Government did precisely that with a temporary increase in personal allowances to address the 10p rates, which they made permanent in the PBR. Certainly the intention this time last year—it was almost to the day that the compensation package was announced—was that it was on a temporary basis. I am not sure that the Government are on the strongest ground here.
As the Minister stated, the intention of new clause 2 is to raise the personal allowances for those over 65 and those over 75 by an additional £2,000 a year.
Mr. Todd: The new clause appears to be silent on the issue of the point where the benefit of this increased allowance starts to be lost. There is a point at which this raised allowance for those over 65 deteriorates. Is that adjusted at all within the proposal?
Mr. Gauke: The hon. Gentleman makes a fair point. It is an important technical point and one which the new clause does not fully address. We recognise that there will be a tapering system. Our policy is aimed at helping those who benefit from the basic rate. We think that these amendments help to achieve that.
I note the Minister’s earlier points about the benefit of raising personal allowances and taking pensioners out of the tax system, but our proposal does not result in some of the difficulties of pensioners having to claim back taxes in certain circumstances. Clearly it helps to take pensioners out of the tax system. I do not intend to run over all the arguments about encouraging saving in order to provide resilience for individuals, to encourage independence and perhaps even to provide stability within our banking system, as I have made those points already. Equally this group has been hit hard by the fall in interest rates in recent months. This must be seen as part of the package to help savers which I addressed earlier. We believe that this is a useful policy. It will help those who have been unfairly affected by the fall in interest rates. An increase in personal allowances in this area is a simple way of redressing that.
Mr. Todd: I want to explore this a little further. If this is targeted at those who have lost income from falling interest rates it will apply to any pensioner over 65 whose income may be drawn from any source. I am not quite clear about the targeting of this in relation to the hon. Gentleman’s argument.
Mr. Gauke: The hon. Gentleman is right to say that income in a number of other areas has also declined, but this measure needs to be seen as part of a wider package. Pensioners, for example, are in a more difficult position than they were a couple of years ago due to the changing economic climate. We think that the Government should pursue that matter, and to find savings in public spending now in order to provide support to pensioners would be a sensible policy.
Mr. Bone: I have spoken to pensioners in my constituency whose savings income has gone down so drastically that they have had to go back to work. Would not the new clause benefit those people, as they would get an effective reduction in the income tax that they pay?
Mr. Gauke: That is absolutely true. These are difficult times and there may also be people who have delayed retirement. I can think of constituents who are in exactly that position. Those people deserve our support, and consequently, I commend the new clause to the Committee.
Mr. Jeremy Browne: As we saw from our discussions on clause 2, it is important that Opposition parties get the details of their policies right before submitting them to the Committee. As far as I understand, the Conservative party’s policy changes depending on what point on Thursday afternoon it is. Amendment 2, which I tabled, is not being discussed directly, but it is helpfully on the blue sheet that gives notice of amendments. It seeks to provide an opportunity to discuss how different income tax thresholds could benefit different interests and income groups. Unlike the Conservative proposals, this is an extremely robust and well thought through set of proposals by my party, and it will form the centrepiece of our election manifesto.
Mr. Bone: I have a sense of d(c)j -vu. Did not the hon. Gentleman stand up at this time last year and say that his proposals were going to form the centrepiece of the Liberal Democrat manifesto? Will we have new proposals before the election for next year?
Mr. Todd: On a point of order, Mr. Atkinson, I am not clear which amendment we are discussing. We appear to be hearing a speech in favour of an amendment that has not been selected.
The Chairman: That is not a point of order for me, but something that the hon. Member for Taunton might wish to explain.
Mr. Browne: I am grateful to you for providing me with that opportunity, Mr. Atkinson. We feel that the clause would be better if it said £10,000 instead of £6,475, and on that basis, we do not feel able to support it. The stand part debate gives me an ideal opportunity to argue that clause 3 is not a good basis on which to legislate. I hope that the Committee will be convinced by my argument and will reject the clause. We believe that increasing the allowance to £10,000 would have a profound and beneficial impact on people on low and middle incomes. For example, it would represent an income tax cut of £705 for those earning over £10,000, and 4 million people would not pay tax altogether.
I do not wish to try your patience, Mr. Atkinson, but it would not be credible for us to make this case without convincing the Committee and the country that the sums add up and that we have lots of robust proposals for financing this radical and attractive measure.
12 noon
The Chairman: Order. I wish to clear some confusion in my mind. The hon. Gentleman can speak to clause 3 stand part—the entire clause—at this moment. We are not debating only the new clause; we are debating the whole thing. I was not sure whether he was clear on that.
Mr. Browne: That is what I was hoping to do.
The Chairman: At the end of this debate we will put the question whether clause 3 should stand part of the Bill. There will be no division on the new clause; if there is to be one, it will be much later in our proceedings.
Mr. Browne: I was just seeking to make a point about the Government’s proposed 2009-10 personal allowance for those aged under 65. I do not wish to incur your wrath, Mr. Atkinson—I did not want to speak at length about alternatives put forward by my party. Those will become apparent in time, and I do not wish to get too far from the matter in hand. I want to put on the record, because it is important, that attention will increasingly be paid to the question of how we can alleviate the tax burden on those on low and middle incomes. The Government have in many cases tried to do that with a complex system of tax credits. Our fear is that that leads to excessive complication; the system could be simpler. As we all know from our constituencies, there can be a sizeable administrative burden, which the Government do not always deal with very efficiently. My party is coming up with alternative proposals that we feel would be helpful.
Mr. Gauke: I am grateful to the hon. Gentleman for giving way during his explanation of the clause and his proposals on personal allowances. It has often been said, certainly by his colleagues, that as part of a fiscal stimulus there is a need to raise taxes on the wealthy to fund tax cuts for those on low pay. Is this proposal explicitly part of a fiscal stimulus, or not? Secondly, as I understand it, when this policy was announced, it was going to be financed by abolishing tax relief on higher earners’ pension contributions. Now that the Government have gone some way towards that, does that leave a black hole in the hon. Gentleman’s party’s calculations?
Mr. Browne: I shall not answer at great length because I do not wish to upset anybody, Mr. Atkinson. The first point is that our proposals are revenue neutral, so there is a shift in the tax burden to try to assist people on low and middle incomes. Therefore, it is not a fiscal stimulus in the sense of borrowing money to fund an overall tax cut. I think most people would accept that those on low and middle incomes tend to spend a higher proportion of their income than those on higher ones, so the effect—admittedly fairly modest—might be to increase overall spending without changing the overall tax burden. Shall I go on to the second point?
Mr. Gauke: I hope the hon. Gentleman will forgive me for intervening while he responds to the first point, before having a chance to respond to the second. The Liberal Democrat tax policy as presented by the hon. Member for Twickenham, particularly in debates after the PBR, was that there is a need for a fiscal stimulus, but a funded one. I think the hon. Member for Taunton is acknowledging that. Applying his own logic, does this mean that when the time comes for fiscal tightening—if he believes fiscal measures are appropriate—there would be a transfer and that his party would raise taxes on the poorest and cut taxes on the wealthiest, because that would be a fiscal restraint?
Mr. Browne: I am grateful for that intervention because I wish to share with the Committee my desire to see the tax burden reduced, if possible. I have watched both Labour and Conservative Governments increase taxes on people on low and middle incomes, and I know how much difficulty that causes. That is not a path that I would argue for going down. We are proposing a measure that would help people and households with fairly modest incomes. It is not primarily designed to try to stimulate the economy as a whole, but that would be a beneficial by-product of our policy, were the Government to adopt it. As I said, it would have a modest but nevertheless real stimulus effect because of the different spending patterns of different groups.
Mr. Bone: Will the hon. Gentleman give way?
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