Mr. Bone: The hon. Gentleman is yet again making a powerful speech on behalf of his partycompletely opposite to the one that he made last year, which was also very powerful and persuasive. Last year, I was persuaded; it was an interesting and radical proposal. Presumably, that is why his party dropped itbecause I thought it was a good idea.
I must ask the obvious question: how much would the proposal cost? In broad terms, how much would it cost for each of the cuts or changes that would need to be made to make up for the loss?
Mr. Browne: I am flattered by the hon. Gentlemans comments and his observation that I am able to argue persuasively in all kinds of forums. His central, flattering observation is not entirely accurate, because I was arguing this time last year that we should make our income tax system better able to assist people on low and middle incomes, and that is the argument I am making today. We can have a discourse about the best way to do that, but we think our proposals would be most effective. On the cost, I could go through all the proposals but perhaps I can refer the hon. Gentleman to my partys website, where they are given in greater detail. It is not central to clause 3, but if you wish to indulge me, Mr. Atkinson, I will happily give a seminar on the benefits of Lib Dem policy.
Mr. Browne: I see you are shaking your head, Mr. Atkinson. [Interruption.] The hon. Member for Rochford and Southend, East says that I do not know. I know only too wellI just do not know whether everyone else on the Committee wishes to know the same amount of detail.
The proposal is a shiftit is not tinkering with the edgeswhich is why I said it would be the central feature of our manifesto at the next general election. This is an important matter because it relates to many people who pay the basic rate of income tax, including many on the minimum wage who are nevertheless caught up in the threshold at quite a low point below their total income. So it is by no means affluent people whom we are talking about; rather, we are talking about typical households in all our constituencies that would benefit from not having the state take a proportion of their income on the one hand, while on the other coming up with complicated ways of reimbursing individuals whom it feels are unable to live on their post-tax income. We are trying to achieve a more equitable society. My party would not be comfortable with endorsing the figures in clause 3.
Mr. Timms: Some of the amendments we have been debating this morning seem to be in a shaky condition. Pensioners are often on fixed incomes, and the age-related
We have made good progress in lifting pensioners out of tax altogether, but I cannot support the new clause. It would cost well over £1 billion and give no benefit at all to that group of nearly two thirds of pensioners aged 65 and over who do not pay tax. I say to the hon. Member for South-West Hertfordshire that it simply cannot be right to spend so much for no benefit at all to those on the lowest incomes. There is a balance to be struck. The hon. Member for Taunton has argued for a somewhat larger increase in age-related personal allowances, but I think that he, too, would acknowledge that the announcements we have made represent a substantial change for people aged 65 and over. It is a welcome change that will benefit a large number of pensioners.
The Government have of course made many other changes for the benefit of pensioners. Overall, as recent figures confirm, 900,000 pensioner households have been lifted out of relative poverty since 1997, and a pensioner is now no more likely to be poor than someone from any other part of the population. That is an unusual position to be in. Historically and traditionally, pensioners have always been less well off than the population as a whole. This is the first time in our history that, over an extended period, pensioners are no more likely to be poor than anyone else, and that has been the case since 2003in both the period of growth and the current downturn. That is an important achievement that the Government have secured. I do not think that the new clause would be right, and I ask the Committee to reject it and to agree that clause 3 should stand part of the Bill.
Question put, That the clause stand part of the Bill.
The Committee divided: Ayes 15, Noes 2.
Division No. 1]
Question accordingly agreed to.
Clause 3 ordered to stand part of the Bill.
Reduction of personal allowance for those with income exceeding £100,000
Question proposed, That the clause stand part of the Bill.
Mr. Timms: The clause legislates for the gradual removal of the personal allowance for those with incomes of more than £100,000 a year. The change will take effect from April of next year and, as part of the package of fiscal consolidation measures, the clause ensures that those with the highest 2 per cent. of incomes will no longer get twice the amount of benefit from the personal allowance that a basic rate taxpayer with an income of £10,000 would receive, for example.
The clause withdraws the personal allowance at a rate of £1 for every £2 of an individuals income above £100,000. Assuming that the personal allowance is £6,475 in 2010-11, it will mean that a taxpayer with an income of more than £112,950 would have the personal allowance fully removed. The clause affects 2 per cent. of taxpayers with the highest incomesthe 2 per cent. in the best position to contribute. The income of that relatively small group has grown by almost 90 per cent. during the past 10 years, twice as fast as for the average taxpayer. It is only right that those in that group should contribute to the fiscal consolidation that is now required. Tapering the allowance means that there is no cliff edge for those with incomes of just more than £100,000 a year. For clarity, I emphasise that no one with an income of less than £100,000 will pay more income tax under the clause. In last years pre-Budget report, it was proposed that the personal allowance was half removed above £100,000 and then fully removed above £140,000. However, the global downturn has been more severe than predicted at the time so we have brought forward the second half of the removal of the personal allowance.
For the purpose of the taper, an individuals income is their adjusted net income. That is the long-established basis for the calculation of the taper that applies to higher amounts of personal allowance for those aged 65 to 74 and those aged 75 and over, as we have just discussed. Broadly, adjusted net income is a persons income liable to income tax after taking account of pension contributions and gift aid payments. Tax due at the additional rate will be collected in the usual way through a combination of pay-as-you-earn and self-assessment. That does not apply to the vast majority of people98 per cent. of taxpayerswho will not experience any change in the way in which their tax is calculated.
Mr. Bone: Does the Minister agree that the policy is a clear departure from new Labour principles and that we are now going back to the old Labour idea of taxing the rich because it is right to tax the rich, whereas new Labour was for a vibrant economy to attract people to this country?
Mr. Timms: No, it is not. The policy is consistent with the new Labour commitment to fairness in the tax system. Everyone throughout the world recognises that consolidation is required. The new Labour approach to
Mr. Greg Hands (Hammersmith and Fulham) (Con): It is a pleasure to serve under your chairmanship, Mr. Atkinson, and I look forward to our deliberations in the coming weeks. This is my second Finance Bill; last year I considered it from the Back Benches. I can only assume that I did something wrong to be put on it pretty much full time from then on, but I am looking forward to it.
It is ironic that this is called clause 4I refer to the intervention by my hon. Friend the Member for Wellingborough intervention about this marking the end of new Labour. The clause allows us to examine the perverse structure of the marginal tax rates proposed by the Government. What the Government propose is, thankfully, slightly simpler than the two-stage proposal outlined in the pre-Budget report 2008, to which the Minister referred. Nevertheless, the proposals introduce considerable complexity into the income tax system and associated tax calculations.
In terms of the revenue raised, which is important to look at, the withdrawal of the personal allowance from individuals with incomes above £100,000 is estimated to raise £890 million in 2010-11, rising to £1.4 billion in 2011-12. As before, those figures combine the estimates for the 2008 PBR staged restriction of the personal allowance with the Budget 2009 announcement. The Budget report estimates that the total yield from removing the personal allowance will be £1.5 billion come 2012-13.
As the Minister says, the Government propose that, from 6 April 2010, the personal allowance for individuals with an adjusted net income of over £100,000 will be limited by £1 for every £2 over the limit. Based on 2009-10 personal allowances, that means that individuals with an adjusted net income of £112,950 or more will not benefit from the tax-free personal allowance. Meanwhile, using the 2009-10 personal allowance figure of £6,475, withdrawing the personal allowance at a rate of £1 for every £2 of income over £100,000 results in a marginal income tax rate of 60 per cent., or 61.5 per cent. with national insurance contributions, on income between £100,000 and £112,950.
Mr. Todd: All those figures are based on there being no behavioural change in the individuals involved. Is the h G going to expand on the issues that that raises?
Mr. Hands: I am, and I thank the hon. Gentleman for that intervention. One of the great weaknesses in the Governments case is that, as far as I can tell, there has been no study of any behavioural changes, either from this or from the change to the 50p tax rate in clause 6, which we will come to in due course.
The volume of changes in this years Budget has added considerably to the overall convolution. Phasing out these allowances, probably more than anything else, has added massive complexity to our tax system. One way of evidencing that is to look at the profusion of marginal tax rates expected to be within the system from 2011. Using current income points, which may change by 2011, we see 11 different effective tax rates, including national insurance contributions: from an income of zero to £5,715 there is an effective tax rate of zero; from £5,715 to £6,420 there is an effective tax rate of 11.5 per cent.; from £6,421 to £6,745 it is 50.5 per cent.; and from £6,746 to £18,023 it is 70.5 per cent.. It then falls sharply to 31.5 per cent. for income between £18,024 and £43,875. It then goes back up, so for income between £43,876 and £50,000 it is 41.5 per cent. Between £50,001 and £58,170, it goes back up to 48.17 per cent., but, between £58,171 and £100,000, it goes back down again to 41.5 per cent. Between £100,001 and £112,950, it reaches its highest rate of all of 61.5 per cent. before going back down to 41.5 per cent. in the penultimate tax bracket of £112,951 to £150,000.
Mr. Hands: I am first going to finish referring to the table, because it is important to have it on record so that we have a feel for how the figures will work and for the complexity of the system. The final rate, for those earning over £150,000, reverts to 51.5 per cent. That is a total rollercoaster ride and I will talk about some of its implications in due course.
Mr. Todd: I admire the hon. Gentleman for his research. I am sure that he has a table for taxpayers who are over 65, from which he will be able to set out a similar set of figures.
Mr. Hands: I do not wish to try your patience, Mr. Atkinson, but the same principle and degree of complexity are involved in that context too. For our purposes this morning, one table will suffice to illustrate the complications in, and the potential effect of, the 11 different marginal tax rates.
The issue gives rise to the absurd position that a taxpayer earning £105,000 has a marginal rate of 61.5 per cent. on additional income, while a taxpayer earning £155,000, which is 50 per cent. more, has a marginal rate of only 51.5 per cent. Furthermore, a taxpayer earning £125,000, which is somewhere in between those two figures, has a marginal rate of just 41.5 per cent. It makes absolutely no sense, and I would like a proper explanation from the Government of their work on the rates. We will now have 16 different personal tax rates, including those levied on trusts and dividend income, and the only people who will benefit from all of the complexity will be tax consultants. What are the Ministers thoughts on that?
In terms of practicalities, the issue also raises significant problems for the PAYE system with associated costs for both Her Majestys Revenue and Customs and for taxpayers who are in PAYE. The actual amount of the allowance depends on the level of income in the tax year, which will not be known until after the end of that year. The PAYE system cannot deal effectively with
Dr. John Pugh (Southport) (LD): I am listening very carefully to the hon. Gentleman, but some of the problems that he mentions are intrinsic to the system itself and are not dependent on the proposal under discussion, are they not? He illustrates a series of problems that will occur, but they would occur in any system in which allowances are reduced. Do all of the problems derive from the simple fact that there are 11 different bands?
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