Mr.
Bone: The hon. Gentleman is yet again making a powerful
speech on behalf of his party—completely 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 it—because 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. Gentleman’s
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
party’s 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.
The
Chairman: indicated
dissent.
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
well—I just do not know whether everyone else on the Committee
wishes to know the same amount of detail.
The proposal
is a shift—it is not tinkering with the edges—which 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
allowance has at least been raised in line with indexation every year
since 1997. In 2008-09 the age-related allowances were increased by
£1,180 above inflation for those aged between 65 and 74, and by
a higher amount for those aged 75 and over. We also announced that the
age-related allowances for those aged 75 and over will rise to
£10,000 for the 2011-12 tax year. We have set the allowances
this year at £9,490 for an individual aged 65 and over and at
£9,640 for someone aged 75 or over, and those increases mean
that 62 per cent. of pensioners aged 65 and over will not pay tax.
Those measures will lift around 800,000 people out of the tax net
altogether, getting towards two thirds of pensioners being outside tax
altogether, compared with a much smaller proportion—certainly
less than half—in 1997.
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
2003—in 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.
Clause
4Reduction
of personal allowance for those with income exceeding
£100,000 12.15
pm 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 individual’s 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 incomes—the 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
year’s 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 individual’s 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 person’s 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
people—98 per cent. of taxpayers—who 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
achieving that consolidation is to make sure that those who are best in
a position to afford an additional contribution should be asked to
contribute more. Clause 4 ensures that those with incomes of
more than £100,000 a year make a fair contribution to the
consolidation that is required. It also removes an unfairness in the
tax system that has been discussed over the years whereby people with
very high incomes receive twice as much benefit from the personal
allowance as somebody who pays tax at the basic rate. Therefore, there
is a further fairness benefit.
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 4—I 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 Government’s
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 year’s 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.
Todd: Will the hon. Gentleman give
way?
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 Minister’s
thoughts on
that? In
terms of practicalities, the issue also raises significant problems for
the PAYE system with associated costs for both Her Majesty’s
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
such situations, and will have to be based on estimates. In
circumstances where an individual’s usual income is well below
£100,000, but they receive a one-off bonus taking it up to, for
example, £120,000, the taxpayer will face a pretty much
unprecedented underpayment of in excess of £2,590 at the end of
the tax year, simply because PAYE will not be able to deal with the
level of complexity associated with the 11 different marginal tax
rates. In turn, that taxpayer expected PAYE to be collected at the
right amount throughout the year and not at the end of it. Such a
situation will throw certain fundamentals of the PAYE system into
question and cause difficulties for individuals, HMRC and tax planners.
The proposals do not sit comfortably with the PAYE system, which is not
designed for that sort of
complexity. 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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