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Baroness Hollis of Heigham: I am amazed that the noble Lord, Lord Higgins, has withstood the opportunity to say that this is not a tax credit. Can I not tempt him? Go on, cheer us up. Going, going, gone.
Amendment No. 34A would substantively change Clause 3 by substituting a revised calculation for the savings credit, linking the amount payable to the basic rate of income tax—22 per cent. It would reward savings up to the level of the guarantee at 78p in the pound. For those with income above the guarantee, the savings credit would be reduced by 22p in the pound.
At best, the amendment is misdirected. It would reward not only modest savings, but also pensioners with much higher incomes. At worst, the cost would be seriously substantial.
As drafted, the Bill ensures that entitlement to the pension credit guarantee is based on pensioners' personal needs, taking account of their resources. The savings credit builds on that by rewarding those who have made some provision for their retirement but who find themselves penalised by a system that reduces benefit entitlement by £1 for every £1 that they have saved, if it is not sufficient to float them off MIG altogether.
Clause 3 introduces fairness where there was precious little, ensuring that those who are likely to have only a modest retirement income are rewarded for their thrift. That is why we intend to reward savings up to the level of the guarantee at 60p in the pound, pace my noble friend Lady Turner, who moved her amendment a few minutes ago, and reduce the savings credit by 40p in the pound for those with income above that level.
The amendment would make the savings reward far more generous. An additional 1 million pensioners would be entitled, including many comparatively
wealthy pensioners for whom the pension credit is not designed. Single pensioners with incomes up to £181 a week and couples with incomes up to £263 a week would be entitled to the savings credit as described by the noble Baroness. The cost would be fairly substantial—an extra £1 billion.I was expecting the noble Lord, Lord Higgins, to intervene on the amendment. I thought that it would be interesting to see what would happen if we aligned the withdrawal of pension credit with all the rates in the tax system—not just the 22p rate, but the 10p rate and all the others. That would taper it out for pensioner couples when they reached an income of £45,000 a year, at a cost to us all of getting on for £30 billion. If we went for 22p in the pound, I suspect that we could not justify not extrapolating all the tax rates.
Lord Higgins: I have always been reluctant to promote amendments that cost £35 billion. The Minister has made the important point that the withdrawal rates, and eventually the taxation rates, vary a great deal as one goes up the income scale. In the light of the Bill, they seem to go rather erratically. As the noble Baroness, Lady Barker, pointed out, at the bottom end of the scale there are some very poor people. Then we go to another band where the withdrawal rate or the tax rate is much less than 40 per cent. It then goes up again to 40 per cent. Perhaps we could have a note some time on exactly how the marginal rate goes up, depending on individual circumstances. Perhaps the Minister could take some typical examples. That would be interesting. When we legislate with one Bill after another, there is always a danger that the tapers will not work out and no one will sit down and calculate all the marginal rates at various levels of income.
Baroness Hollis of Heigham: I am happy to revisit some of the discussions that we had earlier. The noble Lord is talking about marginal deduction rates as regards the interlocking of the three different benefits—pension credit, housing benefit and council tax benefit. We saw that up to an income of £100, the marginal deduction is 100 per cent. Between £100 and £135 it comes down to 91 per cent for the 8 per cent of pensioners who also have housing benefit. At £135, it reduces to 85 per cent with a tapering of housing benefit, which itself is based on rent. Pensioners above that level begin to be covered by the ordinary tax rates and we begin to see the interlocking of taxes.
If the noble Lord is asking me a second question—what happens to the benefit tapers when they are overlaid by the tax system, which is a perfectly reasonable question—I shall write to him on it. I think that such a discussion would be helpful. However, I believe he will find that, given that pensioners' personal allowance is, I think, about £5,000, there is very little overlap between those on £100 to £135 and those paying taxes. The overlap begins to knock-in only when one is losing the pension credit but is on fairly high benefit rates. I should be very happy to have those calculations worked out, and agree with the noble Lord that it will make an interesting
investigation. One needs to see the total picture. However, as pensioners have benefited so widely from the generous increases created by lifting pensioners' tax rates, I am sure that he will be deeply impressed by the result.9 p.m.
Baroness Barker: As I had hoped, the amendment has sparked a debate which has been fairly informative. I, too, look forward to seeing the information that the Minister has promised.
For some of us, it is difficult to accept the disproportionate effects on people at the levels described by the noble Lord, Lord Higgins. Not only is it difficult to work out the effect of benefits, it is difficult to work out the effect of the tax system on other groups. This debate has been helpful to the extent that it has fleshed out that issue.
We should also make it clear that, although the Bill may be passed, some of us object to the principle of taxing the income of comparatively poor people at the higher rate.
Baroness Hollis of Heigham: I take issue with the noble Baroness; perhaps I should have spent more time replying to her.
We are not taxing people, as she said, at 40 per cent. We are, for the first time, allowing pensioners who would otherwise not see any benefit from their hard-earned savings—precisely because we have established a decent, if not generous, basic income level for all pensioners; that is the trap and problem for us—to keep 60 per cent of their income. I will not accept suggestions that they are being taxed at a 40p rate; they are currently not receiving a penny of that money. We are enabling them to keep 60p in the pound both as an incentive and as a recognition of their efforts to provide for themselves. It is also fair. They are currently losing pound for pound; they will in future keep 60 per cent.
I think that that is the generous and decent thing to do. We have a problem only because we have a decent MIG level. The problem would not arise if we had a low level, as we had under the previous administration. We have the problem of seeking to be fair to those who have sought to help themselves because we are seeking to alleviate poverty. I shall therefore not accept statements that we are seeking to tax people at 40 per cent. We are returning to people, and allowing them to enjoy, the rewards of their own thrift, which hitherto they have not been able to enjoy.
Baroness Barker: I accept the Minister's point that my terminology was wrong. However, we still do not want to establish such a 40 per cent taper as a principle. The Minister has spoken consistently about not wishing to tie the hands of a future government. However, we also should not seek to tie the hands of a future government who have the resources to be more generous in the taper. Although we appreciate that the provision will be in force for this Parliament, we do not think that it should be established as a principle. On that basis, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Lord Higgins moved Amendment No. 36:
- Page 3, line 25, leave out subsection (6).
The noble Lord said: The amendment is concerned with definitions of income. However, I should like first to say that I very much welcome the Minister's offer on investigating the issue of marginal rates as one goes up the income scale. The point is relevant if we are really going to work towards what used to be called a negative income tax. As I think I have said before, back in the 1970s we had legislation on a genuinely negative income tax which sought to smooth out the marginal rates. Alas, in 1974, when the Labour government unfortunately came into power, the whole idea was clobbered by a committee consisting of the now noble Baroness, Lady Castle, the now noble Lord, Lord Barnett, and one other person whose name I forget. Nowadays, the noble Baroness, Lady Castle, and I are more in agreement.
As I said, this amendment is concerned with the regulations deciding what is qualifying income. It relates to the provision that my noble friend Lady Noakes spoke to a short time ago and the fact that we are landed with at least three definitions of income. Different definitions of income apply to different sections of the Bill, inevitably leading to considerable confusion. One might think it appropriate to use the same definition throughout the Bill.
A moment or so ago, in reply to my noble friend Lady Noakes, the Minister said that the Government cannot produce the regulations now. We understand the problems of producing regulations. However—as the Minister is always helpful on these matters and as we are all in a sense on the same side on these matters—it would be very helpful if we could have a list of the items that the Government propose should be included in each definition of income and then at the end a list of the items about which they have not made up their minds.
It is true that eventually, when a Bill is passed, such items are embodied in regulation. The trouble with that is that we have no opportunity to amend them as regulations are not amendable. Therefore, if we could have a list of the three definitions of income—or more, if there are more—the House would be able to express a view on whether we think the list is appropriate. Given that we will be deprived of amending the eventual outcome in regulations, that may be helpful.
That point arises on this amendment, which suggests that we knock out the power to make regulations. If the noble Baroness can respond helpfully on that point, it would be easy to withdraw the amendment. I beg to move.
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