Clause 4
Finance Bill
12:15 pm
Stephen Timms (Financial Secretary, HM Treasury; East Ham, Labour)
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.