Income Tax

Ways and Means – in the House of Commons at 3:31 pm on 15th March 1988.

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I now turn to income tax.
The way to a strong economy is to boost incentives and enterprise. And that means, among other things, keeping income tax as low as possible.
Income tax has now been reduced in each of the last six Budgets—the first time this has ever occurred. And the strength of the economy over that period speaks for itself.
However, reforming income tax is not simply a matter of cutting the rates. I also have to look at all the various allowances and reliefs to ensure that they are still justified. With this in mind, I have a number of proposals to announce.
First, forestry. I accept that the tax system should recognise the special characteristics of forestry, where there can be anything up to 100 years between the costs of planting and the income from selling the felled timber.
But the present system cannot be justified. It enables top rate taxpayers in particular to shelter other income from tax, by setting it against expenditure on forestry, while the proceeds from any eventual sale are almost tax free.
The time has come to bring it to an end. I propose to do so by the simple expedient of taking commercial woodlands out of the income tax system altogether. That is to say, as from today, and subject to transitional provisions, expenditure on commercial woodlands will no longer be allowed as a deduction for income tax and corporation tax. But, equally, receipts from the sale of trees or felled timber will no longer be liable to tax.
It is, perhaps, a measure of the absurdity of the present system that the total exemption of commercial woodlands from tax will, in time, actually increase tax revenues by over £10 million a year.
At the same time, in order to further the Government's objectives for the rural areas, I have agreed with my right hon. Friends who have responsibilities for forestry and for the environment that, in parallel, there should be increases in planting grants. Full details of the new grant scheme will be announced next week.
The net effect of these changes will be to end an unacceptable form of tax shelter; to simplify the tax system, abolishing the archaic schedule B in its entirety; and to enable the Government to secure its forestry objectives with proper regard for the environment, including a better balance between broad-leaved trees and conifers.
One of the legacies of the years of penal top tax rates is the complicated special relief for large redundancy payments. This is no longer justified. I propose to increase the exemption limit for these payments from £25,000 to £30,000, and to abolish the additional relief for larger amounts.
Next, benefits in kind—perhaps better known as perks. One of the biggest tax-induced distortions in the economy today is the growing tendency to provide remuneration in kind rather than in cash. It must be right to move towards a system of lower taxes all round and fewer tax breaks of this kind.
Far and away the most widespread benefit in kind is the company car, which is substantially undertaxed. Independent studies, based on figures supplied by the AA, suggest that an employee with a typical company car may be taxed on only about a quarter of its true value.
This discrepancy is too great to be allowed to continue. On the other hand, the scale of the undertaxation is so great that it cannot be put right in a single year. But in a Budget when I am able to reduce tax rates, there is a strong case for a substantial increase in the taxation of these benefits. I therefore propose to double the car scales for 1988–89. This increase replaces the 10 per cent. increase which I had already announced for 1988–89. The yield will be £260 million in 1988–89.
The scales for the taxation of car fuel adequately reflect the value of the benefit, and I propose to leave them unchanged for 1988–89.
However, the taxation of the benefit of free car parking threatens to become an administrative nightmare. I therefore propose to exempt this particular benefit from tax altogether.
Next, mortgage interest relief.
This Government are committed to the further spread of home ownership. Mortgage interest relief has an important role to play in achieving that aim.
However, in addition to the decision to apply the £30,000 limit to the house or flat, which I have already announced, and which will remove the most widely-resented tax penalty on marriage, I have a further reform to propose in this area.
This concerns the parallel tax relief for home improvement loans. Most of these loans are for fittings such as double glazing, and have played a significant part in the recent growth of consumer credit without in any way contributing to the expansion of home ownership. This may be partly due to the substantial scope for abuse, as loans ostensibly taken out for home improvements are used for other purposes, a matter which was the subject of a recent report from the Public Accounts Committee.
I propose, therefore, to end tax relief for all new home improvement loans taken out after 5 April. Existing home improvement loans will be unaffected. This is expected to yield £80 million in 1988–89.
Finally, I can turn to income tax itself. The statutory indexation formula means that I should increase all the principal income tax allowances and bands by the increase in the RPI over the year to last December, or 3·7 per cent. rounded up. I propose to do more than that—indeed twice as much.
Thus the single allowance will go up not by £90, as required by indexation, but by £180, to £2,605; and the married allowance will go up not by £150 but by £300, to £4,095. The additional personal allowance and the widow's bereavement allowance will accordingly rise by £120 to £1,490. Similarly, the single age allowance will rise by £220 to £3,180 and the married age allowance by £360 to £5,035. The higher allowances for taxpayers aged 80 and over, which I introduced in the last Budget, will correspondingly be increased by £240 and £360 to £3,310 and £5,205 respectively, and the new age allowance income limit will be £10,600. The upper limit of taxable income for the basic rate band will be increased to £19,300.
The increases I have just announced mean that the basic tax thresholds will be fully 25 per cent. higher, in real terms, than they were in 1978–79, Labour's last year. Indeed, the married man's tax threshold will he at its highest level in real terms for nearly half a century.
Given these substantial increases in the main allowances, I am taking the opportunity to simplify the system by abolishing three minor personal allowances which have been unchanged, in cash terms, for over 20 years: the housekeeper allowance, the dependent relative allowance, and the son's or daughter's services allowance.
In our general election manifesto last year, we committed ourselves to reducing the basic rate of income tax to 25 pence in the pound as soon as it was prudent to do so. This pledge followed a reduction of twopence in the pound to 27 pence in last year's Budget.
At the time, this was regarded with some scepticism, not to say cynicism, by the Opposition, who no doubt recalled that Labour Governments used to reduce tax only in front of an election, and at all other times increased it. Indeed, shortly before last year's Budget, the right hon. Gentleman the Deputy Leader of the Labour party, the right hon. Member for Birmingham, Sparkbrook (Mr. Hattersley), said: I must advise the Chancellor of something that he already knows: whichever party wins the general election, the tax cuts that he makes in this Budget will be reversed."—[Official Report, 20 January 1987; Vol. 108, c. 772.] The time has come to put the right hon. Gentleman out of his misery. So far from reversing the 1987 Budget tax reductions, I propose to take this, the first opportunity since the general election, to fulfil our manifesto pledge. The basic rate of income tax for 1988–89 will be 25 pence in the pound.
The small companies' rate of corporation tax will similarily be reduced to 25 per cent. This means that the basic rate of income tax and the corporation tax rate for small companies will both be at their lowest level since the war.

Photo of Alex Salmond Alex Salmond Deputy Leader, Scottish National Party

This is an obscenity. The Chancellor cannot do this. [Interruption]

Photo of Mr Harold Walker Mr Harold Walker , Doncaster Central

Order. I name Mr. Alex Salmond.

Motion made, and Question put,

That Mr. Alex Salmond be suspended from the service of the House.—[Mr. Wakeham.]

The House proceeded to a Division

Photo of Patrick Cormack Patrick Cormack , South Staffordshire

On a point of order, Mr. Deputy Speaker. May I draw your attention to Standing Order No. 39, which gives the Chair the power to decide, in determining a Division, whether to ask hon. Members to rise in their places if they want a Division, and to do likewise if they do not? I think it is manifest this afternoon that this is a ridiculous spoiling tactic. I ask you to consider implementing this Standing Order in future, rather than allowing important proceedings of the House to be interrupted in order to gain notoriety for idiots.

Photo of Mr Harold Walker Mr Harold Walker , Doncaster Central

I take account of what the hon. Member for Staffordshire, South (Mr. Cormack) says. I think that in the circumstances the House has proceeded correctly.

The House having divided: Ayes 354, Noes 19.

Division No. 215][4.43 pm
Adams, Allen (Paisley N)Clarke, Rt Hon K. (Rushcliffe)
Adley, RobertColvin, Michael
Aitken, JonathanCoombs, Anthony (Wyre F'rest)
Alexander, RichardCoombs, Simon (Swindon)
Alison, Rt Hon MichaelCormack, Patrick
Allen, GrahamCouchman, James
Amess, DavidCran, James
Amos, AlanCunningham, Dr John
Anderson, DonaldCurrie, Mrs Edwina
Arbuthnot, JamesDavies, Q. (Stamf'd & Spald'g)
Arnold, Jacques (Gravesham)Davis, David (Boothferry)
Arnold, Tom (Hazel Grove)Day, Stephen
Ashby, DavidDevlin, Tim
Ashdown, PaddyDewar, Donald
Aspinwall, JackDickens, Geoffrey
Atkins, RobertDobson, Frank
Baker, Rt Hon K. (Mole Valley)Doran, Frank
Baker, Nicholas (Dorset N)Dorrell, Stephen
Baldry, TonyDouglas-Hamilton, Lord James
Banks, Robert (Harrogate)Dover, Den
Barnes, Mrs Rosie (Greenwich)Dunn, Bob
Barron, KevinDurant, Tony
Batiste, SpencerDykes, Hugh
Beaumont-Dark, AnthonyEggar, Tim
Beggs, RoyEmery, Sir Peter
Beith, A. J.Evans, David (Welwyn Hatf'd)
Bell, StuartEvans, John (St Helens N)
Bellingham, HenryEvennett, David
Bendall, VivianFairbairn, Nicholas
Bennett, Nicholas (Pembroke)Fallon, Michael
Biffen, Rt Hon JohnFarr, Sir John
Biggs-Davison, Sir JohnFaulds, Andrew
Blackburn, Dr John G.Favell, Tony
Blair, TonyFearn, Ronald
Blaker, Rt Hon Sir PeterFenner, Dame Peggy
Bottomley, PeterField, Barry (Isle of Wight)
Bottomley, Mrs VirginiaField, Frank (Birkenhead)
Bowden, Gerald (Dulwich)Finsberg, Sir Geoffrey
Bowis, JohnForman, Nigel
Boyes, RolandForsyth, Michael (Stirling)
Braine, Rt Hon Sir BernardForsythe, Clifford (Antrim S)
Brandon-Bravo, MartinForth, Eric
Bray, Dr JeremyFoster, Derek
Brazier, JulianFoulkes, George
Bright, GrahamFowler, Rt Hon Norman
Brittan, Rt Hon LeonFox, Sir Marcus
Brooke, Rt Hon PeterFranks, Cecil
Brown, Gordon (D'mline E)Freeman, Roger
Brown, Michael (Brigg & Cl't's)French, Douglas
Brown, Nicholas (Newcastle E)Galbraith, Sam
Browne, John (Winchester)Gardiner, George
Bruce, Ian (Dorset South)Gill, Christopher
Buck, Sir AntonyGilmour, Rt Hon Sir Ian
Budgen, NicholasGlyn, Dr Alan
Burns, SimonGoodlad, Alastair
Burt, AlistairGoodson-Wickes, Dr Charles
Butcher, JohnGow, Ian
Butler, ChrisGower, Sir Raymond
Butterfill, JohnGrant, Sir Anthony (CambsSW)
Campbell, Menzies (Fife NE)Greenway, Harry (Ealing N)
Carlile, Alex (Mont'g)Griffiths, Peter (Portsmouth N)
Carlisle, Kenneth (Lincoln)Grist, Ian
Carrington, MatthewGround, Patrick
Cash, WilliamGrylls, Michael
Channon, Rt Hon PaulGummer, Rt Hon John Selwyn
Chapman, SydneyHamilton, Hon Archie (Epsom)
Chope, ChristopherHanley, Jeremy
Clark, Hon Alan (Plym'th S'n)Hannam, John
Clark, Dr David (S Shields)Hargreaves, A. (B'ham H'll Gr')
Clark, Dr Michael (Rochford)Hargreaves, Ken (Hyndburn)
Clark, Sir W. (Croydon S)Harris, David
Haselhurst, AlanMans, Keith
Hattersley, Rt Hon RoyMaples, John
Hawkins, ChristopherMarland, Paul
Hayes, JerryMarlow, Tony
Hayward, RobertMarshall, John (Hendon S)
Heath, Rt Hon EdwardMartin, David (Portsmouth S)
Heathcoat-Amory, DavidMaude, Hon Francis
Heddle, JohnMawhinney, Dr Brian
Henderson, DougMaxwell-Hyslop, Robin
Heseltine, Rt Hon MichaelMeacher, Michael
Hicks, Mrs Maureen (Wolv' NE)Meyer, Sir Anthony
Hicks, Robert (Cornwall SE)Miller, Hal
Higgins, Rt Hon Terence L.Mitchell, Andrew (Gedling)
Hill, JamesMitchell, David (Hants NW)
Hind, KennethMoate, Roger
Holland, StuartMonro, Sir Hector
Holt, RichardMontgomery, Sir Fergus
Hordern, Sir PeterMoonie, Dr Lewis
Howard, MichaelMorris, Rt Hon J. (Aberavon)
Howarth, Alan (Strat'd-on-A)Morrison, Hon Sir Charles
Howarth, George (Knowsley N)Moss, Malcolm
Howe, Rt Hon Sir GeoffreyMowlam, Marjorie
Howell, Rt Hon David (G'dford)Neale, Gerrard
Howell, Rt Hon D. (S'heath)Nelson, Anthony
Howell, Ralph (North Norfolk)Neubert, Michael
Howells, GeraintNewton, Rt Hon Tony
Hughes, Robert (Aberdeen N)Nicholls, Patrick
Hughes, Robert G. (Harrow W)Nicholson, David (Taunton)
Hunt, David (Wirral W)Nicholson, Emma (Devon West)
Hunt, John (Ravensbourne)O'Neill, Martin
Hunter, AndrewOnslow, Rt Hon Cranley
Ingram, AdamOppenheim, Phillip
Irvine, MichaelOwen, Rt Hon Dr David
Irving, CharlesPage, Richard
Jack, MichaelPaice, James
Jackson, RobertParkinson, Rt Hon Cecil
Janman, TimPatnick, Irvine
Jessel, TobyPatten, John (Oxford W)
John, BrynmorPawsey, James
Johnson Smith, Sir GeoffreyPeacock, Mrs Elizabeth
Jones, Robert B (Herts W)Porter, Barry (Wirral S)
Jopling, Rt Hon MichaelPorter, David (Waveney)
Kellett-Bowman, Dame ElainePortillo, Michael
Kennedy, CharlesPowell, William (Corby)
Key, RobertPrice, Sir David
Kilfedder, JamesRadice, Giles
King, Roger (B'ham N'thfield)Raffan, Keith
Kinnock, Rt Hon NeilRaison, Rt Hon Timothy
Kirkwood, ArchyRandall, Stuart
Knapman, RogerRathbone, Tim
Knight, Greg (Derby North)Redwood, John
Knowles, MichaelReid, Dr John
Knox, DavidRhodes James, Robert
Lamont, Rt Hon NormanRhys Williams, Sir Brandon
Lang, IanRiddick, Graham
Latham, MichaelRidley, Rt Hon Nicholas
Lawrence, IvanRidsdale, Sir Julian
Lawson, Rt Hon NigelRifkind, Rt Hon Malcolm
Lee, John (Pendle)Roberts, Allan (Bootle)
Leigh, Edward (Gainsbor'gh)Roberts, Wyn (Conwy)
Lennox-Boyd, Hon MarkRobertson, George
Lightbown, DavidRoe, Mrs Marion
Lilley, PeterRooker, Jeff
Livsey, RichardRossi, Sir Hugh
Lloyd, Sir Ian (Havant)Rowe, Andrew
Lloyd, Peter (Fareham)Rumbold, Mrs Angela
Lord, MichaelRyder, Richard
Luce, Rt Hon RichardSackville, Hon Tom
Lyell, Sir NicholasSainsbury, Hon Tim
Macdonald, Calum A.Shaw, David (Dover)
Macfarlane, Sir NeilShaw, Sir Giles (Pudsey)
McKay, Allen (Barnsley West)Shaw, Sir Michael (Scarb')
MacKay, Andrew (E Berkshire)Sheldon, Rt Hon Robert
Maclean, DavidShephard, Mrs G. (Norfolk SW)
Maclennan, RobertShepherd, Colin (Hereford)
McLoughlin, PatrickShersby, Michael
McNair-Wilson, M. (Newbury)Sims, Roger
Madel, DavidSkeet, Sir Trevor
Major, Rt Hon JohnSmith, Andrew (Oxford E)
Malins, HumfreySmith, Rt Hon J. (Monk'ds E)
Smith, Tim (Beaconsfield)Thurnham, Peter
Soames, Hon NicholasTownend, John (Bridlington)
Speller, TonyTredinnick, David
Spicer, Sir Jim (Dorset W)Trippier, David
Spicer, Michael (S Worcs)Viggers, Peter
Squire, RobinWaddington, Rt Hon David
Stanbrook, IvorWakeham, Rt Hon John
Steel, Rt Hon DavidWaldegrave, Hon William
Steen, AnthonyWalden, George
Stern, MichaelWalker, Bill (T'side North)
Stevens, LewisWallace, James
Stewart, Andy (Sherwood)Waller, Gary
Stewart, Ian (Hertfordshire N)Ward, John
Stokes, JohnWardle, Charles (Bexhill)
Straw, JackWatts, John
Sumberg, DavidWells, Bowen
Summerson, HugoWhitney, Ray
Tapsell, Sir PeterWiddecombe, Ann
Taylor, Mrs Ann (Dewsbury)Wilkinson, John
Taylor, Ian (Esher)Wilshire, David
Taylor, John M (Solihull)Winterton, Nicholas
Taylor, Teddy (S'end E)Wood, Timothy
Temple-Morris, PeterYeo, Tim
Thatcher, Rt Hon MargaretYoung, Sir George (Acton)
Thompson, D. (Calder Valley)
Thompson, Patrick (Norwich N)Tellers for the Ayes:
Thorne, NeilMr. Robert Boscawen and
Thornton, MalcolmMr. Tristan Garel-Jones.
Abbott, Ms DianeMahon, Mrs Alice
Canavan, DennisNellist, Dave
Clay, BobPrimarolo, Dawn
Corbyn, JeremySalmond, Alex
Cryer, BobSedgemore, Brian
Ewing, Mrs Margaret (Moray)Skinner, Dennis
Grant, Bernie (Tottenham)Thomas, Dr Dafydd Elis
Heffer, Eric S.
Jones, leuan (Ynys Môn)Tellers for the Noes:
Lambie, DavidMr. Andrew Welsh and
McGrady, EddieMr. Dafydd Wigley.
Madden, Max

Question accordingly agreed to.

Ordered,That Mr. Alex Salmond be suspended from the service of the House.

Photo of Mr Harold Walker Mr Harold Walker , Doncaster Central

then directed that the hon. Member withdraw from the House and he withdrew accordingly.

Photo of Mr Brian Wilson Mr Brian Wilson , Cunninghame North

On a point of order, Mr. Deputy Speaker. Is it in order to point out that the cretinous performance that we have just witnessed owed everything to self-publicity and nothing to social concern, as testified by the attendance record of members of the Scottish National party in the Social Security Bill Committee—

Photo of Mr Harold Walker Mr Harold Walker , Doncaster Central

Order. Let us get back to the Budget.

Photo of Mr Nigel Lawson Mr Nigel Lawson The Chancellor of the Exchequer

To repeat, Mr. Deputy Speaker, the basic rate of income tax for 1988–89 will be 25 pence in the pound.

The small companies' rate of corporation tax will similarly be reduced to 25 per cent. This means that the basic rate of income tax and the corporation tax rate for small companies will both be at their lowest level since the war.

Life assurance premium relief remains in place for policies taken out before the 1984 Budget. It has traditionally been given at half the basic rate of income tax. I therefore propose to reduce it from 15 per cent. to 121 per cent. But, to give life offices time to adjust, this change will not take effect until 6 April 1989.

I also propose to reduce the additional rate which applies to the income of discretionary trusts and for certain other purposes from 18 per cent. to 10 per cent.

It is now nine years since my predecessor, in his first Budget in 1979, reduced the top rate of income lax from the absurd 83 per cent. that prevailed under Labour to 60 per cent. where it has remained ever since. At that time, this was broadly in line with the European average for the top rate of tax. It is now one of the highest. And not only do the majority of European countries now have a top rate of tax below 60 per cent. but in the English-speaking countries outside Europe—not only the United States and Canada, but in Labour Australia and New Zealand, too—the top rate is now below 50 per cent., sometimes well below.

The reason for the worldwide trend towards lower top rates of tax is clear. Excessive rates of income tax destroy enterprise, encourage avoidance, and drive talent to more hospitable shores overseas. As a result, so far from raising additional revenue, over time they actually raise less.

By contrast, a reduction in the top rates of income tax can over time result in a higher, not a lower, yield to the Exchequer. Despite the substantial reduction in the top rate of tax in 1979, and the subsequent abolition of the investment income surcharge in 1984, the top 5 per cent. of taxpayers today contribute a third as much again in real terms as they did in 1978–79, Labour's last year; while the remaining 95 per cent. of taxpayers pay about the same in real terms as they did in 1978–79.

After nine years at 60 per cent., I believe the time has come to make a further reduction in the top rate of income tax. At present there are no fewer than five higher rates of income tax; 40 per cent., 45 per cent., 50 per cent., 55 per cent. and 60 per cent. I propose to abolish all the higher rates of tax above 40 per cent.

This major reform will leave us with one of the simplest systems of income tax in the world, consisting—

Photo of Mr Nigel Lawson Mr Nigel Lawson The Chancellor of the Exchequer

This major reform will leave us—

Photo of Mr Harold Walker Mr Harold Walker , Doncaster Central

Order. The hon. Gentleman knows that, if he persists, I shall have no option but to use the disciplinary power.

Photo of Mr Harold Walker Mr Harold Walker , Doncaster Central

Order. There will be plenty of time and opportunity to debate these matters in the days ahead.

Hon. Members:


Photo of Mr Harold Walker Mr Harold Walker , Doncaster Central


Grave disorder having arisen in the House, MR. DEPUTY SPEAKER, pursuant to Standing Order No. 45 (Power of Mr. Speaker to adjourn House or suspend sitting), suspended the sitting for 10 minutes.

Sitting suspended at 5.1 pm.

Photo of Mr Nigel Lawson Mr Nigel Lawson The Chancellor of the Exchequer

This major reform will leave us with one of the simplest systems of income tax in the world, consisting of a basic rate of 25 per cent. and a single higher rate of 40 per cent. And, indeed, a system of personal taxation in which there is no rate anywhere in excess of 40 per cent.

I believe that 40 per cent. is an acceptable top rate of tax. But, bearing in mind that the basic rate of income tax is also the starting rate, 25 per cent. is still too high.

Since we first took office in 1979, we have reduced the basic rate of income tax from 33 per cent.—one third—to 25 per cent. —a quarter. Our aim should now be to get it down to a fifth—a rate of 20 pence in the pound —as soon as we prudently and sensibly can.

Meanwhile, I have today been able to reduce income tax at all levels, with increases in both the personal allowances and the basic rate limit, and reductions in both the basic and higher rates. The tax reduction for a married man on average earnings will be worth nearly £5 a week. The changes will take effect under PAYE on the first pay day after 14 June. They will cost £4¼ billion in 1988–89 over and above statutory indexation, of which three quarters represents the cost of increasing tax thresholds and reducing the basic rate.

The total cost of all the measures in this year's budget, again on an indexed basis, is a shade under £4 billion.