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Basic rate limit and personal allowance

Part of Finance (No. 3) Bill – in the House of Commons at 4:45 pm on 19th November 2018.

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Photo of Julian Knight Julian Knight Conservative, Solihull 4:45 pm, 19th November 2018

I thank my hon. Friend for that short intervention. She makes a really good point, and it is almost the next point that I was going to make. The personal allowance will have nearly doubled in just eight short years. That is against a backdrop of trying to get the public finances under control from a debt of £152 billion a year—11% of GDP—which is an astronomical level outside wartime. It represents a real achievement for the Government to have been able to put this amount of money into the pockets of millions of hard-working Britons each year, so that their living standards can rise, despite the difficult decisions we have had to make.

Members from all parts of the House will probably know that I am no particular lover of the Liberal Democrats, and I am pleased to say that in my constituency of Solihull, we are now 24,000 votes ahead of them. However, I pay tribute to them in one respect. In the 2010 coalition agreement, we took on board what the Lib Dems had been proposing, and it was an excellent idea. I am pleased that the Conservative party was open enough to take on that idea and follow it through, from the coalition agreement, to raise those standards of living and raise personal allowances. I pay tribute to that sort of ideas process from the coalition. We have carried it on, as we see it as a key way in which to reduce inequality and expand opportunity.

The £50,000 higher rate tax threshold is also being delivered a year early. Opposition Members often criticise the new threshold, saying it is a tax cut for wealthier people and so on, but it will be taking many thousands of people whom one would not think should be paying the higher rate out of paying 40% income tax. For example, deputy headmasters and headteachers often earn more than the £50,000 threshold. It is wrong that so many hard-working public and private sector workers are dragged into the higher rate of tax. Furthermore, that has a damaging effect on the overall productivity of the economy, because someone who could earn extra by doing extra overtime, taking on a second job, or doing consultancy or freelance work is less likely to do so if they think the tax authorities would take half the money they would earn by doing so. This measure is therefore eminently sensible, to prevent the most productive in our economy from being penalised in this way and to allow them to continue to earn. We have seen fiscal drag in this country over the past 17 years, since the end of the first Blair Government’s sticking to the Major Government’s financial strategy. Since then, the fiscal drag has meant that more and more people who should not have been paying the 40% rate of tax have been dragged into it. I am pleased that has been acknowledged by this Government with this measure, and I am happy to support it this evening.

Labour Members have also talked about reducing the advanced rate threshold to £80,000, which is a fool’s errand. We know from history that, in general, when we penalise at the top end, our tax take comes down. Putting dogma aside, we know there is a sweet spot in the taxation system, where we should try to maximise our revenues while supporting productivity and ensuring there are sufficient incentives in the tax system. The placing of the original advanced rate was a political move in itself; for some 98% of the time that Gordon Brown was Chancellor or Prime Minister, he kept the rate at 40% and did not increase it, because he saw the reality of the situation, which is that the more we allow people to keep of their own money and the more they can keep in their pocket, the better it is for the economy more widely and the greater the tax take. This was political manoeuvring in advance of the 2010 election in order for my party to fall into a bear trap by suggesting we would not decrease the advanced rate of tax.

I should make another point about reducing the advanced rate to £80,000. The amount of money that that would raise would be negligible, if not actually negative, and the number of spending commitments tied to that proposal are disproportionate to any sort of potential income that could be raised, even in the best-case scenario. So the tax allowances as they stand in respect of the basic rate and the advanced rate strike the right balance for our economy in the future.