Clause 1

Finance Bill – in a Public Bill Committee at 10:30 am on 19th May 2009.

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Charges and main rates for 2009-10

Question proposed, That the clause stand part of the Bill.

Photo of Stephen Timms Stephen Timms Financial Secretary (HM Treasury) (also in the Department for Business, Innovation and Skills)

We announced in the pre-Budget report and confirmed in the Budget that the basic rate of tax would remain at 20 per cent. and the higher rate of tax at 40 per cent. for the current tax year. As part of a package of measures, we reduced the basic rate to 20 per cent. from 2008-09, which is the lowest rate for more than 75 years, with the 40 per cent. higher rate continuing to apply to higher-rate taxpayers. Taken with the other changes made to personal tax, basic-rate taxpayers are £145 a year better off in April 2009 compared with April 2008. In 2009-10, 21 million households will gain, on average, by about £6 a week compared with April last year.

The tax rates for this year will continue to preserve the two-rate structure for the vast majority of taxpayers. In the pre-Budget report we set out support to low and middle-income families—to help during the global economic downturn—and the fiscal consolidation measures that we would need in the medium term. All of those changes together mean that no one with an income less than £100,000 will see an income tax rise in 2010-11, when the increases take effect. The measures for 2010-11 announced in the Budget will focus only on the highest 2 per cent. of incomes, those above £100,000 a year—the opportunity to debate those matters will come later.

Photo of David Gauke David Gauke Shadow Minister (Treasury)

First, may I say what a great pleasure it is to serve under your chairmanship in this year’s Finance Bill Committee, Mr. Atkinson.

Clause 1 sets out the main rates for income tax, as the Financial Secretary stated. It would be fair to say that the issue of rates is not as prominent this year as it has been. As the Minister said, the Government have preserved the two-tier structure for income tax. The two-tier structure was announced in the Budget of 2007 by the then Chancellor, the current Prime Minister, and is one that will last, it would appear, for two years, and for two years only. The reason why the issue of rates was so prominent last year—I was one of those lucky enough to serve on the Finance Bill Committee—was that the two-tier structure that we see in the clause was established, with a basic rate of 20 per cent. and a higher rate of 40 per cent. That was the first year of the structure, because before that we had the 10p rate. Next year it appears that we shall have an additional 50p rate.

Turning to how we got to where we are with the clause, it was the consequence of the Budget announcement of 2007. In his very last sentence, the then Chancellor announced that he was reducing the basic rate of income  tax from 22p to 20p. Earlier in his speech he had announced the abolition of the 10p rate, but he had not made it clear that there would be—even taking into account the reduction to 20p—a substantial number of losers.

The Minister has referred to the structure of income tax and the fact that there would be no losers in 2010-2011. But when the new structure was announced in 2007, it quickly became apparent that 5.3 million households would lose out as a consequence of the abolition of the 10p rate. That number was quickly produced by the Institute for Fiscal Studies soon after that Budget. I served on the Treasury Committee and I remember that that number was broadly confirmed by Treasury officials. When the same figure was put to the then Chancellor the day after, he denied that figure and said—for various technical reasons that I do not intend to go into—that the figure was incorrect. By the time we got to our proceedings last year, it was clear that the figure of 5.3 million households losing out was correct. By that point, Ministers had confirmed the figure in written answers, after it was pursued by the right hon. Member for Birkenhead (Mr. Field), although he pointed out that getting those answers was somewhat difficult and it was not possible to obtain answers about how many individuals would lose out.

I have stated the figures now because the Government have their structure of 20p and 40p in clause 1, but the issue of the losers from the abolition of the 10p rate has not gone away. It is true that during our proceedings last year the Government introduced a compensation package that cost £2.7 billion and raised personal allowances. One could be cynical and say that it was during the Crewe and Nantwich by-election last year. If that was the reason, the package was singularly ineffective. None the less, it confirmed that the increase in personal allowances, which was described as temporary this time last year, would not be withdrawn in the PBR last autumn.

There is still uncertainty as to whether there are a substantial number of losers, and I draw the Committee’s attention to EDM 1279, which has been tabled by the right hon. Member for Birkenhead, who suggests that up to 3.8 million individual taxpayers continue to lose out as a consequence of the new structure. The EDM has been signed by 60 Members—predominantly Labour Members. I could be wrong, but I do not believe that any members of the Committee have signed it, and I suspect that Labour members of the Committee are relieved that they did not sign it because, had they done so, they might not have had the honour of being selected for this Committee. It was EDM 1279, but I fear it is too late now.

The EDM calls for compensation, and we appreciate the fiscal mess that the Government are in. If there is to be a compensation package, the question of affordability will have to be considered. Can the Minister confirm whether that number of up to 3.8 million taxpayers is correct? If it is not, what is the correct number? The question is about the number of individual taxpayers. That is an important point because the Government have always given the number of losers in households. It would still be helpful if the Minister could provide the households number to the Committee, but the point made in a number of instances by the right hon. Member for Birkenhead is that a household may consist of two  earners. The example that he often gives is that the man may well benefit from the reduction of 2p in the basic rate of income tax, bringing us to the 20p that we have today, but the woman may be earning less and she may well be losing out as a consequence of the abolition of the 10p rate. Collectively as a household they may well be benefiting, but she as an individual may well be losing. That is why it is interesting to pursue the question of individuals as well as households. That information would therefore be very helpful and it remains astonishing that a Labour Prime Minister, in an attempt to pull a political stunt, was prepared to double income tax for low earners.

The other reason why the issue of rates, which we are debating in clause 1, is perhaps not as prominent as it was last year is that those of us who served last year will recall that the hon. Member for Taunton, on behalf of the Liberal Democrats, tabled a motion to reduce the rate of income tax from 20p to 16p. That, I understand, is no longer the Liberal Democrat position, although we look forward to the hon. Member for Taunton setting out his reasons in due course. I suspect that we will address this when we look at the issue of personal allowances, but I wonder whether the arguments used this time last year on 20p or 16p proved to be so persuasive that the Liberal Democrats changed their course. No doubt we will find out.

The other point I make, with regard to the main rates, is that I do not wish to touch on the various issues relating to the 50p rate which the Government intend to introduce next year. That is for later clauses and my hon. Friend the Member for Hammersmith and Fulham will be setting out our views on those issues. However, I note that in 1997, 2001 and 2005 the Labour party manifestos on which the Government were elected promised not to raise the basic and higher rates of income tax. That, of course, is a pledge that is going to be broken—to the extent that a manifesto pledge in those areas is worth anything from this Government. One can question whether it is even worth asking that question, but I am interested to know from the Financial Secretary whether his party intends to provide a pledge not to raise the standard rate of income tax. Clearly, the Labour party intends to breach its manifesto pledge on the higher rate of income tax, but will it repeat its pledge on the basic rate of income tax and, if it does, will he explain why people should take that in any way seriously?

Save for those brief remarks, Mr. Atkinson, we would be grateful to hear the Minister’s answer, but we are proposing no amendments to clause 1.

Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury) 10:45 am, 19th May 2009

Mr. Atkinson, this is my first opportunity to echo the comments made by others in saying how much I am looking forward to serving under your chairmanship, and that of Mr. Hood, during the course of our deliberations.

I have only a few, brief comments to make on what is, after all, a very short clause. However, it is worth putting the clause in the context just given by the hon. Member for South-West Hertfordshire. Of course, the discussion that we had a year ago about this clause focused primarily on the 5 million-plus people in the  UK who were losing income as a result of the Government doubling the 10p rate of income tax for those on particularly low earnings. Of course, the Government’s attempts to try and rectify that situation and convince Labour Back Benchers, in particular, and people right across the country that they had not intended to inflict such financial penalties on people on low earnings, meant that there was little opportunity to scrutinise quite serious changes to our system of income tax. The Government did not introduce those proposals in the normal way through a Budget and a Finance Bill so the opportunities for scrutiny were compromised. That is regrettable. Approximately a million people are still net losers as a result of the changes that the Government introduced, even with the compensation that was meant to rectify that issue.

The hon. Member for South-West Hertfordshire reminded us that, at this stage in our deliberations last year, I tabled an amendment to reduce the 20p rate to 16p. It remains Liberal Democrat policy to try to reduce the income tax burden on those on very low earnings. Our preference now is to try to do that through thresholds, rather than the rate itself. But the total amount that we wish to redirect to low earners remains the same. More detail will obviously be made available, possibly in next year’s Finance Bill. We live in times of rapid political change so who knows what will happen?

The other two points that I wish to make are slightly more central to the clause. First, I find it extraordinary that the first clause of this rather substantial piece of legislation contains a word that is misleading. It states:

“the higher rate is 40%”.

It is not the higher rate as anyone understands it in the wider world. As I understand it, compensation and tax credits make marginal rates for those on low incomes variable. Then there is a 20 per cent. rate and the 40 per cent. rate—this is without national insurance. There was then going to be a 45 per cent. rate and there are a whole range of tapers which mean that at some point people are paying marginal rates on their income of 61 per cent. Then it drops off and there is a 50p rate. By no reckoning is 40p the higher rate. It is roughly in the middle. I query whether the Bill is accurate in the impression that it seeks to create when even on line 8 people are invited to believe that 40 per cent. is the highest rate of income tax one can pay, unless one says that it is the higher rather than the highest rate, but I would regard that as splitting hairs.

My final point is about simplicity. In his final Budget as Chancellor, the Prime Minister gave as a reason for having two rates the fact that everyone would know where they stood. It was nice and clear cut. There is merit in greater simplicity, as we have discussed before. Indeed, I am told that “Tolley’s Tax Guide” has increased from 4,555 pages in 1997 to 9,841 pages in 2006. So it has doubled in length in a decade. That is an unreasonably large amount of guidance and legislation to get through in order to understand the tax liabilities in this country. Therefore, greater simplicity is valued by nearly everybody except, perhaps, accountants who benefit from a lack of simplicity.

The Government made a merit of having a more simple structure of income tax, but have then complicated it at every turn to try to target assistance or, indeed, penalties at particular groups in society. We now have a higher rate that is not the higher rate, a system that is  meant to be simple that is not simple and large numbers of people on low incomes who have been heavily penalised as a result of the Government’s changes. So it is not a happy start to a long period of reflection and deliberation on other clauses that are probably even less attractive to the general public than this first one.

Photo of Stephen Timms Stephen Timms Financial Secretary (HM Treasury) (also in the Department for Business, Innovation and Skills)

I note that the content of clause 1 is not very controversial so I will keep my remarks brief. The hon. Member for South-West Hertfordshire asked me about the early-day motion and the reference to 3.8 million people. I am aware of that figure, but I cannot confirm it as I have not seen the analysis and I am not sure of the basis that underpins it. However, the number of households that have lost out as a result of the changes has been reduced from over 5 million—which was the initial announcement, as the hon. Gentleman said—to 600,000 this year, and 500,000 by 2011-12. It will therefore have been reduced by 90 per cent. by that time. The losses that we are talking about are less than £1 a week on average this year. We have made a great deal of progress in addressing the concerns that were raised in the Committee and elsewhere a year ago.

Photo of David Gauke David Gauke Shadow Minister (Treasury)

I note that the Minister is not able to confirm the figure of 3.8 million individuals who have lost out, and again he has given a household number. Is that because the Treasury has simply not done any analysis on how many individuals will lose out, and if not, why not?

Photo of Stephen Timms Stephen Timms Financial Secretary (HM Treasury) (also in the Department for Business, Innovation and Skills)

It is because the available data are on a household basis. I think that there was some discussion about that last year. I do not know of a sound basis on which to do the individual calculation. The figure of 3.8 million sounds large, and I would be surprised if it was that big, but as I said, I have not seen the analysis and I cannot comment on whether it is a plausible figure. I am confident that the number of households that have lost out will be 600,000 this year and the extent of the losses is extremely modest.

The hon. Member for South-West Hertfordshire raised a point about the changes regarding the new 50p rate, as did the hon. Member for Taunton who also commented on the restriction of allowances. We will come on to those matters shortly so I will not say any more about them at this stage, other than to observe that it is right for us to take action to respond to the biggest economic crisis that the world has seen in 70 years. That requires some fiscal consolidation and we have set out what I will argue is a fair way of taking the necessary action. That is for a later debate, and I commend the clause to the Committee.

Question put and agreed to.

Clause 1 ordered to stand part of the Bill.