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 individuals 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 incomesthe 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 years 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 individuals 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 persons 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 people98 per cent. of taxpayerswho will not experience any change in the way in which their tax is calculated.
Does the Minister agree that the policy is a clear departure from new Labour principles and that we are now going back to the old Labour idea of taxing the rich because it is right to tax the rich, whereas new Labour was for a vibrant economy to attract people to this country?
No, it is not. The policy is consistent with the new Labour commitment to fairness in the tax system. Everyone throughout the world recognises that consolidation is required. The new Labour approach to achieving that consolidation is to make sure that those who are best in a position to afford an additional contribution should be asked to contribute more. Clause 4 ensures that those with incomes of more than £100,000 a year make a fair contribution to the consolidation that is required. It also removes an unfairness in the tax system that has been discussed over the years whereby people with very high incomes receive twice as much benefit from the personal allowance as somebody who pays tax at the basic rate. Therefore, there is a further fairness benefit.
It is a pleasure to serve under your chairmanship, Mr. Atkinson, and I look forward to our deliberations in the coming weeks. This is my second Finance Bill; last year I considered it from the Back Benches. I can only assume that I did something wrong to be put on it pretty much full time from then on, but I am looking forward to it.
It is ironic that this is called clause 4I refer to the intervention by my hon. Friend the Member for Wellingborough intervention about this marking the end of new Labour. The clause allows us to examine the perverse structure of the marginal tax rates proposed by the Government. What the Government propose is, thankfully, slightly simpler than the two-stage proposal outlined in the pre-Budget report 2008, to which the Minister referred. Nevertheless, the proposals introduce considerable complexity into the income tax system and associated tax calculations.
In terms of the revenue raised, which is important to look at, the withdrawal of the personal allowance from individuals with incomes above £100,000 is estimated to raise £890 million in 2010-11, rising to £1.4 billion in 2011-12. As before, those figures combine the estimates for the 2008 PBR staged restriction of the personal allowance with the Budget 2009 announcement. The Budget report estimates that the total yield from removing the personal allowance will be £1.5 billion come 2012-13.
As the Minister says, the Government propose that, from 6 April 2010, the personal allowance for individuals with an adjusted net income of over £100,000 will be limited by £1 for every £2 over the limit. Based on 2009-10 personal allowances, that means that individuals with an adjusted net income of £112,950 or more will not benefit from the tax-free personal allowance. Meanwhile, using the 2009-10 personal allowance figure of £6,475, withdrawing the personal allowance at a rate of £1 for every £2 of income over £100,000 results in a marginal income tax rate of 60 per cent., or 61.5 per cent. with national insurance contributions, on income between £100,000 and £112,950.
I am, and I thank the hon. Gentleman for that intervention. One of the great weaknesses in the Governments case is that, as far as I can tell, there has been no study of any behavioural changes, either from this or from the change to the 50p tax rate in clause 6, which we will come to in due course.
The volume of changes in this years Budget has added considerably to the overall convolution. Phasing out these allowances, probably more than anything else, has added massive complexity to our tax system. One way of evidencing that is to look at the profusion of marginal tax rates expected to be within the system from 2011. Using current income points, which may change by 2011, we see 11 different effective tax rates, including national insurance contributions: from an income of zero to £5,715 there is an effective tax rate of zero; from £5,715 to £6,420 there is an effective tax rate of 11.5 per cent.; from £6,421 to £6,745 it is 50.5 per cent.; and from £6,746 to £18,023 it is 70.5 per cent.. It then falls sharply to 31.5 per cent. for income between £18,024 and £43,875. It then goes back up, so for income between £43,876 and £50,000 it is 41.5 per cent. Between £50,001 and £58,170, it goes back up to 48.17 per cent., but, between £58,171 and £100,000, it goes back down again to 41.5 per cent. Between £100,001 and £112,950, it reaches its highest rate of all of 61.5 per cent. before going back down to 41.5 per cent. in the penultimate tax bracket of £112,951 to £150,000.
I am first going to finish referring to the table, because it is important to have it on record so that we have a feel for how the figures will work and for the complexity of the system. The final rate, for those earning over £150,000, reverts to 51.5 per cent. That is a total rollercoaster ride and I will talk about some of its implications in due course.
I admire the hon. Gentleman for his research. I am sure that he has a table for taxpayers who are over 65, from which he will be able to set out a similar set of figures.
I do not wish to try your patience, Mr. Atkinson, but the same principle and degree of complexity are involved in that context too. For our purposes this morning, one table will suffice to illustrate the complications in, and the potential effect of, the 11 different marginal tax rates.
The issue gives rise to the absurd position that a taxpayer earning £105,000 has a marginal rate of 61.5 per cent. on additional income, while a taxpayer earning £155,000, which is 50 per cent. more, has a marginal rate of only 51.5 per cent. Furthermore, a taxpayer earning £125,000, which is somewhere in between those two figures, has a marginal rate of just 41.5 per cent. It makes absolutely no sense, and I would like a proper explanation from the Government of their work on the rates. We will now have 16 different personal tax rates, including those levied on trusts and dividend income, and the only people who will benefit from all of the complexity will be tax consultants. What are the Ministers thoughts on that?
In terms of practicalities, the issue also raises significant problems for the PAYE system with associated costs for both Her Majestys Revenue and Customs and for taxpayers who are in PAYE. The actual amount of the allowance depends on the level of income in the tax year, which will not be known until after the end of that year. The PAYE system cannot deal effectively with such situations, and will have to be based on estimates. In circumstances where an individuals usual income is well below £100,000, but they receive a one-off bonus taking it up to, for example, £120,000, the taxpayer will face a pretty much unprecedented underpayment of in excess of £2,590 at the end of the tax year, simply because PAYE will not be able to deal with the level of complexity associated with the 11 different marginal tax rates. In turn, that taxpayer expected PAYE to be collected at the right amount throughout the year and not at the end of it. Such a situation will throw certain fundamentals of the PAYE system into question and cause difficulties for individuals, HMRC and tax planners. The proposals do not sit comfortably with the PAYE system, which is not designed for that sort of complexity.
I am listening very carefully to the hon. Gentleman, but some of the problems that he mentions are intrinsic to the system itself and are not dependent on the proposal under discussion, are they not? He illustrates a series of problems that will occur, but they would occur in any system in which allowances are reduced. Do all of the problems derive from the simple fact that there are 11 different bands?
The system that the Government propose and the phasing out of the allowance above £100,000 will add immensely to that complexity. The hon. Gentleman is right to say that there is already a certain amount of complexity, but the amount of complexity added by the proposals is entirely disproportionate to that which already exists.
Those with income subject to PAYE in and around some of the bands will be subject to estimated PAYE codes, which will in many cases lead to under or over-payments of tax and in-year requests for change and coding notices, which will put further strain on the tax administrative system. The result will be an increase in the need for form-filling, the issue and processing of which, together with making the associated payments, repayments or coding adjustments, will increase the administrative burden and costs for many taxpayers and HMRC.
Perhaps I should declare an interest as a fellow of the Institute of Chartered Accountants in England and Wales, as clearly this could be welcomed as a job creation scheme for accountants. I was not aware of those facts, and my hon. Friend has helpfully brought them to the Committees attention, but is it not just a stealth tax whereby taxation on higher earners is increased without actually saying that that is what it is? Are the Govt not trying to do that by the back door?
My hon. Friend is absolutely right. It is a more stealthy way of raising yet more revenue from higher earners. I do not wish to trespass on the major debate we are to have on clause 6, but I think that he is quite right. He is also right that that will act as a boon and incentive to many in the tax planning industry for additional bands that should not be there.
I will introduce two sets of comments from observers on the associated payments, repayments and coding adjustments. The second is actually from the Institute of Chartered Accountants but the first is from the Chartered Institute of Taxation, which, with regard to these proposals, states:
We consider that a more appropriate method would have been to lower the threshold at which the 50% band is introduced or to set a rate between 40% and 50% for the band of income between £100,000 and £150,000.
HMRC/HM Treasury (HMT) models could predict the level at which these would need to be set to yield the same revenue as the current proposals, yet with reduced administrative burdens for HMRC, tax agents and tax payers.
What consideration has the Minister given to those suggestions?
The ICAEW made more or less the same point:
A more straightforward option would be for personal allowances to be given in full, but for the rate of tax applying to be higher over, say, £100,000 of taxable income. This would have the benefit that PAYE would then be able to deal effectively with bonuses etc so that underpayments of tax would be less likely. Analysis will need to be done to identify an appropriate rate of tax and there will be winners and losers.
What consideration has the Minister given to that proposal? He has explained the rationale in terms of his belief that those who have been and are earning more should be paying more, but can he explain the rationale behind the plethora of new marginal tax rates that he is creating? That seems to breach the principle that everyone is entitled to receive a certain amount of income on which they pay no tax, but it also seems to breach the undertaking that the Minister gave personally, along with the Government, not to make our tax code too complicated. That cumbersome and complicated schedule of marginal tax rates will surely lead to gross distortions in the system, so I would be grateful to hear what studies have been done of that change with people outside.
My hon. Friend will recall the 2007 Budget, in which the then Chancellor, the current Prime Minister, proudly announced that for the first time the UK would have only two rates of tax on personal income, combining national insurance and income tax, and a simplification process, having abolished the 10p rate. Now we seem to have more bands than ever.
My hon. Friend is, of course, quite right. That is yet another example of the Governments economic and tax policy unwinding disastrously over the past two years with the former Chancellor, now as Prime Minister, continuing patterns of disastrous stewardship of the finances.
My other question is about what behavioural changes there will be. What behavioural changes does the Minister predict will happen on the overall tax take from those changes? At the moment, they seem to be predicated entirely on no behavioural change, which was the point made by the hon. Member for South Derbyshire in his intervention. How does the Minister feel about jeopardising our long-treasured, progressive system of taxation, where bands go up the more that one earns, and introducing this rollercoaster? What impact will that have on the message that the Government are sending out to the people of this country?
It is a great pleasure to serve under your chairmanship, Mr. Atkinson. We are seeing a clear change in Government policy here. The stealth tax is still presentthey are trying to get it through the back door. It is an attempt to tax higher earners, going away from the Tony Blair philosophy that swept Labour into power. Now the Government believe in tax-and-spend, while the Conservatives believe in lower taxation and responsible spending. That is good for the election that is on the horizon.
I remember last year, in every debate, whoever was Chancellor stood up and said, We believe in making a simple tax system. We want to remove complications and have as few rates as possible. What we now have is a complete and utter reversal, which I think is a mistake. Honesty would have been the better policynot fiddling with personal allowances but simply putting the tax rate up on higher earners, if that was what the Government believed was right. Then we can have a proper debate. The days of stealth taxes should be over.
I have a few brief comments. Regarding the points made by the Government about complexity, hon. Members will recall that the Liberal Democrats proposal was targeted at those people earning £100,000 and more. It was abandoned at a celebrated occasion at a party conference, when we made what was called the green tax switch. The Government have a different way of doing itthey have a less severe redistribution in their proposal than in ours. The reasons why the Lib Dems modified their position are the very issues that I would like the Minister to address now.
It has been suggested that if we introduce such a proposal, people who are in the unfortunate category of earning £100,000, looking with envy at the people who earn £98,000, will simply find a way to take their reward via other means such as capital gains. It was also argued, when we changed our position apropos the higher tax band, that some of the gains in redistribution would ultimately be somewhat spurious. Some of the reductions in social inequity that would follow were probably more imagined than real. Will the Minister familiarise me with his thinking about those proposals in terms of their effects on tax avoidance and people taking their reward in different ways? The Minister may well acknowledge a genuine redistribution urge here, but what does he think the proposals will do to low incomes?
I do not agree with Opposition Members characterisation of the measure. Regarding complexity, as I said in my earlier remarks, the threshold for income tax and national insurance will, under the proposals that I have set out, including some of those in the Bill, be fully aligned for individuals for the first time. Some of the steps in the table read out by the hon. Member for Hammersmith and Fulham will be removed. The only parts of his table that are affected by the measure that we are discussing now are right at the top end of the income range. As I have underlined, only 2 per cent. of peoplethose on the highest incomeswill be affected. The full allowance will still be available for 98 per cent. of taxpayers. The 2 per cent. whom we are talking about are already required to complete self-assessment forms. Hence, there will be no additional form-filling for themit will all be done through the form that they already have to complete.
Surely the Minister must realise that anybody who is likely to be earning between £100,000and £112,950 is likely to change their behaviour as a result of these changes. At the weekend, in The Sunday Times there was an article entitled Five ways to turn income into capital gains. That is precisely the sort of thing that I think will lead to behavioural change, which he claims will be avoided.
I will come on to the question of behavioural change in a moment. The hon. Gentlemans charge was that people would have to fill in more forms and I am simply pointing out to him that that is not the case. They already complete a self-assessment form. That is all that is required for the calculation to be successfully completed, so there will not be any more forms for them to fill in.
Surely there will be more forms to be filled in if a mistake has been made, which is quite likely to happen. People will have to resubmit their tax returns, on the basis that mistakes are far more likely with this very complicated structure.
There is no basis for that assertion at all. People will complete their self-assessment form in the way that they do now. They will state their income and the calculation will be made. There is no reason at all why this change will alter the accuracy with which people complete their forms.
There is a clear case on fairness grounds for this change, which I touched on in my earlier remarks. At the moment, a taxpayer gets relief from their personal allowance at the highest rate of tax that they pay. That means that a basic rate taxpayer gets the benefit of £1,295 and a higher-rate taxpayer gets the benefit of twice that sum, which is £2,590. It is entirely right, at a time when all of us acknowledge that fiscal consolidation is required, that people at the high end of the income range should contribute somewhat more.
I entirely accept my right hon. Friends argument about fairness. However, I must admit that I have been puzzled about the mechanisms that have been chosen, which are likely to incentivise behavioural change in a group of people who are well able to pay for advice to maximise the benefit of that change. What calculation has the Treasury done on the net revenue that will be lost as a result of this proposal from people simply altering their behaviour, such as topping upadmittedly, only temporarilytheir pensions, putting money into venture capital trusts, or using a variety of mechanisms that would achieve the outcome that they desire?
First, an assessment has been made and the figures in the Red Book take account of anticipated behavioural changes. I noticed that the Institute for Fiscal Studies described those assumptions as being not unreasonable; they are sensible assessments of the kind of changes that will be required.
However, I would caution my hon. Friend on one point. Sometimes there is a suggestion in these discussions that, in reality, we cannot increase the tax paid by people on high incomes. That is not the point that he made, but it is sometimes suggested that, if there is to be fiscal consolidation, the practical reality is that the additional contributions have to come from those on lower incomes. That is not his position, or my position, but I think that it is very important that we resist that view and that we proceed with measures such as this one, which require, as I have already set out, an additional contribution in tax from the 2 per cent. of highest earners in the country.
The Minister is being generous in giving way. He can correct me if I am wrong, but I do not think that I have seen anywhere an assessment of the phasing-out of the allowances. I am sure that he is right that there have been assessments. I think that the issue was debated by the Treasury Committee, to assess the impact on behavioural changes caused by the 50p tax rate. However, I do not think that I have seen anywhere in the Red Book an assessment of the changes to the phasing-out of the allowances. Therefore, if such an assessment is in the Red Book, can he tell us what the numbers are?
Yes. The assessment was done for both measures together, rather than for each measure separately. So the figures apply to both measures.
Surely the Minister must realise that there are two very separate issues here. They are the 50p tax rate for those earning more than £150,000 and the changes in the allowances, which will make behaviour very susceptible to these very small changes in income. For example, people may get a bonus towards the end of the year. which might take them from £95,000 to £115,000. But the behavioural change there will be very different from that of someone who is currently on £250,000 and considering whether to leave the country. Those are two different things and I should be grateful to hear what separation he has made of those two considerations.
The hon. Gentleman is right, of course. There are different issues and there will be a number of kinds of behaviour. There has been talk of people going for capital gains. There will be a variety of different behavioural responses that people will perfectly appropriately pursue. My point was that the figures, such as those discussed in the Treasury Committee, relate to that variety as a whole. That is the basis on which the assessment has been made. I have no doubt that the individual steps were looked at when that assessment was put together, but the figures that have been set out relate to the measures as a whole.
Is the Minister ablenot necessarily nowto tell us what the fiscal benefits of this measure are and what they would have been if anticipated behavioural change had not been read into that? What benefit will this achieve for the Treasury and what allowance is being made for peoples behavioural change?
As we heard, this was discussed at the Treasury Committee. If one looks at the theoretical take from the measures in the clause, the scorecard revenue that we expect to receive is 36 per cent. of that total theoretical revenue. That has been fully taken into account in the Red Book.
I understand the point about a high marginal rate over a portion of income, but the measure that the clause set outs is the right way to seek a contribution to consolidation from this group of taxpayers. It is relatively straightforward to implement. It ensures that taxpayers with incomes in this income bracket pay a maximum of £2,590 towards fiscal consolidation and it minimises the behavioural impact too. As I said earlier, the taper will operate on exactly the same principles as the familiar taper for age-related allowances. All those affected will be within the self-assessment regimes already. I do not agree that having another rate for income tax between 40 and 50 per cent. would have been better. Doing this through the personal allowance tapering and using a mechanism that is already familiar in the tax system is the appropriate way to go.
Fiscal consolidation is always difficult. Those who are asked to contribute more in the future than in the past will, understandably, have some regrets. But those whose income is at the highest end of the income spectrum have seen their incomes rise the fastest over the past decade. So it is absolutely fair to ask them to contribute rather more.
The Minister makes the point that people who lose out because of, to use a phrase he has used a number of times this morning, fiscal consolidation, will feel aggrieved. But does he not agree that they will feel particularly aggrieved if a tax rise is contrary to an express commitment in a manifesto?
In a period in which we are seeing an utterly unprecedented crisis in the world economy, I think that people are looking to the Government to take the right decisions and safeguard the economy, families and businesses. The situation that we are in at the moment is unprecedented and requires very bold measures on the part of the Government. We have put bold measures in place and this is one of them. People will recognise that that is the right thing to do.