Clause 2

Finance (No. 3) Bill – in a Public Bill Committee at 12:30 pm on 10th May 2011.

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

Photo of David Gauke David Gauke The Exchequer Secretary

Clause 2 sets the basic rate limit for income tax for the 2011-12 tax year. The limit set this year ensures that the gain from the personal allowance increase for 2011-12 is focused on the low and middle-income taxpayers who need it most, and it is set in such a way that the majority of higher rate taxpayers pay the same amount of tax and national insurance contributions as planned by the previous Government.

The clause reduces the basic rate limit by £2,400 to £35,000 in 2011-12 which, when combined with the £1,000 increase in the personal allowance introduced by clause 3, means that the higher rate tax threshold for 2011-12 is reduced by £1,400 in cash terms, to £42,475. Together with the corresponding adjustments made to keep the national insurance upper earnings and profits limits aligned with the higher rate tax threshold, that means that the majority of higher rate taxpayers pay the same amount as planned by the previous Government.

The coalition Government are committed to creating a fairer tax system that rewards work, with real-terms progress every year towards increasing the personal allowance to £10,000. The £1,000 increase in the personal allowance introduced by clause 3 represents the first step towards that £10,000, and will benefit 23 million individuals, removing more than 800,000 people from income tax altogether. However, we had also to ensure that increasing the personal allowance by £1,000—the largest increase ever—was consistent with bringing the public finances back under control. Accordingly, we have made the adjustment in clause 2 to focus the benefits on people on low and middle incomes—the right decision for a fair and sustainable change.

The overriding priority of the June 2010 Budget was to reduce the fiscal deficit. At a time when we are asking so much of so many, it is right to reward the efforts of people who choose to work by increasing the personal allowance, but equally, it is right to focus the gain from the increased allowance on those who need it most. The change in the basic rate limit does exactly that.

Photo of David Hanson David Hanson Shadow Minister (Treasury)

As the Minister said, clause 2 sets the basic rate limit for income tax at £35,000. Subsection (1) replaces the existing amount of the basic rate limit in section 10(5) of the Income Tax Act 2007, which is £37,400, with the figure of £35,000 for 2011-12. Subsection (2) disapplies the indexation provisions for the basic rate limit for 2011-12 as a whole. As the Committee will know, an individual’s taxable income is charged to tax at the basic rate of tax up to the basic rate limit. The basic rate limit is subject to indexation—an annual increase based on the percentage increase to the retail prices index. Parliament can override indexed amounts through the provisions in the Finance Bill.

The basic rate limit for 2010-11—the year until April of this year—was £37,400. Had that been indexed, it would have become £39,200. Because of clause 2, it is now at £35,000, which means that we have dragged into the higher rate of taxation an increased number of individuals across the board. The clause sets the basic  rate limit at £35,000 in 2011-12. That follows the announcement in the June Budget that the basic rate limit would be reduced below the figure in the plans that the coalition Government inherited, in order to ensure that the increase in personal allowances was targeted on basic rate taxpayers. That links to clause 3, which we will discuss shortly.

The reason why I am testing the Minister on this matter is that I want an indication from him not only of the impact on those people who will now be subject to higher rate taxation, but of the implications of that higher rate taxation in relation to a range of other measures in due course. The Institute for Fiscal Studies has estimated that the reduction in the basic rate limit will mean that an additional 750,000 people are dragged into the higher rate tax bracket. I would welcome from the Minister an indication of his assessment of the number of people who are now being put into the higher rate tax bracket who would not have been in it had this change not been forthcoming, because those individuals will pay a higher level of tax and that will have a knock-on effect on a range of other issues, which I will explore in a moment.

Photo of Ian Murray Ian Murray Labour, Edinburgh South

My right hon. Friend will perhaps go on to talk about this, but one of the key issues that has been raised, certainly with me in my constituency, relates to those individuals who earned £36,000 to £37,000 a year and were in the lower rate tax bracket, but who now, because of this sleight of hand by the Chancellor, have gone into the higher tax bracket and are in danger of losing their child benefit. Could my right hon. Friend comment on that?

Photo of David Hanson David Hanson Shadow Minister (Treasury)

My hon. Friend anticipates the discussions that we intend to have on this clause. The Minister did not really touch on those issues in his introductory remarks. That sleight of hand—that was a useful phrase that my hon. Friend employed—means that whatever number of individuals are brought into the higher tax bracket will be affected in 2012 and 2013 by a range of other measures that apply to people in the higher tax bracket. My hon. Friend mentioned one example—child benefit. Clearly, individuals with children will lose their child benefit in 2013 when the Government remove child benefit from households with a higher rate taxpayer. The Government are not only breaking the universality of child benefit, but ensuring that those individuals who are higher rate tax payers do not receive child benefit. Clause 2 means that a number of people—we have determined that it could be about 750,000, but I would welcome the Minister’s assessment of the number in due course—on relatively modest incomes of £35,000 to £43,000 are being dragged into the higher rate tax bracket and will therefore find themselves subject to the loss of benefits in a range of other areas.

The Minister will know that it is not only child benefit that is affected. Last week on the Floor of the House we discussed clause 35, “Reduction in childcare relief for higher earners”, which effectively reduces the level of child care tax relief for higher earners. Before we agree on the clause, the Minister should examine how many individuals will be affected in other ways, downstream or in other years, by the changes.

As the Government have confirmed, it is estimated that about 160,000 additional households that currently qualify for child benefit will be dragged into paying the  higher rate of tax. I accept that a considerable number of households on relatively modest incomes will benefit from the provisions in clause 3 and the higher threshold, but they will then find themselves in the higher tax bracket. In 2013 they will lose benefits such as child benefit, which is essential for child care and child support, particularly in a single-parent household.

I would like to tease out the Minister’s assessment of what impact those changes will have on the wider level of benefits downstream in 2012 and 2013. Will he give the Committee some indication of what modelling has been done and what savings have been made? What will the impact of the changes be for those people who currently receive child benefit, and who perhaps thought that they would continue to receive it even when they heard in the press that it was being removed for higher earners? Some of those people will now be pulled into the higher earning category, and they will lose child benefit and child care vouchers and tax relief accordingly.

The Treasury has estimated that 20,000 additional people in single-income families will pay the higher rate of tax from April 2011, and 15,000 from April 2012. It is important for the Minister to give the Committee his assessment of the impact of the legislation, particularly with regard to single people. The clause will bring additional people into the higher-rate tax bracket, and I want to know whether an assessment of the measure has been made, including a breakdown of how many single people and couples will fall into that extra category, along the lines of the Treasury figures. What is the Minister’s assessment of how the changes in clause 2 will affect people in 2013? There will be those who believe that they are paying the lower rate of taxation but who, if clause 2 is agreed, will find themselves paying the higher rate. In due course—in two years’ time—they will find that they also lose child benefit.

In my view, a modest income of between £35,000 and £40,000 a year might well be earned by a junior police officer, a junior teacher or a junior local government worker. There will certainly be people in the private sector on relatively modest incomes who find themselves dragged into the higher rate tax bracket because of the measures in the clause, and that will lead them to lose child benefit in 2013. Has the Minister had cross-governmental discussions with colleagues from the Department for Work and Pensions or the Department for Business, Innovation and Skills about the impact of the legislation on potential employment opportunities for single parents, both male and female? The marginal difference between the higher rate of tax and the loss of child benefit may mean that people are not able to afford the child care that could keep a single person at work in the community, particularly in metropolitan areas such as London.

Photo of Ian Mearns Ian Mearns Labour, Gateshead

The point outlined by my right hon. Friend will affect tens of thousands of households up and down the country and appears to be more than mere prestidigitation on behalf of Ministers. It will be a devastating blow for the many people for whom we have coined the phrase “the squeezed middle”. It will affect the potential income of families, particularly those with children, who will also lose their child benefit. The measure is stunning, and I apologise to my hon. Friends, because I had not spotted it coming.

Photo of David Hanson David Hanson Shadow Minister (Treasury)

It is key that the Minister assures the Committee that he can give us details on the numbers of people who will lose out in future benefits, such as child benefit, because of the measures. If the Committee accepts the clause, we will ensure that a large number of people are brought into higher rate tax. At some point in future, therefore, those people will lose access to child benefit and, in particular, to child care vouchers.

Mr Gauke indicated dissent.

Photo of David Hanson David Hanson Shadow Minister (Treasury)

The Minister shakes his head. Perhaps he wants to intervene to explain how people who will be new higher rate taxpayers under the clause will not lose out in 2013. If he can explain that, I shall be very happy.

Photo of David Gauke David Gauke The Exchequer Secretary 12:45 pm, 10th May 2011

I shall explain why I am shaking my head by returning to clause 35 and the child care vouchers, which we debated last week. To clarify, under the policy that is implemented by clause 35—which was introduced, after all, by the Opposition— higher rate taxpayers will get, essentially, the same tax relief as basic rate taxpayers. Without the changes under clause 35, higher rate taxpayers would continue to get greater tax relief than basic rate taxpayers.

Photo of David Hanson David Hanson Shadow Minister (Treasury)

I accept that. We touched on that matter in passing and the Minister knows that we supported clause 35 last week and before that. Can he answer the question on child benefit? He has an opportunity to do so now. How many people will lose child benefit because of the impact of clause 2? Can he tell the Committee now how many people in all our constituencies will wake up on a date in 2013 and find themselves no longer receiving child benefit?

Photo of David Gauke David Gauke The Exchequer Secretary

I will respond to the right hon. Gentleman—

Photo of David Hanson David Hanson Shadow Minister (Treasury)

Oh, the Minister will respond in due course. It is worth while his doing that, because people fear that the clause, as portrayed by him, is very much linked to clause 3, which we will discuss shortly. Clause 3 raises the level of personal allowance to approximately £7,500, with an objective, set in the coalition document, to raise it to the Liberal Democrats’ aspiration of approximately £10,000.

In his introductory remarks on clause 2, the Minister said that the increase in personal allowance has been paid for, in part, by the change in the allowance in clause 2—it has helped to support the funding of clause 3. Does he expect to extend the provisions in clause 2 still further between now and 2013? Does he expect to include more people in the higher rate tax bracket to achieve the aspiration in clause 3, and to achieve the future aspirations to the £10,000 limit? We will debate those matters in detail when we discuss clause 3, but they link significantly to my points on the impact of clause 2.

To conclude, I want the Minister to tell us two things. First, what assessment has he made of the number of individuals who will be deemed to be higher rate taxpayers because of clause 2? Secondly, what assessment has he made of that higher rate taxpayer inclusion on people’s ability to access benefits, such as child benefit, in 2012 and 2013? He needs to make clear to the Committee the  impact of all those measures, because today we are simply faced with clause 2, which makes no mention of the fact that higher rate taxpayers will lose child benefit in 2013. It makes no mention of the arrangements for working families tax credit and other benefits, which will change as a result of the higher rate taxpayer status in 2013.

It is particularly important for us to hear the Minister’s assessment of how many women the measure will affect. How many women, many of whom depend on child benefit, will be brought into the higher tax rate? Within that, how many single women will be affected by the change in clause 2? He will find that individuals will lose out on future benefits because of the change. It is incumbent on him to talk about not just the clause, but its knock-on impact on others in society as a whole.

Photo of David Gauke David Gauke The Exchequer Secretary

Let me see what I can say in response to the questions asked by the right hon. Gentleman. Clauses 2 and 3 will ensure that the benefit from the increase in the personal allowance is focused on those who pay basic rate income tax. To be fair to him, he did not fall into the trap, as some have, of saying that there will be an income tax increase for those paying higher rate income tax, as the reduction in the basic rate merely counteracts the benefit that would otherwise apply to the increase in the personal allowance.

The right hon. Gentleman asked what the number of losers will be. To put it more precisely, he asked how many people will become higher rate taxpayers as a consequence of a reduction in the basic rate limit. Compared with the plans that we inherited, an additional 385,000 people will become higher rate taxpayers in 2011-12. Around two thirds of them will be better off under the overall approach because they will experience the full benefits of the increase in the personal allowance without experiencing the full loss from the reduction in the basic rate limit. He may be interested to know that I am able to provide a regional breakdown of those numbers. I will not give that to the Committee on this occasion, but the information is available if he wants it.

Perhaps I can provide some clarity on one or two of the comments that suggested that people earning £36,000 will start paying the higher rate of tax. That is not how the income tax system works. Individuals start paying the higher rate from £42,475. That threshold represents the sum of the personal allowance, which is £7,475, and the basic rate limit of £35,000. We have also announced our plans for the following year. As we want to focus on encouraging work across the piece, and we do not need to keep the measure limited to basic rate taxpayers, we are not reducing the basic rate limit in the same way, so we will not bring more people into the higher tax rate.

I know that you, Mr Gale, will not want us to engage in a lengthy debate on child benefit. The right hon. Gentleman asked a number of factual questions, not all of which I am in a position to answer. However, at a time when we have to make difficult decisions, it is not fair for people on low incomes to continue subsidising the child benefit of those earning much more. As I said, it is right to focus the gains of the personal allowance increase for 2011-12 on low and middle-income taxpayers. The changes to personal tax thresholds announced in the June 2010 Budget mean that the majority of higher  rate taxpayers will pay the same amount of tax and national insurance contributions as planned by the previous Government.

The right hon. Gentleman is asking me for a considerable breakdown. We are some way away from the changes in child benefit. I am not sure that it helps hugely to give figures here about changes in the current personal rate limit in order to assess the impact that they will have in January 2013. I do not intend to be detained on this particular subject.

Photo of David Hanson David Hanson Shadow Minister (Treasury)

Does the Exchequer Secretary not accept that this is an important point? The Committee needs to know what impact these proposals will have before it can approve clause 2 today. The impact will be that a number of people—I would welcome clarification on the number—will be brought into the higher rate of tax and, therefore, under current Government policies will lose child benefit in 2013. It is important that the Committee sees this figure before it considers accepting the clause. It is an implication of the clause that has not been considered before our discussion today.

Photo of David Gauke David Gauke The Exchequer Secretary

The 2012 Finance Bill will put in place the relevant thresholds that will apply in January 2013. We still have to legislate on the child benefit changes, and there will be plenty of opportunity to debate their impact later. Additional people will be paying this tax as a consequence of the changes. It is estimated that the figure is 385,000, two thirds of whom will still be gaining from the overall package of changes in income tax. Increasing the personal allowance demonstrates the Government’s commitment to make sure that work pays and to reward those who choose to work.

Photo of David Hanson David Hanson Shadow Minister (Treasury)

In that case, I will carry on for a moment. We also need to know another key fact, which has not been touched on by the Minister. How many single people do the Treasury estimate will fall into the higher rate tax band as a result of the changes under clause 2? A single person who falls into the higher rate tax band under the proposals in clause 2 may not qualify for child benefit in 2013. Two individuals with a joint income that is £25,000 more than that of the single person will, under the current Government proposals, receive child benefit in 2013. At the moment, only higher rate taxpayers are losing out under the proposals on child benefit. I accept that child benefit is a separate issue, but there is a causal link. If an individual becomes a higher taxpayer, they will, under Government proposals, lose child benefit. If need be, we will continue until 1 o’clock and the Minister can reflect on this in the three hours between now and the next sitting. It is incumbent on him to bring back to this Committee his assessment of the number of single people who will be paying a higher rate of tax as a result of clause 2 and who will be losing child benefit under the proposals for 2013. We need to know that figure before we can agree on this clause.

Stella Creasy rose—

Photo of Roger Gale Roger Gale Parliamentary Assembly of the Council of Europe (Substitute Member)

Order. For the benefit of Hansard and the record, I was not entirely clear whether the Exchequer Secretary had sat down and this was an intervention.

Photo of Stella Creasy Stella Creasy Labour, Walthamstow

I thank my right hon. Friend the Member for Delyn for giving way. Do his points not raise further concerns about the different measures on household income and individual income? I am thinking of some of the problems that we are seeing both in this Bill and in the child benefit proposals. I notice a recurring pattern here. In a number of Committees that I have sat on with my right hon. Friend and the Exchequer Secretary, there has not been enough data effectively to scrutinise some of these concerns. I hope that the Exchequer Secretary will listen to my right hon. Friend’s  points and acknowledge the need to provide better information about the distinction between measures affecting households and those affecting individual income —there is also London weighting to consider—because of the consequences that will be felt by many households and individuals across the country as a result.

The Chairman adjourned the Committee without Question put (Standing Order No. 88).

Adjourned till this day at half-past Four o’clock.