I am grateful for the opportunity to discuss clause 3, and to put it into the context of the debate on the Budget and incomes. Clause 3 sets the personal allowance for those aged under 65 at £7,475 for 2011-12. That is a rise from £6,475 in 2010-11. Subsection (2) disapplies the indexation provisions for the allowance for 2011-12.
Individuals are entitled to a personal allowance for income tax that depends on an individual’s age and income. Income tax personal allowances are also subject to indexation—an annual increase based on the percentage increase to the retail price index. Parliament can override those amounts, and provisions in the Finance Bill can do that. The clause allows for a rise from £6,475 in 2010-11 to £7,475 in 2011-12. I need not remind the Committee that that benefits everybody who is a taxpayer, no matter what their level of income. It benefits those on higher rate taxation and those on lower rate taxation. It does not benefit those individuals who pay no taxation at all, such as pensioners or the unemployed.
The increase in allowance of approximately £1,000 was set out in the June Budget, which also set out the fact that the personal allowance would increase by a further £630 in 2012-13, with an equivalent £630 reduction in the basic rate limit to leave higher rate thresholds unchanged. Those measures will come into effect in the next financial year and are not included directly in these clauses. It is an estimate that the Treasury has made. Will the Minister confirm the estimate of the number of individuals who will benefit from those changes? We believe that approximately 880,000 people will be taken out of income tax altogether, but I would be grateful if he confirmed his assessment and understanding of the number of people who are taken out of income tax as a result of the proposals in clause 3.
It has been claimed that 60% of those who are taken out of tax will be women. I would welcome the Minister’s assessment of that in relation to clause 3. In addition, my understanding is that HMRC estimates that approximately 23 million basic rate taxpayers will gain, on average, by around £117 per annum. However, I would like to test the Minister. I nod my head to the Liberal Democrat members of the Committee— the hon. Members for Brecon and Radnorshire and for Bristol West—who pressed hard for that trajectory in the coalition agreement. The price of that has been their support of some very unpalatable Government measures that have been introduced elsewhere. Clause 2 proposes that the allowance should rise to £7,475 by 2011-12. The hon. Members for Bristol West and for Brecon and Radnorshire would like to see the personal allowance rise to £10,000 by the next election under the coalition deal. I would be interested if the Minister gave some indication of its trajectory, not only for this year under clause 3 but for future years towards the objectives of Liberal Democrat Members.
I would also welcome some indication from the Minister of the net impact of all this. The provisions in clause 3 cannot be taken in isolation. The Lord giveth and the Lord taketh away. The Government have increased the personal allowance this year from £6,000-odd to £7,475, which is of great benefit to those who pay income tax. However, we also have to face a rise in VAT, a freeze in child benefit and cuts in working family tax. Will the Minister explain to the Committee how those feature across the board, and what impact they will have on the benefits of the clause, which he will undoubtedly trumpet?
Does my right hon. Friend agree that the narrative developed for taking this position on personal allowances was that it would help the very poorest? However, the Institute for Fiscal Studies pointed out that in 2009-10 only 62% of the adult population had a high enough income to pay income tax. It went on to say that these tax cuts are not targeted well enough to help the poorest.
My hon. Friend makes a valid point. In fact, he pre-empts what I was about to say. I confirm what he said. The Institute for Fiscal Studies said that in 2009-10, only 62% of the adult population had a high enough income to pay income tax.
In supporting the clause, and effectively supporting the forgoing of taxation that would otherwise have been raised, we need to assess not only the provisions in clause 3 but the impact of other changes on the community at large. For 38% of the adult population who do not pay income tax, there are VAT on rises on petrol, on white goods and on other goods across the board, there are changes in pension levels resulting from changed calculations, and possible changes being made downstream to the winter fuel allowance. Many of these changes will impact on individual incomes, and clause 3 is being promoted with the strong support of the Liberal Democrats as a way to take people out of tax. Clause 3 may take people out of some income tax, but it does not take them out of taxation; 2.5% on VAT is just as important to families as being lifted out of some portion of income tax by the proposals before the Committee.
The Red Book and the documents produced by the Office for Budget Responsibility clearly show that the Government are giving with one hand, with the increase in the tax allowance, but that with the other they are taking away with a host of other taxes. Over time, the Government’s figures for the reindexation of thresholds from RPI to CPI show that although they will be giving away £1.2 billion they will take back £1 billion. Over time, the thresholds will be eroded.
My hon. Friend makes a sound point.
I simply ask the Minister to explain the impact of clause 3, and on whom it will impact. I also ask him to consider clause 3 in a wider context. Will it make a difference to the tax take for society at large, and will the Government’s tax proposals make an overall difference for individuals in our community? As my hon. Friend the Member for Edinburgh South says, we need to consider not only the proposed changes to the indexation of thresholds; we also need to consider the clause in the light of all the other tax changes before agreeing to support it. It is a benefit to those who pay tax, but it is being paid for by sleight of hand in other ways, and people feel that they are having to pay through indirect taxation. I would welcome the Minister’s views on that, as well as his overall view of the net impact not just of these tax changes, but others on individuals who will be affected by the changes in clause 3.
Is the Minister committed—this will be of particular interest to the hon. Members for Bristol West and for Brecon and Radnorshire—to meet the trajectory towards £10,000 by the end of this Parliament? Is it a one-off, in which case we can support it—or not, depending on our view of the clause—or is it part of a strategy to continue to raise thresholds over the next two to three years to the level requested by the Liberal Democrat coalition partners?
I am interested in teasing out what the Government’s attitude will be to national insurance down the line. There are proposals on the table to consolidate national insurance rates with general taxation rates. If that were to happen, people on pensions, who have a pensionable income that would be taxable, would then become liable to a part of the tax burden that they do not have to pay at present. That, in conjunction with the future progress of the proposals under discussion, would be interesting.
I am sure that the Minister will comment on that point and the time scale for the amalgamation of tax and national insurance. My key point relates to the Liberal Democrat proposal for a trajectory towards a £10,000 personal allowance. I do not want to test your patience by returning to clause 2, Mr Hood, but it raised the basic rate limit to ensure that we included more people in the higher rate of taxation. Clauses 2 and 3 are intrinsically linked by that provision. By raising the level, does the Minister see a trajectory over the next three to four years towards the £10,000 that the Liberal Democrats wish to see, or will it be ruled out by further higher rate threshold reductions, which will mean that other individuals, who are on a moderate income in the £35,000 to £43,000 tax bracket, will pay for it?
On clause 3, what is the Government’s long-term strategy on tax allowances? Can the Minister give the Committee an overall figure in relation to the tax and benefit changes, so that we can assess what the clause means in relation to value added tax and other changes being made by this Government?
Clause 3 supports the Government’s aim of creating a fairer tax system by rewarding the efforts of those who choose to work and by supporting millions of taxpayers on low and middle incomes. As we have heard, it increases the personal allowance by £1,000 in cash terms, from £6,475 in 2010-11 to £7,475 in 2011-12. Compared with plans inherited from the previous Government, that will lift more than 800,000 individuals out of tax altogether, and it will mean that 23 million basic rate taxpayers have an average real-terms gain of £160 a year, equivalent to £200 a year on average in cash terms.
I will provide clarification during the course of my remarks, if the right hon. Gentleman is prepared to bear with me. The clause represents the first step towards meeting our long-term objective of increasing the personal allowance to £10,000 which, as the right hon. Gentleman has pointed out, was a Liberal Democrat policy at the general election and one that was signed up to in the coalition agreement. The agreement notes that we are committed to making real-terms increases towards the £10,000 target ever year. Those increases will be announced as part of the Budget process. Clearly, we are already making substantial progress towards meeting that target. The personal allowance increases announced to date will take 1.1 million people out of tax altogether. Including the announcements in the June 2010 Budget and the March 2011 Budget, 23 million basic rate taxpayers will gain.
In the recent Budget, the Chancellor announced the next step. The clause relates to 2011-12, but from 2012-13 we will see an increase of £630 in the personal allowance. As I said, in total, the Government’s action will take 1.1 million individuals out of tax from April 2012. Compared with the previous Government’s plans, 23 million basic rate taxpayers will benefit by an average of £210 a year in real terms.
I appreciate the complexity of this particular issue. The Minister mentioned 23 million taxpayers, and he said that 1.1 million taxpayers will be taken out of the tax system altogether. However, he is talking about that in cash terms, whereas the indexation of the 2010-11 figure of £6,475 would have been £310. Is that figure of 1.1 million people on top of that, or are we talking about a £1,000 cash-terms increase rather than the £690 figure that it would be if we take out the indexation for the particular year?
This is compared with the plans that we inherited from the previous Government. Another way of looking at it is to say that if we had stuck with the plans we inherited, an additional 800,000 individuals would be paying income tax. I hope that is helpful to the hon. Gentleman.
In fact, may I be slightly more precise about the numbers? The right hon. Member for Delyn asked a perfectly fair question when he said that he understood that the number of people who would be taken out of tax was 880,000. That was the assessment that we made in the June 2010 Budget. Because September’s inflation was higher than forecast, the real-terms increase in the personal allowance was less than it would have been previously. As a result, our latest estimate is that 830,000 individuals will be taken out of tax in 2011-12, compared with the figure under the plans that we inherited.
I am grateful to the Minister for those revised figures, which are welcome. For the record, they show that 50,000 fewer individuals will be taken out of tax. However, the Minister should also clarify that we are talking about individuals who are being taken out of income tax, because tax is still levied on all those individuals through VAT and other measures that he is aware of.
Yes, the right hon. Gentleman is right. Those individuals are being taken out of income tax. However, I want to respond to the point made by the hon. Member for Sheffield Central. He asked whether these people are really the poorest people. They are low earners, earning roughly between £6,500 and £7,500. They are striving in difficult circumstances, and it is right that we should seek to give them help. They should be encouraged and I imagine that that approach will have the support of all members of the Committee.
I was asked about the percentage of people being taken out of income tax who are female. That percentage continues to be 60%.
I was looking to you, Mr Hood, to help me.
I will attempt to answer the hon. Gentleman. As I have said a number of times already in our debates, we face a very difficult fiscal situation and we need to make tough decisions. If we look at the accumulative impact of the tax, tax credit and benefit reforms introduced by the Budget, and at previous fiscal events, we will see, as I said earlier, that the top decile has the largest losses. That is the case across the income distribution, in cash terms and as a proportion of net income. The same results apply across the expenditure distribution. When we also factor in public service changes, the top 20% of households will make the greatest contribution towards reducing the deficit, because a percentage of their income benefits in kind from public services. The Government are trying hard to ensure that we do this fiscal consolidation in as fair a way as possible.
The hon. Member for Gateshead raised the issue of bringing together national insurance contributions and income tax. The Chancellor made a statement that we are looking at the operation of those two revenue sources to see whether there is a way of improving them and operating them together. However, he also made it absolutely clear that the two taxes would continue to exist and that national insurance contributions would not be levied on over-65s or on any other sources of income, such as savings and dividends. I want to make that clear in case Members have people visit their constituency surgeries concerned that they are about to be hit by a significant increase in tax because they believe that national insurance contributions are going to be levied on pensioners’ incomes. That is not the Government’s intention and I am sure that all hon. Members will provide appropriate reassurance.
Yes, that is also part of the plan. We do not intend to extend national insurance contributions to additional sources of income, so I can provide that reassurance.
The hon. Member for Edinburgh South made a point about the indexation of tax increases and the argument that, somehow, the personal allowance increase will be taken away by changes to indexation. Across this Parliament, the combined effect of personal allowance increases this April and next April will be worth significantly more than any losses from the switch to CPI. We also have to bear in mind that there will be further significant progress in future years and Budgets towards our target of a £10,000 personal allowance. The costs for future above-RPI increases in the personal allowance are not included in that calculation. I hope that that provides reassurance.
In conclusion, this is a very worthwhile step. We are making significant progress in helping a lot of low earners. As I said, 23 million people in this country will benefit from the increase at a time when we have to make difficult choices. We do not deny that, but we are providing support to those people who are struggling, getting out to work and putting in the effort. It is unfair that people who earn relatively small amounts of money should be caught up in the income tax system. The clause enables us to reduce that pressure and take substantial steps to help those people, and I hope that it will stand part of the Bill.
I want to put to rest some myths. This change benefits low earners, but it also benefits everybody in this room. It benefits high earners. It benefits everybody.
That is not the case. As the right hon. Gentleman made clear earlier, clause 3 is intrinsically linked to clause 2, which reduces the basic rate limit. That means that those of us who are higher rate earners, including all members of this Committee, will not benefit from the personal allowance increase set out in clause 3. It is targeted at basic rate taxpayers only.
I accept what the Minister says, but the measure effectively benefits people other than those on low incomes. The people who will benefit from the legislation are not those earning £6,000 or £7,000 but have higher incomes. The increase in the personal allowance is offset by the rise in VAT and other taxation measures across the board that have been brought forward by the Minister in other legislation.
The other point that my right hon. Friend might come to concerns the link between clauses 2 and 3. Although low-income earners will benefit from clause 3, which is important to help people out of tax, for members of the Committee and anyone who earns more than the higher rate tax threshold, the link between clauses 2 and 3 will have no effect because they will not lose out through the changes in clause 2. The measure affects many people, but the only losers are those at the threshold of the measures in clause 2. It is important to recognise that that group in the middle is disproportionately affected by the legislation.
The right hon. Gentleman seems to be getting confused, as are some of his colleagues, about tax bands, average earnings and the squeezed middle, and he seems to be having some problem with his definitions. Average earnings in our country are £23,348—that is in the private sector, which is lower than the public sector. We are talking about a higher rate tax band that starts at £43,000. That does not affect the squeezed middle.
I am sure that many people in the hon. Gentleman’s constituency will be very interested in what he has said. My point is that the changes in clauses 2 and 3 should not be taken in isolation from each other or other changes made to taxation. The savings that people will make through the higher threshold will be offset by other changes to taxation, although that has not been mentioned in detail by the Minister.
Those changes include the increase in value added tax, to name but one—the hon. Gentleman stood in the election on a platform of not raising VAT, but he has voted to raise it, which may not help his bid for re-election. In part, he has achieved his objective of a trajectory towards a £10,000 threshold, but at the same time he has broken election pledges on other matters such as value added tax, which are worthy of discussion as part of the package surrounding clause 3. The Minister will not face a Division on clause 3. I am grateful for his comments and for the discussions that we have had about the clause.