‘(6) The Chancellor of the Exchequer shall undertake a review, within six months of the passing of this Act, of the impact of the reduction in the starting rate for savings and the increase in the starting rate limit for savings, with particular reference to—
(a) the impact on the household savings ratio, as measured by the annual assessments of the Office for Budget Responsibility;
(b) the impact on the annual saving rate, including changes in housing equity, by—
(i) age; and
(ii) income decile.’.
The clause is about the starting rate for savings, which broadly applies where an individual’s income from employment, self-employment or pension income is less than the starting rate limit for the tax year, after taking the personal allowance into account. It increases the starting rate limit to £5,000 in 2015-16 and reduces the starting rate for savings to 0%. It also allows individuals to request that no withholding taxes are applied to savings by banks or building societies, where it is anticipated that no tax will ultimately be due on those amounts.
Our aim in asking for the review in our amendment is to get some additional analysis of how significant the measure in the clause will be for many people on lower incomes, given that the cost of living crisis has led to savings being eroded or not made at all. In Treasury questions this morning, I put it to the Chancellor that, although he billed the Budget as a Budget for savers, the OBR has said, and we have seen in the Red Book, that the savings ratio has been revised down for every year until 2018.
The truth is that the recession has caused a long-term squeeze on real incomes. People are struggling to pay their bills, and in those circumstances the capacity of individuals to save greater amounts of money is severely limited. When the Chancellor made his Budget statement, I was struck by the way in which he billed his Budget. He spoke of it as a budget for the makers, the doers and the savers, but my feeling about the Bill as a whole is that it does not have much in it for those who are making do—those who are merely surviving day to day, week to week, as their incomes have taken a huge hit and they have ended up worse off as a result of the choices made by the Government since they have been in power.
For people who are making do, just getting by and surviving day to day, trying not to be too terrified each time a bill arrives, how do they save? That is the thrust of the amendment. How do they get into a position where they can afford to put aside even a few pounds a week in order to build up their savings and take advantage of the measures in the clause? The truth is that, at the moment, saving is a luxury for many people in our country. It is a luxury that is far out of reach for people who struggle with a real and deep-seated cost of living crisis which, despite recent changes in wages and prices, shows no sign of abating and will still be felt for some time to come.
Let us look at the facts. The savings ratio itself has fallen in recent months. The ratio—the amount that is put away as a percentage of after-tax income—is lower than in many other wealthy countries, raising concerns about the sustainability of our economic recovery from the financial crisis. Official figures show that the UK’s household savings ratio—the percentage of disposable income put aside for a rainy day—fell to a near four-year low during the final three months of 2013. At just 5%, it was the lowest rate since the 3.1% rate in the first quarter of 2010. A survey by the charity Shelter of working adults who pay rent or a mortgage found that, with little or no savings to fall back on, 3.8 million families could be just one pay cheque away from losing their home. That throws into sharp relief the way in which people are struggling at the moment, how near to the edge many people live every day, and how just one change—one pay cheque not coming in—can push people over the edge.
Savers withdrew money from their accounts last year at the fastest rate for nearly four decades, according to Bank of England figures. Britons took around £23 billion out of long-term savings in 2013, so for all those people who have been able to save and put aside money for a rainy day, many more have been dipping into their savings just to make ends meet, again highlighting the very real impact of the cost of living crisis. The Money Advice Service has said that 16 million Britons are “living on the edge” with zero savings. Its surveys from the beginning of this year show that 27% of people say they can save money each month, and 37% say they have less savings than last year. It also found—some of these figures are very striking and bring home the issues that we are dealing with—that 71% of UK homes are caught out by unexpected bills.
The average unforeseen cost, according to the Money Advice Service, is about £1,000 per household. It also found that loans to loved ones are the largest unexpected cost for households, with the average loan to family members nearly £2,500. Again, one sees the interplay between families and individuals struggling to make ends meet and pay the bills, and either dipping into the small amount of savings that they have been able to make or having to go to loved ones—the famous bank of mum and dad in many cases, or other relatives and friends —to ask for help to meet some of these unexpected costs.
It is a pleasure to serve under your chairmanship, Mr Streeter. Would the savings ratio also indicate to my hon. Friend why, with people unable to save, the cost of living crisis and wages on average £1,600 down, there has been a proliferation in the last few years of payday lenders charging usurious rates and changing the nature of our high street?
My hon. Friend is right to draw the Committee’s attention to payday lending, which has been a big issue on which a number of powerful campaigns have been run, particularly in this Parliament. It has been a growing issue. It is another symptom of what is happening out there in the real economy. What happens to those who find themselves with wages that are £1,600 a year down and, even with tax and benefit changes, nearly £1,000 worse off? Many do not have the luxury of savings, and those who can save very little. What happens after that?
As I said in the earlier debate, many people live in perpetual terror of the size of their gas or electricity bill. When there is not enough money to pay it, they have to get the money from somewhere. If they are lucky enough to have any savings, they will dip into them; if not, they turn to loved ones who may be able to help—knowing people who can lend significant sums is in itself a luxury. The Money Advice Service said that the average loan to loved ones is £2,500. That is a huge sum, not a trifling amount by any measure. It just goes to show how significant the issues are when it comes to people being able to make ends meet. For those who do not have a loved one who can loan anything like that amount—I do not know many people in my constituency who could find a spare two and a half grand to give to a family member to help them cope—where else do they go? That is why we have seen this huge increase in payday lending, which has led to many people simply being abused by the system.
It is also why we have seen so many people turning to food banks. Again, we had the recent media reports of almost 1 million food parcels being handed out in our country—a shocking figure. There has been a huge growth in food banks in my constituency. That is what happens when people cannot make ends meet. They deal with the necessities. They deal with the payday lender who may be on their back and try to stop the interest getting ever more out of control. They have managed to borrow as much as they could from loved ones. They do not have any savings, so they have nothing to dip into, but if they had had savings, they would have exhausted them. They then have to start making choices about going hungry or keeping the lights on at their house, feeding their children three meals a day and perhaps going hungry themselves and eating just once in the evening. I know families in Ladywood who make that choice.
The recent welcome upward trajectory of the relationship between wages and prices—one intersection on the graph that went in the right direction in the last set of figures—does not wipe out the huge impact there has been on families and their incomes. That directly relates to their ability to save, which is what the clause deals with. The Money Advice Service ran a campaign urging households to save £3 a day to help cover unexpected bills during the year. I was interested by that £3 a day: it seems like quite a small sum, but it is a significant amount for my constituents. It is the difference between being able to have lunch, for example, and going hungry. For people in such dire circumstances, even that suggested £3 a day saving to cover unexpected bills is far out of reach.
That brings me to the reasons why people are in a position where they cannot save that much money. There was a lot of debate about some of these issues in the Committee of the whole House, but I will touch on some of them briefly. One is energy bills: gas and electricity bills have risen by about £300 since 2010, such that the average energy bill for heating is about £1,300 a year—a huge increase since the general election. Even with the change in how fuel poverty is measured, that has resulted in significant fuel poverty. It is a real problem: most families who come to my advice surgeries find the gas and electricity bill to be the biggest obstacle to their being able to make ends meet. If people find themselves in that position, saving any money at all is a luxury that is far out of reach.
Other factors prevent people from being able to save. A significant one is the cost of rent. We have seen many more people who are unable to get a foot on the housing ladder and have to rent for longer than they anticipated. Rents, which have increased more than twice as much as wages, form a significant part of any household’s expenditure. If rent is increasing and people find themselves in rented accommodation for ever longer periods, saving any money to meet the much higher expectations for getting a mortgage to buy a house is out of reach for many ordinary people.
The cost of child care is another reason why people either cannot save at all or can save only small amounts. Child care costs have soared: we have seen the cost of nursery places increase by 30%, which is five times faster than pay. The cost of a nursery place is now the highest in history. The average bill for a part-time nursery place of 25 hours a week has increased to £107.
Why does child care feature so highly in the list of things that people worry about and that prevent them from doing other things with their money that the Government would like them to do, such as putting some money aside for a rainy day? Child care has a direct impact on the ability to go to work, particularly for mums, but both parents are affected. If child care is unaffordable, people will have to make other choices about whether they can afford to work. No Government wants people to choose not to work because they cannot afford child care, as that is not good for those individuals or the economy. However, child care is having that significant impact on individuals throughout the country and forcing people into making what the Government and all policy makers would consider a bad choice that we would not want them to have to make: not to go to work. Those people will not be in a position to put anything aside to save. The central point I come back to is that, for the people who are in a position where they are making do, surviving on a day-to-day basis, saving is, I am afraid to say, a luxury that is far out of reach.
My final point about why people are in such difficulty and not able to save is on the huge increase in insecure employment. Among those lucky enough to be in work, many more are in part-time work, desperate for more hours but unable to get them. We have also seen a huge increase in zero-hours contracts. That increase in insecure employment has a powerful impact on that individual’s ability to make their income cover their day-to-day costs and puts saving far out of reach. How can people put money aside if they do not know how many hours they will be working from one week to the next?
I know of cases of constituents who have been on jobseeker’s allowance who have managed to get jobs on zero-hours contracts but are not offered any hours. Every week, they are told that they still have that contract but will not be offered any hours. When one constituent decided to resign because he was offered no hours, he was penalised and sanctioned by the jobcentre. It is a completely ridiculous position for someone to find themselves in, but that is the impact of some of these arrangements on a practical level. If someone simply does not know if they can make ends meet from one week to the next, because they have no idea whether they are going to get five, 10, 12, 16 or more hours a week, how are they able to save any money?
Saving is a luxury for millions of people at the moment, even if they are able to eke out a small amount to save. This is a very real problem and the Government should have taken the opportunity to include measures in the Bill to help to tackle some of those practical issues, particularly energy and child care costs. If they had, people would be more able to meet day-to-day living costs so that they could then take advantage of the changes in clause 3 that seek to improve the position of those with small savings.
Amendment 2 would enable us to keep an eye on the savings ratio in particular. As I noted, according to the Budget Red Book, that ratio is forecast to go down every year until 2018. If it was indeed a Budget for savers, it should encourage people to save more and help more people to afford to save in the first place. If someone is simply keeping their head above water, there is no way that even £3 a day is within their reach. That is the thinking behind our amendment, which I hope Members will support.
As in the previous proposed new clauses we debated, we have asked for a review, because we fear the direction of travel of the savings ratio and the position that people find themselves in with the deep-seated cost of living crisis. At least it would force the Government to review the impact of what is happening to the savings ratio in relation to the changes in clause 3, and that would be a positive step.
I have a couple of more general points about clause 3. The proposed changes under the clause are expected to help pensioners in particular. A number of taxation experts have made an argument about making pensioners aware of how to benefit from the changes. When, later and elsewhere in the House, the pension changes are debated, it will be important to emphasise independent advice and how to get the message to pensioners about their entitlement and how they can take advantage of the changes, including those in clause 3. I would be grateful if the Minister shed more light on how the Government intend to get the message out about the clause and the benefits of the changes for pensioners in particular. Will he also say whether HMRC has thought about how a similar result to that achieved by the changes in the clause could be achieved through individual savings accounts? Should the Government do more to ensure that all sections of society have access to and knowledge of tax-favoured products?
Lots of people know about ISAs, but they also need to know the details of how they work and the fact that this is deliberate Government policy, designed to give a tax-favoured product to ordinary people. It should not just be the preserve of the wealthy or the financially aware. Will the Minister say something about the Government’s thinking on not only the measures in the clause, but how they will interplay with existing measures such as ISAs?
The Chartered Institute of Taxation raised a couple of technical points in relation to the clause. I think the point about the R85 form was made to the Minister in its commentary on the clause. Although the institute welcomes the changes in the clause, it points out that people will complete form R85 only if they know about it and if they understand that they are eligible, so it goes back to the point I made about getting the message out and making sure that people understand how the systems work, and then making sure that they are able to take advantage of them. The Chartered Institute of Taxation stated that the onus is on banks and building societies and HMRC to ensure that the R85 system is better publicised. Clearly, if we want people to be in a position where they can take advantage of the measures, they will need to know about them and understand them. Will the Minister set out the Government’s thinking in relation to the role that HMRC can play in getting the message out?
The institute also raised a technical point on gift aid liability, which is something for us all to be aware of every year when the personal allowance is increased. It states that the issue will be particularly acute with the change in April 2015, when the first £5,000 of savings becomes income-tax-free, taking many more people, particularly pensioners, out of income tax overall. There is an interplay with gift aid, which could catch out some pensioners who made an enduring gift aid declaration. Will the Minister highlight the Government’s thinking about gift aid? How do they intend to make sure that pensioners do not get caught out when they have made an enduring declaration to a charity? Should individuals be made more aware, or should charities do more to help people who might accidentally get caught out by the measure?
I welcome the opportunity to serve under your chairmanship, Mr Streeter. I wish to speak briefly to support my hon. Friend and the case she has made for a review. She has underlined the importance of savings to individuals, families, communities and the overall economy. The Chancellor’s 2014 Budget revealed that the economic recovery, though welcome, is still reliant on consumer spending. Although it was billed as a Budget for savers, it is actually forecast that the savings ratio will fall each year for the next five years, as hard-pressed households draw down their savings and increase borrowing, with the implications that my hon. Friend has so admirably spelt out.
Britain needs balanced investment and an export-led recovery—I think we all agree with that—but consumers can dip into their savings only so far. The independent Office for Budget Responsibility has stated that growth may slow when savings peter out, so the issue is serious. That is why a review is a sensible way to ensure that we get the best possible outcome for individuals, families, communities and the economy as a whole.
Clause 3 reduces the starting rate of tax on savings income, such as bank or building society interest, from 10% to zero, and increases the starting rate band significantly, from £2,880 this year to £5,000 next year. It is part of a broader package of measures announced by my right hon. Friend the Chancellor in the Budget earlier this year to support hard-working people who are saving or have saved for their future.
The clause will benefit savers with low overall incomes. We estimate that around 1.5 million savers could benefit, over 1 million of whom will no longer be required to pay tax on bank or building society interest. As well as enabling many more savers to keep more of the interest they earn on their savings, the provisions represent a major simplification of the starting rate for savings, which has been identified as one of the most complex provisions within the tax rules.
The current rules involve a series of complicated eligibility calculations, taking into account a person’s total non-savings income and their total overall income. They also require all eligible savers to reclaim tax from HMRC if they are to benefit. The Office of Tax Simplification suggested that the starting rate was too complex to be understood by many savers; that explains the low levels of awareness and take up.
The clause sweeps away that complexity for most of those eligible for the starting rate. Instead of the current complex calculation, the message is that if someone’s taxable income next year is less than £15,500 they will be able to register their account to have interest paid without any tax deducted. There will be no need for a reclaim process. Different figures will apply for those savers who have dividend income or additional personal allowances, or those who choose to transfer some of their allowance to a spouse or civil partner. We will make sure that detailed guidance is available in good time for the implementation of the change in April 2015. I am grateful to the hon. Lady for raising the issue of gift aid. We will ensure that the guidance, which we will produce later this year, will address the point she raised.
The Government want to ensure that as many eligible people as possible register their accounts to receive interest without tax deducted. That can be done by the completion of a simple certificate, the R85, or by giving a declaration to the account provider online, by telephone or face to face. There is no need to contact HMRC. The regulations governing the R85 form will be changed under powers within the clause to enable every eligible person to use the process. The Low Income Tax Reform Group has paid tribute to recent progress made by HMRC, the British Bankers Association and the Building Societies Association in improving the operation of the R85 procedure and communications with customers about it. In addition, following a recommendation from the Office of Tax Simplification, the R85 help sheet has been improved. I welcome that progress. However, it is important that work continues so that as many eligible savers as possible are aware that they can register their accounts and can do so easily and simply—the hon. Lady was right to raise the issue of awareness—and HMRC and the Treasury will therefore work closely with account providers and their representatives in the run-up to the implementation of the change to make sure that that happens.
I acknowledge the point the hon. Lady made about general awareness of the provisions. It is important that there is that awareness. Clearly, it is in the interests of banks and building societies to ensure that their customers are aware of these opportunities and of the way that the system works. She also mentioned ISAs. The Government are making changes to the ISA rules. ISAs are a long-standing success when it comes to awareness. Over 5 million adults currently subscribe fully to the cash ISA limit. They will benefit from the equalisation of and increase in cash in the overall ISA subscription limits as a consequence of our measures.
It is also worth pointing out, as the hon. Lady touched on in her remarks, that we should not think that savers are simply the very wealthy. Three-quarters of those who subscribe to the maximum for their ISAs are basic rate taxpayers. It is also worth noting that one third are pensioners. Returning to the steps that we are taking for the savings rate, this measure will predominantly help those with relatively low incomes.
Amendment 2 commits the Government to a review of these changes to the starting rate within six months of the passing of the Bill. The changes in question are not scheduled to come into effect until 6 April 2015. Therefore, the amendment envisages a review of the changes being undertaken before they have come into effect. For that reason alone, I am not inclined to accept amendment 2. However, even leaving that drafting flaw aside, the amendment is unnecessary. The OBR, the Office of National Statistics and HMRC will continue to publish details about the savings ratio, savings levels, the amount of savings by particular groups and the amount of savings income. All those data contribute to a greater understanding of developments within the savings market, savings income among particular groups and the amount of savings income received by individuals. The hon. Lady said that we need to keep an eye on the savings ratio. Well, the savings information will be available regardless of the amendment.
We want to make this change simple and, as far as possible, light touch for savers and account providers. For most, it will operate through the simple and long-established R85 registration process, with gross payment of interest, which is already used by thousands of savers. The amendment would require additional information gathering and greater administrative burdens for eligible savers and account providers, which the Government believe would be inappropriate and disproportionate for this simplifying measure.
The hon. Lady digressed in her speech on to wider issues about help for low incomes, which is an important point. Although I do not intend to engage with every point that she raised, it is very clear that if we want to help those on lower incomes, we need to have a strong and growing economy. I am pleased that we have made the progress that we have over the past year with the economy growing by more than 3%, but we recognise that there is further to go. However, we cannot get away from the fact that the only sustainable way to raise living standards is to tackle the country’s economic problems head on—something that this Government have been prepared to do.
Clause 3 provides targeted support for low-income savers and ensures that they can get much more from their savings. It also removes a major complexity in the tax system by extending and simplifying the starting rate for savings. I believe that the amendment is unnecessary and could make this change more burdensome for savers and account providers. I therefore hope that the clause will stand part of the Bill and that the hon. Lady can be persuaded to withdraw her amendment.
Clause 3 has the Opposition’s support. I am grateful to the Minister for what he said on gift aid. I note that guidance is forthcoming and I look forward to reviewing that when it is available. I also welcome his comment in relation to the R85 help sheet and the ongoing work in simplifying that process. I am minded to press amendment 2. A review of the type that we have called for, particularly in terms of what we know is happening to the savings ratio this year and every year until 2018, is important. It will help us to understand better what is happening to savers and the ability of people to save.