Power to exempt social security benefits from income tax

Finance Bill – in a Public Bill Committee at 12:45 pm on 4th June 2020.

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Photo of Alison Thewliss Alison Thewliss Shadow SNP Spokesperson (Treasury) 12:45 pm, 4th June 2020

I beg to move amendment 8, in clause 12, page 7, line 2, leave out ‘may’ and insert ‘must’.

This amendment seeks to exempt all social security benefits from income tax.

Photo of Siobhain McDonagh Siobhain McDonagh Labour, Mitcham and Morden

With this it will be convenient to discuss amendment 9, in clause 12, page 7, line 4, leave out from ‘benefits’ to end of line 5.

This amendment seeks to exempt all social security benefits from income tax.

Photo of Alison Thewliss Alison Thewliss Shadow SNP Spokesperson (Treasury)

I am happy to move the amendment and speak to amendment 9, which The Scottish National party tabled just as a query. When we were looking at the Scottish social security system and the opportunity not to have income tax levied on social security benefits, it got us thinking about what the logic is of taxation on social security, because it is the Government giving with one hand and clawing back with another, resulting in an incredibly complex system where some benefits—indeed, some parts of benefits, some types of benefits and some subsets of benefits—end up liable for income tax whereas others are not. We end up with a cumbersome system that is difficult to navigate.

Our thought process in looking at the benefits was to ask why it should be that bereavement allowance, carer’s allowance, contributory and youth ESA, income-based ESA, some but not all incapacity benefit, industrial death benefit pensions, state pension, widowed mother’s allowance, widowed parent’s allowance and the widow’s pension are all taxable, whereas others such as personal independence payment, war widow’s pension and universal credit are not.

The young carer grant is not, but carer’s allowance is. There are a huge number of inconsistencies in the social security and income tax system, and our amendment seeks to ask: why should that be? Should we not look for a much simpler system, which would give people the money in their own hands without having to negotiate backwards and forwards with the Government? That would save the Government a job in clawing back that taxation and allow people to get on with their lives, rather than having to worry about what the taxman will take from their benefits. The SNP thought it was worthwhile exploring this issue with the Committee.

Photo of Bridget Phillipson Bridget Phillipson Shadow Chief Secretary to the Treasury

As with clause 11, the Opposition have no objection to what the Government seek to achieve in this clause. On the substance of the amendments put forward by the hon. Member for Glasgow Central, there are a few issues that I hope she will be able to clarify. She will be aware that the general principle is that a benefit is taxable if it is an earnings replacement benefit. As the Treasury’s tax benefit reference manual notes, the reason behind that is to avoid creating an incentive whereby an individual receiving social security benefits is better off than someone on a comparable income whose earnings are liable to tax. What consideration has she given to that potential outcome of her amendments?

My second observation is about the cost of the measure. I am grateful to the House of Commons Library, which has sought to estimate the cost. The cost of exempting all taxable social security benefits from income tax would be around £5.9 billion in 2020-21. Of that amount, 95%, or £5.6 billion, is attributable to the state pension. The Library’s analysis identifies that those in the top decile of income distribution would benefit the most, while those in the lowest would gain the least. I know that the hon. Lady cares very much about those issues, and I would be grateful if she addressed that point, because it strikes me that such an approach would usually be regressive, and I would like to understand a bit more about the assessment of the distributional impact of such a policy.

Photo of Alison Thewliss Alison Thewliss Shadow SNP Spokesperson (Treasury)

I thank the hon. Lady for her comments, which she is quite right to make—the Library analysis is really important. I am moving the amendments to point out just how complex the system is that there is of course a cost to having and administrating such a system. People have difficulty navigating that system, because it makes it more difficult to claim what they are entitled to, particularly if they are moving from one benefit to another. Although I appreciate the points that she has made and understand why she made them, these are probing amendments to see what the point is and what the Government are doing to make an ongoing assessment of the logic of that complexity, for which there is a cost and a difficulty. Although I in no way deny the cost—I know the amendments have no prospect of being passed by the Committee—I would like the Government to consider carefully the impact of that complexity on individuals, and whether they can simplify the system, which is ludicrously complicated.

Photo of Jesse Norman Jesse Norman The Financial Secretary to the Treasury

I thank colleagues for their contributions. As they have recognised, the amendments are very technical in nature. I will keep my remarks brief because, if we can, I would like to discuss clause 13 before we break, which will leave us a clear run at the afternoon. Clause 12 introduces a power that commits the Government to clarifying tax exempt status for future new social security benefits introduced by the UK Government or devolved Administrations using a statutory instrument. That power has a more general applicability and creates an additional flexibility that will be of value to Government in making changes to address needs more rapidly than at the moment.

The hon. Member for Glasgow Central tabled her amendments in an interrogatory—or probing—spirit, for which I thank her. My response has been very well articulated by the hon. Member for Houghton and Sunderland South. Scottish benefits are treated in line with the fiscal framework and, under that framework, which exists between the UK Government and the Scottish Government, only new benefits that top up or replace an existing taxable benefit will be liable to tax. That is an established principle of taxation exactly to avoid the perverse incentives that might otherwise be created.

In addition to the questions raised by the shadow Minister about cost and equity, it is worth mentioning that the effect of entertaining the amendments would be to undermine the fiscal framework agreement and that longstanding principle of taxation. I ask the hon. Member for Glasgow Central, in a rhetorical spirit, whether she really means to overturn the fiscal framework that was hammered out over a number of years between those two sides. If she does, is it her intention to throw out other settled agreements between the Scottish Government and the UK Government within that framework? I suggest that that is not her intent and, because the meaning and purpose of the clause is clear, I commend it to the Committee and invite her to withdraw the amendment.

Photo of Alison Thewliss Alison Thewliss Shadow SNP Spokesperson (Treasury)

I am indeed content to withdraw the amendment, but the point stands that there is an inconsistency within the system, in which a war widow’s pension is not taxable but a widow’s pension is. There are huge inconsistencies about which I have questions. The Minister is being mischievous when he suggests that I would want to undermine the fiscal framework, but he knows fine well that I long for the day when the fiscal framework is not necessary because Scotland is an independent country that makes for ourselves the full range of decisions about what is best for our people. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 12 ordered to stand part of the Bill.

Photo of Siobhain McDonagh Siobhain McDonagh Labour, Mitcham and Morden

We now have four minutes to go. Does the Committee wish to move on to clause 13?

Ordered, That further consideration be now adjourned. —(David Rutley.)

Adjourned till this day at Two o’clock.