Income tax charge for tax year 2020-21

Finance Bill – in a Public Bill Committee at 11:30 am on 4th June 2020.

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

Photo of Siobhain McDonagh Siobhain McDonagh Labour, Mitcham and Morden

With this it will be convenient to discuss the following:

Amendment 5, in clause 2, page 1, line 10, at end insert—

“(2) The Government must lay before Parliament a review of the impact of the rates of income tax for 2020-21 within six months of Royal Assent, which must consider the following issues—

(a) the effect on taxation revenue of maintaining income tax rates for 2020-2021; and

(b) the effect of income tax rates for 2020-2021 on annual income for the following:

(i) Households below average income, and

(ii) High-net worth individuals as defined by HMRC.”

This amendment would require the Government to assess the impact of the income tax rates in the Bill on tax revenues and on households and individuals of different income levels.

Clauses 2 to 4 stand part.

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

I am delighted to see you in the Chair, Ms McDonagh. I welcome all colleagues and thank them very much for their commitment to this important Bill and this important process. Ms McDonagh, you and our colleagues will be aware that we are scheduled to have seven sets of sittings to give every aspect of the Bill thorough examination. It will be a pleasure to serve on this Bill Committee with colleagues under your chairmanship. It is my first Bill as Financial Secretary to the Treasury, and I hope it will not be my last.

Let me begin by speaking to clauses 1 to 4, which legislate for income tax—the main default and savings rates of income tax, and the starting rate for savings for 2020-21. I shall also speak to amendment 5 to clause 2, tabled by the Labour party.

Clause 1 legislates for the income tax charge for this year, 2020-21. Income tax, as the Committee knows, is one of the most important streams of revenue for the Government, raising more than £190 billion in 2018-19. The clause is put into legislation annually in the Finance Bill. It is essential, because it allows income tax to be collected, so that it can fund the vital public services on which we all rely.

Clauses 2 and 3 set the main default and savings rates of income tax for 2020-21. These clauses, too, are put into legislation annually in the Finance Bill. Clause 2 ensures that for England and Northern Ireland, the main rates of income tax continue to be 20% for the basic rate, 40% for the higher rate and 45% for the additional rate. Clause 3 sets the basic, higher and additional rates of default and savings rates of income tax at 20%, 40% and 45% respectively for the whole of the UK.

I want to consider Labour’s amendment 5 to clause 2, which is in the name of the hon. Member for Houghton and Sunderland South. It would require the Government to review the impact of 2020-21 income tax rates on tax revenues, and both on households with below average incomes, and on high net worth individuals, as defined by Her Majesty’s Revenue and Customs. As the Committee will be aware, the Government already publish comprehensive assessments of income tax rates. In our judgment, the proposed additional review is therefore not necessary.

On revenue impacts, the Office for Budget Responsibility publishes tax revenue forecasts at every fiscal event, and did so most recently at Budget 2020. The Government’s tax information and impact note published in October 2018 provides a clear explanation of the tax impact on the Exchequer and the economy of maintaining the personal allowance and higher rate threshold for 2020-21. On distributional impacts, the Government publish a distributional analysis of the cumulative impact of Government policy at each fiscal event, and did so most recently at Budget 2020. HMRC’s annual income tax liabilities statistics publication provides breakdowns of the number of income tax payers and income tax liabilities across multiple characteristics, including by income source and by tax band. All those publications are in the public domain on gov.uk. Amendment 5 would do little to provide meaningful additional analysis that goes beyond the Government’s existing comprehensive publications, and I ask the Committee to reject it if it is brought to a vote.

Clause 4 maintains the starting rate limit for savings income at its current level of £5,000 for the 2020-21 tax year. As members of the Committee will be aware, the starting rate for savings applies to the taxable savings income of individuals with low earned incomes. The Government made significant changes to the starting rate for savings in 2015, lowering the rate from 10% to 0%, and also extended the band to which the rate applies from £2,880 to £5,000. The changes made by clause 4 will maintain the starting rate limit for savings at its current level of £5,000 for the 2020-21 tax year. The limit is being maintained at that level to reflect the significant reforms made to support savers over the last few years. That support is provided by the Government across the UK, for those at all stages of life and at all income levels. As a result of the support, about 95% of savers pay no tax at all on their savings income.

The decision in 2015 to increase the starting rate for savings by more than 75% has done much to support savers on low incomes. Since then, savers have been further supported by the introduction of the personal savings allowance, which offers up to £1,000 of tax-free savings income for basic rate taxpayers. This will remove an estimated 18 million taxpayers from paying tax on their savings income in 2020-21. In April 2017, the annual ISA—individual savings account—allowance was increased by the largest ever amount, to £20,000.

As a result of the combination of the personal savings allowance and the starting rate for savings, some savers can receive up to £6,000 of savings income outside an ISA completely tax-free. Most savers will of course also benefit from the tax-free personal allowance, which is set at £12,500.

The Government also support our nation’s youngest savers. To encourage those with children and grandchildren to save, the junior ISA and child trust fund allowance increased by more than double, to £9,000, from April 2020. Child trust funds will start to mature from September of this year, and the increase will provide an opportunity to boost the amount that children will have when their accounts mature.

Finally, I should mention the support that the Government offer those on the lowest incomes who wish to save through the Help to Save scheme. Help to Save provides savers with a 50% bonus on their savings—a perfect example of what the Government’s commitment to levelling up opportunity across the whole country can offer. I encourage Committee members to do what they can to promote the scheme to their constituents.

The Government remain committed to supporting savers of all incomes at all stages of life. Recent reforms, coupled with a significant increase in the starting rate limit in 2015, mean that the taxation arrangements for savings income are very generous. Around 95% of people with savings income, as I have mentioned, will continue to pay no tax on that income next year. The Government therefore do not believe that a further increase in the starting rate for savings is appropriate at this time.

Clauses 1 to 3 ensure that the Government can collect income tax, and set the main default and savings rates for the tax year 2020-21. Clause 4 maintains the starting rate for savings income at its current level of £5,000 for this tax year. I commend the clauses to the Committee, and ask it to reject amendment 5.

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

It is a pleasure to serve under your chairmanship, Ms McDonagh, and to welcome other Members to the Committee. I thank the Clerk and all the team in the Public Bill Office for the support that they have provided in recent weeks and will continue to provide as we debate the Bill. Circumstances have been very challenging for staff who have adapted to working remotely. I am grateful for all the discussions and advice that they have been able to offer us. I also extend, via the Minister, our thanks to all the officials in the Treasury who have been working very hard to respond to the crisis that we face. I want to put on the record our thanks for their work, which is often not recognised. Our country’s response to the crisis depends on the work that they undertake on behalf of us all.

I am sure we all accept the importance and necessity of scrutinising the Bill. However, the Opposition find it regrettable that it was not possible to find an alternative arrangement for the Committee stage of the Bill. We hope that the House can resolve the wider issues around protecting those who have shielding responsibilities and making sure that we can all be kept safe at this time. Our proceedings obviously place a great deal of pressure on the staff who are vital to the House’s functioning. Again, I reiterate my thanks to them. We will want to consider certain aspects of the Bill in much greater detail over the coming weeks. I can assure the Minister that we appreciate the pressure that officials are under in responding to the crisis, and that we intend to be responsible in our approach, and will remain focused on our key priorities in the Bill.

Our amendment 5 would require the Government to assess the impact of income taxes in the Bill on tax revenues, and on households and individuals of different income levels. The Government like to tell us that we live in unprecedented times, which is of course true. As such, we need greater scrutiny of policies that may need to be revised in what is clearly becoming an unprecedented economic downturn. The Resolution Foundation estimates that GDP will contract between 10% and 24% owing to the outbreak of covid-19: an economic shock of a kind that has not been seen since the 18th century. Very much is at stake. It is crucial that the Government assess the means by which they generate revenue, given the huge demands facing our public services and economy.

First, we need to know how much revenue we are generating from maintaining income tax rates, in order to determine whether it is enough to meet the demands on our economy and the pressures on public services, as well as the Chancellor’s income support packages. Secondly, we need to better understand its distributional income. Over the past 10 years we have seen large cuts to working age benefits against reductions in direct tax, including a large rise in the tax-free personal allowance. Unsurprisingly, the winners in all this have not been low-income households. According to the Institute for Fiscal Studies, the poor have been disproportionately hit by tax and benefit changes since the Conservatives came to power 10 years ago. The worst-off 10% of households have lost 11% of their income since 2010. When we factor in households with children, that rises to 20%. In contrast, the highest-earning 10% of the population have seen their incomes fall by only 2% in the same period.

In its 2020 Budget analysis, the Resolution Foundation makes it clear that nothing has been done to offset the considerable welfare cuts made by previous Chancellors since 2015. Households in the second net income decile, for example, will eventually be £2,900 a year worse off on average, thanks to the tax and benefit changes announced since 2015, and £900 of that is yet to come; it will result from welfare policies that are still being rolled out. These cuts mean that the incomes of the poorest families have fallen over the last two years, and there is a real risk that child poverty rates will reach record highs by 2024.

We understand that welfare cuts have been offset in some ways by aggregate tax cuts, but those changes have been of most benefit in cash terms to those in the top half of income distribution. That has been tempered by some changes, but we have real concerns about the impact that this situation is having on low and middle-income families. Overall, tax and benefit policy over the last five years has been regressive, with the poorest losing the most, both in proportional terms and cash terms, and already welfare cuts have resulted in the incomes of the poorest families falling. Child poverty is rising, and we have real concerns about that. The Government must take action to address this searing inequality.

We know from research conducted by the Equality and Human Rights Commission that the overall impact of policy decisions taken between 2010 and 2017 is regressive. Looking at some of the outcomes that the commission discovered, we see that ethnic minority households will be more adversely effected than white households; the average loss for black households is above 5% of net income, which is more than double the average loss for white households. Households with one or more disabled members will be significantly more adversely impacted than those with no disabled members, and on average, tax and benefit changes will reduce the income for families with a disabled adult by about £2,500 a year. If that family also has a disabled child, the income reduction will be over £5,000 a year, which compares with a reduction of about £1,000 for non-disabled families.

Lone parents will lose around 15% of their net income on average, which is almost £1 in every £6. By contrast, the losses for all the family groups are much smaller, especially for those who are relatively well-off; they are between nothing and 8%. Women lose more than men from reforms at every income level. Overall, women lose about £950 a year on average, which is more than double the losses of men.

In its report, “The shifting shape of UK tax”, the Resolution Foundation has found, when considering marginal rates of tax, including the crucial role played by the benefit system, that the highest rates are concentrated in the bottom half of income distribution, with very high marginal deduction rates of 63% or even 75% being common. I am sure that Members will agree that our tax system cannot be called progressive if the poorest households and average earners continue to experience the greatest proportional loss. We must consider the distributional impact and revenue effects of current rates of income tax as we consider the most pressing issues arising from coronavirus and the impact it has had on our society and economy. It has crippled the job market and risks putting thousands of people—even millions—out of work.

The Resolution Foundation anticipates that in the event of widespread unemployment and closures of firms once the furlough scheme is phased out, a 10% structural unemployment rate, such as the one we sadly saw during the 1980s, could lead to £175 billion being lost in taxes. Alongside that, there will be need for more social security benefits to be paid out. Such a reduction in tax receipts would add to an already higher proportion of working-age adults not paying income tax at all, and given that tax receipts make up so much of Government revenue, it is vital that the Government consider the impact of maintaining rates of employment.

Labour Members believe that we need a tax policy that looks to the economy of the future, and considers the challenges that we must face during this pandemic. It is vital that those individuals who are best placed to contribute do so, and that those who need Government support are able to access it, including the most vulnerable people in our society. Our amendment would allow the Government to reflect on their policy and to measure how much, if at all, it needs to change to fund support during this crisis, together with their other spending plans presented at the Budget earlier this year.

Turning to the question of whether this amendment is necessary, and to respond to the points made by the Minister, I refer to a joint report of the Institute for Fiscal Studies, the Chartered Institute of Taxation and the Institute for Government, which was published back in 2016, and which considered the issue of the absence of post-legislative scrutiny. That report said that post-legislative scrutiny should focus on whether a measure raises the revenue it is expected to raise, whether it is achieving its policy objectives, and whether it is operating as intended—so, whether the measure is still needed, and its impact. Clearly, this is a much broader point, but it is worth the Government considering the impact in this area, where we require clarity up front about what measures will achieve.

The report also pointed out that when Parliament does engage on tax issues, most scrutiny is focused on new proposals, and there is very little capacity or appetite to look at the effectiveness of past measures, or the coherence of the system as a whole. We intend to return to this question later, and particularly to the work that the National Audit Office has been doing in this area. It argues that there is a role for other institutions in considering more effective systematic scrutiny, and suggests that it could perhaps do that, and that there could be a greater role for the Office of Tax Simplification, or perhaps the Office for Budget Responsibility. It also considers what role Parliament might play in all this, perhaps through its Select Committees, and what scope there is for boosting academic evaluations of tax policy.

We had a wide debate on Second Reading about the fact that our public services are overstretched; they have faced a decade of real challenge, and were left ill prepared for the crisis we face. We also face an important challenge in the months and years ahead in recognising the important role that key workers have played during this crisis. Their contribution has been undervalued and not recognised for far too long, and that must change. The measures the Government will adopt in their approach to taxation and social security will play an important role in shaping that. That is why we tabled amendment 5: so that we can have that scrutiny and greater consideration. We want to avoid the mistakes made in the past. The amendment will help the Government to tread carefully, to recognise the challenges we face in responding to the current crisis, and to make evidence-based revisions to policy, both in the here and now in responding to this crisis, and in the future. We hope to push the amendment to a vote.

Photo of Alison Thewliss Alison Thewliss Shadow SNP Spokesperson (Treasury) 11:45 am, 4th June 2020

It is a pleasure to see you in the Chair, Ms McDonagh, and to join all the members of the Finance Bill Committee.

I echo the thanks that other hon. Members have given to the Clerks and staff who have made this possible, but I share the concerns about having to meet physically, and about the fact that there is no option for hon. Members to participate remotely or to vote digitally.

Given that the Secretary of State for Business, Energy and Industrial Strategy was taken ill yesterday at the Dispatch Box, we should think more carefully about how we spend our time in this place and how close together we are. I know discussions were had about how far apart we should sit and how that would work, but the reality is that the highest risk factor is people being in a room together and talking for hours on end, which sounds very much like the Finance Bill to me.

I agree with many of the comments made by the hon. Member for Houghton and Sunderland South, and I congratulate her on her position and her lead on this Bill. It is clear that for many people there is a fundamental unfairness in the economy. There are issues that are longstanding and intractable, and the Government have not shown great interest in trying to deal with those inequalities or in addressing the situation, particularly for women, ethnic minorities and disabled people, who still, after so many years, remain the worst off in society. The Government need to take far more and firmer action to address that.

The Government need to take further action to address the climate emergency. We should be seeing a lot more on that in the Bill, and should take our responsibilities on this issue far more seriously. If there ever was a time to do that, it is now. We have the opportunity. We have shut down huge chunks of the economy, and we can think, in this small time that we have, about how we want to reopen the economy, and how we could make changes that could otherwise pass us by. The amendments that the SNP will table to this Bill are in that vein. We want to look at equality and the environment. We want to look at how we can instil fairness in the system, if indeed that can be done.

I will also mention an issue that my hon. Friend Kirsty Blackman has spoken about on many occasions: the need for this Committee to take evidence. The Domestic Abuse Bill Committee is also meeting today and is taking evidence from a range of experts. The Finance Bill does not do that. It will take written evidence—a lot of that has arrived, and I thank all those who have sent it—but we do not get the opportunity to take oral evidence and interrogate the people who have the most knowledge on the implications of the Bill. If we took that evidence, we would make better, wiser decisions and more fully understand the implications of the Bill, and the Government could avoid making mistakes and having to come back and change things retrospectively in the next Finance Bill. It would be incredibly helpful if people such as the Chartered Institute of Taxation and the Institute of Chartered Accountants in England and Wales could come before the Committee and we could hear from them. I urge the Government to consider why that could be helpful to all of us in this Room, rather than just passing it over as not necessary.

The amendment tabled by the official Opposition is worthy, but I would caution them, slightly, with respect to its implications for Scotland. They have not considered fully how it would affect Scottish income tax rates. What we do in this Parliament has that impact. Scotland has a progressive taxation system, and we are proud of it. We have taken the measures we can within the restrictions we have. However, if that system is not considered within the amendment, that will miss out a huge chunk of the impact on the Scottish budget and mechanisms within it for funding the Scottish budget and all the things we want in Scotland. I would not, at this stage, be willing to support the amendment, because it does not encompass that aspect, and it should. Scotland should be kept in mind in many of the measures or suggested changes. I will conclude my remarks with that reasonable point.

Clause 1 accordingly ordered to stand part of the Bill.