Mr.
Timms: The amendment would extend the 10 per cent.
starting rate for savings income from a band of £2,440 to a band
of £37,400. I will respond to the amendment, although I will
also comment on what we have now clarified as Conservative
policy.
Responding to
the points raised by the hon. Member for Henley, it is certainly the
case that, although low interest rates have greatly helped families
with mortgages, for example, they have reduced the returns for savers.
The Government are not at all dismissive of that. I can understand why
the amendment has been tabled and I agree that savers need help in
difficult times, but I do not agree with the approach set out in the
amendment. The hon.
Member for South-West Hertfordshire has helpfully clarified that this
is a one-year proposal and the Conservative party would not be
committed to it for future years. However, because of the way that
income is ordered when an individual’s tax liability is
calculated, with tax on savings income being calculated after income
from other sources, such as employment, self-employment and pensions
has been taxed, the effect of the amendment would be to make the 10 per
cent. savings rate disproportionately valuable to savers with higher
incomes. That would cost the Exchequer about £250
million.
The concern
about disproportionality is even greater in relation to the proposal to
abolish tax on savings—we have clarified that that is the
Conservatives’ policy. When that proposal was first announced in
January, there was some confusion among Conservative Front Benchers
about how it would affect higher rate taxpayers. The shadow Chief
Secretary said that it would not help higher rate taxpayers, while the
shadow Chancellor said that it would. I believe that the shadow
Chancellor was right. Indeed, the example that the hon. Member for
South-West Hertfordshire just gave—a rather puzzling example
about a single mother working part time, earning £100,000 a
year—
Mr.
Timms: Ah, but the hon. Gentleman said £100,000. It
makes more sense to refer to someone earning £10,000.
Nevertheless, on the basis of his proposal, there would be a
benefit for higher rate taxpayers as well. The amendment
does not go that far, but it would cut the basic rate on savings to 10
per cent. and would suffer from a similar drawback of being
disproportionately valuable to savers with higher incomes.
There are
more effective ways of targeting support—particularly for savers
who are likely to be facing the greatest difficulties, such as
pensioners. That is why the Budget announced three measures to support
older people in particular. First, from October this year, we will
raise the ISA limits for those aged 50 or over. More than 18 million
people hold ISAs, so that will provide support to many savers through
the tax system. That is one particularly successful measure of a raft
of measures that the Government have taken to increase saving in the
economy.
Mr.
Gauke: I have two brief points to make on ISAs. One is on
the rather complicated system of different limits depending on
one’s age. Can the right hon. Gentleman explain why he has done
that? Secondly, how much does he think a person can benefit from the
reduced tax as a consequence of the increase in the ISA threshold?
Given current interest rates, does he agree that the most it can be is
about £30 or £40 a
year?
11.30
am
Mr.
Timms: I have not done that calculation, but the figure
that the hon. Gentleman suggests may well be right. Of course, his
argument a few minutes ago was about the need to increase the
incentives to save. Raising the ISA limit in such a way will be a
significant
incentive. Secondly,
HMRC is launching a tax back campaign, which will contact 2.7 million
pension credit recipients. The campaign will encourage pensioner savers
to reclaim any tax that they have overpaid on savings and, where
possible, register their account to receive income from their savings
tax free in the future. Again, that will help pensioners with
savings.
Thirdly, and
perhaps most significant, the Government will increase the capital
disregard in pension credit and housing and council tax benefit for
pensioners to £10,000 from this November. That will
significantly increase the generosity of pension credit for those who
have savings. More than half a million low-income pensioner households
will benefit by £4 a week on average, those on the lowest
incomes by up to £8 a
week.
Mr.
Todd: Those measures are certainly welcome. Will the
Minister expand a little on the assumed interest rate that is taken
into account in calculating the entitlement for housing benefit, when
savings that are vestigial that lie within that limit are taken into
account? That issue concerns many pensioners whom I
represent.
Mr.
Timms: I am aware of the matter, and it has been raised
from time to time. It is not accurate to describe that as an assumed
interest rate. The assumption that is made is that if someone had a
significant capital sum—in the future we are talking about over
£10,000—it would be perfectly appropriate for them to use
some of that, as well as the interest earned, to meet their
expenditure. It would not be right to ignore entirely the benefit of
that sum in meeting to expenses.
Mr.
Bone: Is the Minister introducing a new concept? I never
realised before that the disregard was more than a calculation of the
assumed interest. Instead, it says to a pensioner, “You are too
rich. You must use some of your savings.” Is that the new
policy?
Mr.
Timms: No, it is simply a recognition of the fact that
people with savings are able to draw on them to meet their
needs—that is, after all, the purpose of savings. That has
always been the case, and the basis of the pension credit capital
disregard. That
package is much more effective in supporting savers at risk in the
current difficulties than the approach suggested in the amendment. In
2011-12, the Government package will cost £190 million a
year—not much less than the amendment suggests, and the package
will be much better targeted at those who most need the
help. Mr.
Atkinson, I have a few remarks on the clause stand part. Clause 2 will
raise the basic rate limit from last year’s £34,800 to
£37,400 this year, a rise of £800 over indexation. Taken
together with the £130 above-indexation increase to the personal
allowance made by the next clause, it means that nobody will pay a
higher-rate tax on incomes below £43,875. It is an increase in
the higher-rate threshold, which will support middle-income families
during the global downturn. It also takes the higher-rate threshold for
2009-10 to the same level as the upper earnings and profits limits for
national insurance, the point at which somebody stops paying the main
11 per cent. rate of national insurance and starts paying
the additional 1 per cent. rate.
In 2011-12
the threshold at which someone starts to pay national insurance will be
aligned with the tax-free personal allowance. The levels at which
individuals start and stop paying the main rates of tax and of national
insurance will be aligned for the first time—a simplification
that will be widely
welcomed. One
feature of the broad-based fiscal consolidation announced in the
pre-Budget report last year included increasing the rates of national
insurance by 0.5 per cent. Alignment of the national insurance primary
threshold and the income tax personal allowance will mean that those
with incomes of less than £20,000 and subject to the full
standard rate of national insurance will gain more than they would lose
from the rate rise at that point. Looking at all the changes since
April 2008, no one with an income of less than £40,000 will be
worse
off. The
Budget changes build on the pre-Budget report, securing further
consolidation targeting the 2 per cent. of individuals with the highest
incomes—those most able to contribute—while protecting
those with lower incomes. I invite the Committee to support clause
2.
Mr.
Gauke: I shall respond principally to the
Minister’s remarks on amendment 1 and our policy on savers. Let
me be clear—it has been clear throughout—that our policy
to benefit savers was to benefit only basic rate taxpayers and
pensioners on modest incomes. That has been the position all the way
through, and I hope that that is clear, notwithstanding the remarks of
the
Minister. On
the package referred to by the Minister, I do not intend to spend a
great deal of time on the issue of ISAs, Mr.
Atkinson—I am sure that you would warn me off from doing so. To
be fair, the Minister has a
point about the increase in the ISA limits being a symbolic message of
encouragement to saving. However, I note that he did not disagree with
my numbers—in practice, it is likely to be around £30 or
£40 per person in the current
climate. Mr.
Timms: May I press the hon. Gentleman on his earlier
point, that the position of his party is clear on whether higher rate
taxpayers will benefit from the measure or not? His point was the point
made by the shadow Chief Secretary. However, the shadow Chancellor told
the BBC’s “Money Box” programme on 10
January: “Of
course that’s entirely true—that if your entire income is
savings and you’re a higher rate taxpayer, then you benefit like
other people do from the fact that the basic rate goes to
zero—and we never said otherwise. Indeed I’ve made that
point as
well.” So,
the shadow Chancellor is telling us that higher rate taxpayers will
benefit from his
proposal.
Mr.
Gauke: I have the Q and A that was circulated internally.
We have made it clear that the policy is targeted at basic rate
taxpayers. We shall continue to have a tapering system. Indeed, in that
interview on “Money Box”, some of the criticism that my
hon. Friend the shadow Chancellor was getting was that the policy would
not benefit some pensioners who were earning somewhat more. The policy
is
clear. The
tax back campaign raises two important points, one of which is how our
policy would help the lower earners—pensioners who do not
receive enough from their savings to pay the basic rate of income tax.
There are a large number of such people, who do not always get their
tax back and do not always go through the process to reclaim. That is
not to say that we do not welcome the Government’s initiative to
encourage more people to get their tax back—indeed, I raised the
point with the Minister this time last year, asking what the Government
were doing about it, and the Low Incomes Tax Reform Group has
campaigned on the issue for a long time. None the less, a reasonably
substantial number of people—in particular, a reasonably
substantial number of pensioners—are not getting their tax back
in the way that they should and I suspect that that will continue to be
the case. Our policy would help those
people.
Mr.
Bone: Will the Minister give way—sorry, the shadow
Minister? Surely, the situation is this; if those people were not
paying any tax under the Conservative policy, we would not have the
Revenue spending all the money on a campaign that must be costing a
considerable amount of taxpayers’
money.
Mr.
Gauke: Indeed. My hon. Friend is right that our policy
would be a lot simpler to administer and that there would not be a need
to campaign for pensioners to reclaim the tax that they had overpaid.
So he is absolutely right, and his suggestion is clearly
helpful.
I note the
comments made by the Minister with regard to the national insurance
contribution rises. I do not intend to get into a lengthy debate on
that issue. I noted that the Minister chose his words very carefully
when he discussed who would be gaining and who would not be losing.
However, the fact remains that the NI contribution increase that is
designed to come into effect immediately after the election will make
those people who are earning £20,000 worse off.
I also note
the Minister’s comments about the alignment between the upper
earnings limit of NI and a higher rate of income tax, which was part of
the package announced in 2007. I would be grateful for
clarification—this is a genuine question—about a point he
made that slightly confused me, which was about the lower earnings
limit. As I recall, the original proposal in 2007 was that the point at
which one started paying NI contributions and the point at which one
started paying income tax was going to be the same. However, that got
rather confused by the compensation package for the 10p rate and the
increase in the personal allowance. However, there was not an
equivalent increase for the point at which one starts paying NI
contributions, so that we lost that very simple two-tier system. From
what the Minister has said—maybe I have missed a
point—the implication is that by 2011 we will be back to that
system.
Mr.
Timms indicated assent.
Mr.
Gauke: The Minister is nodding in assent, but I would
still be grateful for a little clarification on that issue. Subject to
receiving a response to that point, however, I will be seeking leave to
withdraw amendment 1.
The
Chairman: Order. Before the amendment is withdrawn, does
the Minister want to respond to that
point?
Mr.
Timms: I am happy to do so. I can confirm that, as we
announced in the pre-Budget report, we will align the national
insurance primary threshold to the level of the income personal tax
allowance, with effect from April 2011.
Having said
that, however, I would be grateful if the hon. Gentleman explained the
mechanism for achieving the effect that he has described to the
Committee, which is that the abolition of income tax on the first part
of people’s savings will not benefit higher rate taxpayers. For
example, take someone who has earnings of, say, £30,000 and
savings income of £20,000, so that their total income puts them
into the higher-rate tax band. Presumably someone in that position
would benefit from the zero rate that the hon. Gentleman’s party
proposes, so that there would be a benefit to higher-rate taxpayers, as
the shadow Chancellor said on “Money Box”. I cannot see
what mechanism there could be for avoiding the effect that the shadow
Chancellor said—rightly, I think—would apply.
I am glad
that the hon. Gentleman broadly welcomes the tax back campaign. Let me
just make the point that, as we will discuss further when we consider a
later clause, 62 per cent. of pensioners pay no income tax, thanks to
the very substantial rises in age-related personal allowances that this
Government have introduced. A much, much higher proportion of
pensioners are out of tax altogether than was the case in
1997.
11.45
am
Mr.
Gauke: On the issue of age-based personal allowances, I
will try not to stray into the next debate. The intention is that
savers will benefit at basic rate
only . I note that the Government were able to increase personal
allowances in a way that did not benefit higher rate income tax payers.
We are confident that we can find mechanisms in order to deliver our
objective, which is to help basic rate payers.
I beg leave
to withdraw the amendment.
Amendment,
by leave,
withdrawn. Clause
2 ordered to stand part of the
Bill.
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