Age-related Tax Allowances

Monday 9th September 2013 Westminster Hall

16:30

[Kelvin Hopkins (Luton North) (Lab)]

I beg to move,

That this House has considered the e-petition relating to age-related tax allowances.

It is a pleasure to serve under your chairmanship this afternoon, Mr Hollobone. We have been allocated three hours, but my speech will not last that long or anything like it. I am, however, pleased to have the opportunity to speak about age-related tax allowances, setting them in their historical context and in the context of today’s pension provision.

I first declare an interest as a person of pensionable age and as chair of the parliamentary support group of the National Pensioners Convention, the radical and progressive campaigning organisation that has been fighting to advance the cause of pensioners for more than 30 years.

The NPC’s first president was Jack Jones, the late and great former general secretary of the Transport and General Workers Union. Forty years ago, I worked for Jack Jones as a TUC staff member servicing the TUC’s transport industries committee, of which Jack was the chair. Jack had no equal in his principled commitment to the pensioners’ movement, such that, when he retired from his union’s leadership, he donated his entire leaving gift of some thousands of pounds to the National Pensioners Convention.

Speaking today, I am acutely conscious of the history of the NPC and of the struggles of the pensioner movement over the decades. Today’s debate has been prompted by the online petition on age-related allowances initiated by Arthur Streatfield on behalf of the NPC and all pensioners. The petition was signed by considerably more than 114,000 people before its closure in March, and it demonstrated the strength of feeling generated by the Government’s freeze on age-related allowances announced in the Chancellor’s March 2012 Budget.

I speak not only for myself or the active members of the National Pensioners Convention—even the thousands who signed the petition are only a fraction of those affected—as we in this House should always be conscious of the fact that there are more than 11 million pensioners in Britain, or nearly 20,000 per parliamentary constituency. Pensioners are among those who follow politics most closely and are some of our most well-informed electors. They are most likely to vote in elections, so we would all be wise to take proper and full account of their views.

The moral case for pensioners and their interests, however, is most important. They have spent a lifetime serving the economy in employment, sometimes serving the country in times of war, and giving their all in raising families. Elderly pensioners often become frail and live on low incomes; they have earned the right to be treated well by the society to which they have given so much. We should respect and care for our elders and ensure that they have the incomes necessary to live in comfort and security.

I have a few things to say on the timing of today’s debate. It was originally tabled to take place before the freeze on the age-related personal tax allowances had come into force, but the proroguing of Parliament, and the Queen’s Speech, denied us that opportunity. By the time the Backbench Business Committee had been re-elected and was able to allocate time, we had reached the summer recess. Although a debate may now seem something of an afterthought, it at least gives MPs the chance to discuss the matter in detail, which was never the case when the Chancellor made his initial announcement. It also provides us with the opportunity to see how the policy relates to the much wider issue of older people and the effect of austerity on their living standards and general well-being.

For decades there has been an acknowledgement of the need to provide additional support through the taxation system to older people in retirement. In 1925, old-age relief was introduced to help those aged over 64 with incomes of £500 a year or less. The Chancellor at the time, Winston Churchill, said that the modest savings of pensioners should be exempt from tax. The basis of today’s age-related allowance was introduced in 1975, and in 1987 further assistance was given by the introduction of an increased allowance for taxpayers aged over 80—reduced to those aged over 75 in 1989.

The decision by the Chancellor in the March 2012 Budget to freeze the age-related tax allowances, therefore, not only went against a widely held consensus that had been in place for more than 50 years, but caused serious concern about the future income levels of older people throughout the UK. The Chancellor announced in the House that he would freeze the age-related allowances from 6 April 2013 at the level of £10,500 for someone aged 65 to 74 and at £10,660 for someone aged 75 or over until those allowances aligned with the ordinary personal allowance. People retiring after that date—in effect, those born after 5 April 1948—are therefore to receive a lower personal tax allowance of £9,205, which is £1,295 less than they would have been expecting. It is estimated that the measure will save the Exchequer £3.3 billion by 2016-17 and, according to Treasury figures, will result in 4.4 million existing tax-paying pensioners losing between £63 and £83 a year, while future pensioners will suffer a loss of between £285 and £322 a year after tax.

Understandably, the announcement caught the headlines the following day, but it came as a surprise to many, and it was unexpected for a number of reasons. Only the year before, the Chancellor had told the House that the allowances would continue to rise for the lifetime of the Parliament in line with the retail prices index. There was no indication that he was preparing a change of policy. Twelve months later, he clearly decided to break that promise.

Astonishingly, while announcing a freeze on the tax allowances of pensioners at the same time, the Chancellor said that he would give those earning more than £150,000 a year a 5% cut in their tax rate, from 50% to 45%, which was an enormous windfall to those on the highest incomes. Someone on an income of £1 million taxable at the highest rate stood to benefit to the tune of £50,000 a year. It is hardly surprising, therefore, that older people felt as if those on modest incomes, seeing the purchasing power of their tax relief decreasing, were effectively subsidising a tax cut for the super-rich and for better-off pensioners. One blatant unfairness arising from the Chancellor’s decision was that while pensioners with annual incomes of less than £25,000 saw their tax bills rise, those with incomes in excess of £29,000 saw their tax relief increase by £268.

At the time of the announcement, there had been much erroneous nonsense in the media suggesting that older people had somehow escaped the effects of the Government’s austerity measures and that they needed to feel the pain just like everyone else. Think-tanks such as the Intergenerational Foundation and the Nuffield Foundation were quick to point out that older people were a burden on society’s finances, and individual politicians from the Deputy Prime Minister to the shadow Chancellor mentioned how universal benefits would have to be taken away from Britain’s apparently greedy older generation.

Since 2010, an argument has been put in some quarters suggesting that we can no longer afford older people. No doubt that background noise had some influence on the Chancellor’s decision in the 2012 Budget. The revenue collected by the state from older people, however, whether directly through a range of taxes or through costs that older people bear that would otherwise be paid by the state, adds up to a staggering £175.8 billion every year, compared with total expenditure on older people through pensions, welfare payments and health care of £136.2 billion. The overall net contribution by pensioners to the economy is, therefore, almost £40 billion and is estimated to rise to almost £75 billion by 2030. Most importantly, that is more than enough to pay for the current range of age-related benefits, as well as the personal tax allowances that we are debating today.

We have only to look at the voluntary and charitable sector to see how older people are keeping many of its organisations going, and how without them many of the networks of support that hold our communities together would start to crumble. Not only that, but millions of working families rely on the help of grandparents to provide unpaid child care, enabling parents to go out to work. Through volunteering, caring and of course paying taxes, Britain’s pensioners continue to give back to the country, rather than simply taking from it, as some would have us believe. As history often shows, however, an economic crisis can provide the conditions in which sections of society are scapegoated and blamed for the problems that we face. This time it appears to be pensioners and the elderly who are being targeted as the source of our economic woes, rather than the activities of a largely unregulated and irresponsible finance industry and the feeble Government policies to deal with it.

One of the biggest problems with the debate over the freeze on age-related tax allowances has been the myths that it has promoted. Following the Chancellor’s Budget statement, the newspapers dubbed the freeze the “granny tax”, although the truth is that around 60% of those affected are men. It has been widely acknowledged that our poorest pensioners tend to be women, many of whom do not even have enough income to pay any tax at all. A lifetime of caring responsibilities, or of part-time or low-paid work, means that many of them now struggle on less than £10,500 a year. Even the inadequate minimum wage would give people an income of over £12,800. Therefore, many older women are among the 6 million pensioners in this country who do not pay tax because they simply do not have enough money. To argue that they have escaped austerity when they have been living in austerity for years is outrageous nonsense. To suggest that someone on £15,000 is well off and can afford to face an increase in their tax bill when older people are facing many other financial pressures is either naive or callous, or both.

The inflationary impact on older people is higher than that which the country as a whole is experiencing, largely because pensioners spend a greater proportion of their limited income on things whose cost is rising fastest, such as food, fuel and health. It is estimated that average living costs for those over 75 have risen by 6.2%, which is considerably higher than the official consumer prices index would suggest.

The Chancellor was disingenuous to suggest that the freeze in the tax allowance was a mere simplification of the taxation system, when many people rightly saw it as a tax increase. Within hours of the Budget, a petition was set up on the Government’s website by retired civil servant Arthur Streatfield and was promoted by the National Pensioners Convention. I pay tribute to the NPC for its work in bringing this issue to the fore and for promoting tirelessly over the years other issues, such as pensions, social care, fuel poverty and universal benefits. I am grateful to it for its advice and assistance to me for today’s debate.

When the petition was launched, NPC’s general secretary, Dot Gibson, said:

“Since the Budget announcement, we have been inundated by messages from pensioners like Arthur who are outraged that the Chancellor has given a tax cut to those earning over £150,000 whilst pensioners on little more than £11,000 are having their tax allowance frozen. There has been a lot of nonsense about pensioners having been cushioned from the government’s austerity measures, but they’ve already seen cuts to their winter fuel allowance, a reduction of their state pension increase because it’s now linked to the lower Consumer Price Index rather than the Retail Price Index, rationing of care services in the community, closure of day care centres, changes to disability benefits and caps on housing support.”

Dot continued:

“It’s time we came out fighting and this petition is just the start. The government needs to recognise that older people are an asset not a burden. We not only need to reverse this latest attack, but also to campaign for higher state pensions, proper care and an end to fuel poverty.”

I absolutely agree with Dot.

In the Government’s mid-term spending review on 26 June, the Chancellor announced that universal benefits for older people, such as the winter fuel allowance and the concessionary bus pass, would for the first time be included in an overall cap on welfare spending. That seems to be just a way of cutting universal benefits by the back door. At the same time, the Department for Work and Pensions released figures showing that between 1.9 and 2.1 million older people are living below the official poverty line, and the older the age of the pensioner, the greater the likelihood of low income.

Pensioners living in a household where someone is disabled are almost three times as likely to suffer material deprivation as those living in a household where no one is disabled. Pensioners from minority backgrounds—there are many in my constituency—are also more likely to live on low incomes. When more than 1 million pensioners tell the DWP that they would be unable to pay an unexpected bill of £200, it speaks volumes about the need for a higher basic state pension for everyone and the need to take another look at the decision to freeze age-related tax allowances.

Despite what many might assume, we do not treat our older people with sufficient dignity. The UK state pension remains among the least adequate in Europe, with the risk of poverty among older people ranked fourth of the 28 EU countries. Some 5.6 million older people have savings of £10,000 or less. Nearly 2.5 million pensioner households live in fuel poverty and spend more than 10% of their income on fuel. That figure is rising. Almost a quarter of all pensioners—24%—do not go out at least once a month; 41% do not take a holiday away from home; 10% are unable to have their hair cut regularly; 5 million older people consider the television to be their only source of company; and one in 10 pensioners say they feel completely cut off from society, family and friends. That does not strike me as an impressive advertisement for Britain being a great place in which to grow old.

Despite that picture, the Chancellor’s decision to freeze age-related personal tax allowances has, for at least the next few years, penalised more than 4 million older people who are already struggling to cope. I agree there is merit in the long-term policy objective of securing a single personal tax allowance based on income rather than age, but it must be recognised that age-related personal tax allowances were designed to help with the additional expenses, such as home maintenance, that older people face. Such allowances will continue to be relevant for as long as the state pension remains disgracefully inadequate.

We have as a society recognised the need to provide additional assistance to older people because they face additional challenges brought on by ageing. We also recognise that after a lifetime of contributing to society, which continues in retirement, there are ways in which older people should be rewarded and justly so.

If the Chancellor had thought a bit harder, he might have realised that a much fairer way of achieving a change in the personal tax allowances would have been to uprate age-related allowances by inflation, and increase the under-65 allowance by more than inflation so that over time the two would eventually harmonise and older people would continue to get an increase in their allowance.

[Dr Thérèse Coffey (Suffolk Coastal) (Con)]

Surely the hon. Gentleman accepts that one of the Government’s aims is to simplify tax allowances and have one allowance regardless of how old someone is. Is it sensible for an hon. Member over 65 to have higher take-home pay, simply because of age, than someone under 65?

[Kelvin Hopkins]

I made the point about levelling up rather than levelling down. If we level up the allowances for those under 65, the point will come when they meet what pensioners now get. That would be fairer than damaging pensioners’ incomes now.

The Chancellor in his announcement in last year’s Budget suggested mistakenly that pensioners had somehow been protected from the economic crisis. He implied that they were a burden on the public purse that could not be afforded and that it was right to take more money away from those on £10,500 a year, while giving a tax cut to a small number of very rich pensioners and others with incomes over £150,000.

In his 2011 Budget, the Chancellor promised that the age-related allowance would increase in line with the retail prices index until at least 2015. Just a year later, he broke that promise. Ros Altmann, then director general of Saga, the over-50s group, and a campaigner for pensioners for many years, said:

“It’s astonishing to see a categorical promise broken like this without any acknowledgment and without any measures to offset the effects…It’s just not acceptable.”

I agree with Ros. The decision was wrong, and it should be reversed. I call on the Chancellor today to do just that and to deliver his original promise to pensioners.

16:47

[Dr Thérèse Coffey (Suffolk Coastal) (Con)]

It is a pleasure to serve under your chairmanship, Mr Hollobone. I did not intend to make a speech, but a year or so ago I co-authored a policy to try to simplify allowances and national insurance. I will not dwell on that today, but I thought it was important to put on record the fact that I support the Government’s proposals to simplify taxation, which is what this policy does.

I have received criticism from constituents because a quarter of them are over 65, which is a higher proportion than 10 years ago. Suffolk Coastal, like many coastal areas, is a place where many people choose to retire, partly because they are attracted by its wonderful scenery, lifestyle and so on. It is important to say that we will do what we can to help pensioners on low incomes, and also to make a start on tax simplification, which I believe this policy does.

I understand why the hon. Member for Luton North (Kelvin Hopkins) outlined pensioners’ concerns, including about inflation, but I am proud of what the Government have done, including by introducing the triple lock on pensions, meaning that they will rise by a minimum of 2.5%, by the consumer prices index or by average earnings, and through the pension reforms that will come into place in a few years whereby we move to a flat-rate system so that people will not be penalised for saving towards their own pension. That will also remove the burden of, and the embarrassment that some people feel about, trying to seek help through means-testing, credits and so on. I do not recognise the suggestion that the Government are turning their back on pensioners.

[Kelvin Hopkins]

I am following the hon. Lady’s speech with interest, but the fact is that some pensioners—more granddads than grannies, if I may say, and as a granddad myself, I feel this personally—will find that their incomes reduce as a result of the Government’s 2012 Budget, while those on the highest incomes will see their incomes increase. Is it right for pensioners on low incomes to see their income transferred to those on the highest incomes?

[Dr Coffey]

I hear what the hon. Gentleman is saying, but my understanding is that people will not be affected in cash terms, although they may be in real terms.

There is a significant increase in the number of people who continue to work beyond the age of 65. Some might say that that indicates that there is a pensions crisis as people cannot afford to stop working. It might be true that people have got used to a certain income and that, as other costs have risen, they continue to work if they can do so. They have been helped by the Government’s revolutionary change of scrapping the default retirement age, which was controversial on many fronts. To a large extent, people are working longer because we are healthier and living longer, which is why it is fixed in law that the default pension age will increase regularly.

As people will be working longer, I come back to the rather simplistic point of why somebody should have different take-home pay simply on the basis of their age, rather than any other criteria. I recognise that a number of people who have unearned income will be affected, but the hon. Gentleman will be aware that the age allowance is phased out when people’s income is above a certain amount.

I support the Government on the initiative. I do not believe in any way that old people are a burden—they are certainly not; they are an asset. However, everyone should do their bit to ensure that we continue to have a tax system that rewards appropriate levels of work and those who have worked, and we should continue to try to simplify the tax system as a whole. Although the hon. Gentleman talked about levelling up allowances, it has not been the policy of the Labour Opposition—or, certainly, of the previous Labour Government—significantly to increase tax allowances, as the coalition Government have done. We will get to an allowance of £10,000 sooner rather than later, and who knows what all the parties will offer in their 2015 manifestos? It was sensible to move to one tax allowance, on which point I shall conclude.

16:52

[Catherine McKinnell (Newcastle upon Tyne North) (Lab)]

It is a pleasure to serve under your chairmanship, Mr Hollobone. I congratulate my hon. Friend the Member for Luton North (Kelvin Hopkins) on securing the debate, which is somewhat belated, given that it was meant to take place many months ago. However, I commend him for his persistence in pursuing the matter and not letting it lie.

The measure was one of a number that I and my colleagues in the shadow Treasury team discussed at great length, and on which we pressed Ministers, during consideration in Committee of this and last year’s Finance Bill. We are therefore not debating a new issue, but I commend my hon. Friend for his passionate speech in which he highlighted the very real cost of living crisis faced by many pensioners and the situation in which the Government’s changes have left a number of pensioners.

The hon. Member for Suffolk Coastal (Dr Coffey) spoke in favour of tax simplification and discussed the perceived merits of the Government’s measure. She put forward an interesting argument of which there was much to commend but, despite that, I shall explain why we do not support the reforms and especially the way in which the Government have gone about bringing them into play.

[Kelvin Hopkins]

Is it not the case that what is called tax simplification is sometimes simply a cover for making the tax system less progressive and therefore less advantageous to those who are less well off?

[Catherine McKinnell]

My hon. Friend makes a powerful point. The Office of Tax Simplification expressed surprise at the way in which the measure was introduced, and I shall go on to quote from the office as I set out the reasons why we do not support the Government’s policy.

It might be helpful to recap what has happened. Until the beginning of this tax year, individuals aged 65 or over were entitled to receive an additional age-related allowance, with a further addition for those aged 75 and over. Since 1977 and what was known as the Rooker-Wise amendment, all income tax allowances had been required to increase in line with the retail prices index, unless Parliament specifically determined otherwise.

As we are all aware, in Budget 2012, it was announced that from 2013-14—from this April—the availability of those age-related personal allowances for income tax would be restricted. The allowance for people aged 65 or over was frozen, as was the allowance of £10,660 for those aged 75 or over. Additionally, people turning 65 on or after 6 April 2013 were not entitled to any age-related allowances at all, meaning that the general personal allowance was all that applied to them.

On the basis of the speed with which the changes were introduced and our opposition to them, we tabled an amendment to this year’s Finance Bill that called on the Government properly to consider the impact of the changes to the personal allowance system on the group of people who are affected. We put that proposal forward at a time of overwhelming opposition to the changes. A whole body of evidence showed that the impact on pensioners would be hugely detrimental. As my hon. Friend pointed out, this came at the same time as a tax cut for those earning more than £1 million, who the Government were handing an average tax cut of £100,000.

The e-petition that has led to the debate is testament to the measure’s impact on pensioners and their level of concern about it. I commend Arthur Streatfield and his valiant efforts in obtaining 114,488 signatures, meaning that the debate could be secured.

My hon. Friend quoted Dot Gibson, the general secretary of the National Pensioners Convention, when she gave her backing to Arthur Streatfield’s e-petition, but it is worth repeating what she said:

“Since the Budget announcement...we have been inundated by pensioners like Arthur who are outraged that the Chancellor is giving a tax cut to those earning over £150,000 whilst pensioners on little more than £11,000 are having their tax allowance frozen. There has been a lot of nonsense about pensioners having been cushioned from the austerity measures, but they’ve already seen cuts to their winter fuel allowance, a reduction of their state pension increase because it’s now linked to the…Consumer Price Index rather than the Retail Price Index, rationing of care services in the community, closure of day care centres, changes to disability benefits and caps on housing support…The Chancellor’s decision to freeze the age related tax allowance is really the last straw for pensioners who feel they are being asked to pay for the mistakes of the bankers and politicians.”

The Opposition agree, which was why we voted against the changes during the passage of last year’s Finance Bill. It is absolutely the wrong priority at the wrong time, and in the current economic climate, the Government should be prioritising ordinary families, ordinary pensioners, the young and the long-term unemployed, not millionaires.

[The Exchequer Secretary to the Treasury (Mr David Gauke)]

For the sake of clarity, will the hon. Lady confirm whether the Opposition’s position is that, as a matter of principle, those under the age of 65 should have a lower personal allowance than those over the age of 65?

[Catherine McKinnell]

We are debating today the choices that the Government have made, the way in which this tax allowance change has been implemented, the speed at which it has been implemented, the lack of consultation, the lack of consideration and the lack of will from the Government to consider the impact on pensioners. That is what the focus of today’s debate must be, because it is about the current Government’s policies, the way in which they are being implemented and the impact that they are having on pensioners now. If the Minister would like to confirm that the Government have actually given some consideration to the impact on pensioners of the changes, that would be very helpful.

[Mr Gauke]

I hope to have the opportunity shortly to set out what the current Government have done for pensioners, but given that I did not hear a clear answer as to whether it is a matter of principle, can the hon. Lady confirm that the Labour party has no plans to reverse the abolition of age-related allowances?

[Catherine McKinnell]

Again, it would be helpful if the Minister could confirm for those taking part in the debate and for those following it—the many pensioners who have called for the debate and who want to know—what consideration the Government have given to their position and to the fact that pensioners are suffering a cost of living crisis. The Government seem to be taking no account of that.

[Kelvin Hopkins]

I think the point is that pensioners face extra costs in their lives. They often spend more time at home and need more heating in their homes, for example. Someone as far back as Winston Churchill recognised that, which was why he initiated the idea of a greater tax-free allowance for pensioners to help them with their additional living costs. That is the case that I made in my speech.

[Catherine McKinnell]

I thank my hon. Friend. The point that he and I make is that the concern about the Government’s change is the lack of notice that many pensioners have had of it. It has not been introduced gradually to give pensioners a chance to readjust their savings plans or earnings plans; they have not been given time to adjust to the change. I will go on to say just what a shock it was to many pensioners, and to the Office of Tax Simplification itself, when the change came about, but it is worth reflecting first on the number of pensioners affected.

We are talking about 4.41 million people who are worse off in real terms, with an average loss of £83. Those are the Government’s own impact figures, but in addition The Daily Telegraph has estimated that many people could be £479 worse off as a consequence, or £511 if they are aged over 75. It could cost a couple nearly £1,000. Those are not insignificant numbers for pensioners who are watching their household bills rise month on month. They are now watching their income diminish as a result of these changes.

It is also helpful to consider region by region the number of constituents affected by the changes. Many MPs have been contacted by constituents who are most aggrieved by the changes and, in particular, by the lack of notice that they were given of them. We know from written answers that the Minister was unable to identify exactly how many people would be affected by the change in the age-related allowance—the granny tax, as it has been dubbed, or indeed the granddad tax, as my hon. Friend the Member for Luton North rightly pointed out. However, Her Majesty’s Revenue and Customs has been able to produce figures for the number of people over 65 paying income tax by region. The House of Commons Library sensibly suggested that that could be used as a proxy to estimate the number of people in each region affected by the freeze, so we know that 170,000 of those affected live in the north-east, 480,000 in the north-west, 340,000 in Yorkshire and Humber, 320,000 in the east midlands, 370,000 in the west midlands, 450,000 in the east of England, 410,000 in London, 710,000 in the south-east, 460,000 in the south-west, 240,000 in Wales, 370,000 in Scotland and 90,000 in Northern Ireland. Those figures are something for everyone to consider when we think about the number of constituents in our own areas who are affected and the sheer volume of engaged voters up and down the country who, as my hon. Friend pointed out, will not forget these changes quickly.

However, the critical group of people whom we should be seriously concerned about are those reaching their 65th birthday this year. I would be grateful if the Minister could update us on whether the Treasury has undertaken any research to try to understand the true impact of the changes on that group, because it is a group of approximately 360,000 people who will be roughly £322 a year worse off as a result of being excluded from the age-related allowance. For that group, the incredibly short notice of the change has been completely unacceptable. We are talking about people who are very close to retirement age and have little chance to change their plans.

As I mentioned, at the time of the 2011 autumn statement the Chancellor made this categorical commitment:

“To ensure employers and older people do not lose out, for the duration of this Parliament the annual increases in the employer NICs threshold, and the age related allowance and other thresholds for older people, will be over-indexed compared to the CPI, and will increase by the equivalent of the RPI.”

Let me repeat that:

“To ensure...older people do not lose out, for the duration of this Parliament the annual increases in the...age related allowance....will be over-indexed compared to the CPI, and will increase by the equivalent of the RPI.”

And when was that statement made? It was made just four months before Budget 2012, when the Chancellor decided not to “over-index” the age-related allowance and not even to increase it by the RPI, but to freeze it permanently for those born before 6 April 1948 and scrap it altogether for those born on or after that date.

It was dressed up as a “simplification” measure. It was justified on the back of the Office of Tax Simplification’s interim “Review of pensioners’ taxation”. What the Chancellor did not mention at all in the statement was that that review stated:

“We would stress...that the OTS has not reached any conclusions as to the best way forward with age-related allowances, nor have we formulated detailed recommendations”.

Indeed, in his evidence on the 2012 Budget to the Select Committee on the Treasury, the director of the Office of Tax Simplification, John Whiting, commented:

“I was surprised that it was taken forward so quickly...The context is that we undertook to do a two-stage review of pensioner taxation. The first would document the problems and codify all the problems...Stage two was to go ahead and look at them and try to work out what might be the best way forward.”

Of course, we know why the Chancellor did not want to wait for the final OTS report, through which he could have properly understood the impact of the changes on current pensioners and particularly on those who are turning 65 this year. He needed a soft target for a tax grab to help to fund his indefensible tax cut for millionaires. This is a measure dressed up as tax simplification that will actually increase revenue to the Government by £360 million in 2013-14. That will rise to £1.25 billion in 2016-17.

[Dr Thérèse Coffey]

rose—

[Kelvin Hopkins]

rose—

[Catherine McKinnell]

I will give way to the hon. Lady and then to my hon. Friend.

[Dr Coffey]

Of course, the hon. Lady will recognise that the Government believe that they will increase the amount of tax that they take from the richest in society by reducing the rate, as opposed to trying to suggest that it is being taken from some of the poorest in our society.

[Catherine McKinnell]

I will give way to my hon. Friend the Member for Luton North and then deal with both points.

[Kelvin Hopkins]

I hope my hon. Friend will agree that the Government would do rather better to look at the £84 billion profit that Vodafone has made on the sale of assets. By careful avoidance measures, it is avoiding billions in taxation. The Government would do better to look at that rather than at pensions.

[Catherine McKinnell]

We run the risk of digressing into a broader debate on tax avoidance and taxation rates, and it would be an injustice to the pensioners who are affected by the change in the age-related allowances to allow that. However, I take on board both points that were made in those interventions. My hon. Friend’s was about the crucial measures the Government need to take to clamp down on tax avoidance and evasion, close the tax gap and ensure that all revenue due to the Exchequer is brought in. The Minister and I regularly debate those issues. I also take on board what the hon. Member for Suffolk Coastal said. I appreciate her point, but I dispute her analysis. She should look at the figures for the shift in income that took place to forestall and then avoid the 50p tax rate, and then at the bumper tax take as soon as the rate dropped to 45p; those who are savvy, and in a position to do so, are able to take advantage of the reduction.

Like so many of the Government’s decisions, the change is completely arbitrary. It is likely that this year somebody celebrated their 65th birthday on 5 April, retaining their age-related allowance, while somebody down the street born the very next day lost their allowance and as a result will find themselves substantially worse off for the remainder of their retirement. That was why the Opposition voted against the measure in last year’s Finance Bill and tabled an amendment calling on the Government to conduct a proper review of the impact of the change on that group of people in particular and on pensioners in general. Some people did not have the common sense or ability to ensure that they were born before 5 April 1948, and as a consequence of that total lack of foresight, they will be much worse off for the remainder of their retirement. That is a deeply unsatisfactory situation for the people who prompted the debate today, on whose behalf we speak.

17:11

[The Exchequer Secretary to the Treasury (Mr David Gauke)]

It is a great pleasure to serve under your chairmanship, Mr Hollobone, for, I think, the first time. I congratulate the hon. Member for Luton North (Kelvin Hopkins). He put his case with great eloquence and passion. I thank my hon. Friend the Member for Suffolk Coastal (Dr Coffey), who, as she says, represents a large number of pensioners in her constituency, including my uncle Norman. Hon. Members have had the opportunity to discuss these matters a number of times, as the hon. Member for Newcastle upon Tyne North (Catherine McKinnell) said. In fact, we last debated the topic during proceedings on the Finance Act 2013, not to mention the lengthy debates during proceedings on the Finance Act 2012. I am pleased to have another opportunity to explain the Government’s position.

As hon. Members are aware, a phased withdrawal of age-related allowances was legislated for through the Finance Act 2012, meaning that there would be no new recipients of such allowances from April 2013. The existing age-related allowances have since been kept at their 2012-13 levels, meaning that we have frozen the age-related allowances at £10,660 for individuals born before 6 April 1938 and £10,500 for individuals born over the following 10 years. Once the personal allowance aligns with those levels, there will be one personal allowance for everyone. I appreciate that there is opposition to the measure, but we believe that in the light of the other changes we have made, particularly those that relate to the basic state pension, those steps will help us achieve a fairer, simpler tax system.

The Government’s first priority for income tax has always been to increase the personal allowance, and the allowance has seen above-inflation increases in every year since we came to office. Given his earlier remarks, I am sure the hon. Member for Luton North supports that. In this financial year, the allowance rose by £1,305—the largest cash increase ever—and next year it will continue to rise by a further £560. Those steps mean that we will meet our target of increasing the personal allowance to £10,000 a year early, taking the number of taxpayers who have seen the benefit of our increases to 25 million. We remain committed to ensuring that personal allowances are set high enough that pensioners who are solely reliant on the basic state pension do not pay any tax. As such, half the people over 65 will not have to pay any income tax at all in this financial year.

[Kelvin Hopkins]

The point being made is that many pensioners do not pay tax because their incomes are simply too low.

[Mr Gauke]

In a moment I will turn to what we are doing with the basic state pension and the steps we have taken to ensure that it is rising more quickly than it otherwise would have.

My hon. Friend the Member for Suffolk Coastal touched on simplification. We want to make the tax system simpler and easier for people to understand, and the changes to age-related allowances are an important part of that. It is worth pointing out that we are not the only people to conclude that such allowances add unnecessary complications to the tax system. A 2009 report by the Public Accounts Committee commented:

“The age-related allowance rules are complex and hard for older people to understand and place too much emphasis on older people having to prove their eligibility, resulting in errors in claims and potential overpayments of tax.”

And, in March last year, the Office of Tax Simplification published its interim report on pensioner taxation, highlighting no fewer than nine complexities.

The taper feature is one of the main sources of complication in age-related allowances. It is worth setting out how it works, to demonstrate the degree of complexity in age-related allowances. The taper removes an individual’s age-related allowance where their income exceeds the aged income limit,—£26,100 in 2013-14—at a rate of £1 for every £2 over the limit. The age-related allowance is reduced up to the point at which the income tax allowance is exactly the same as the normal personal allowance. That taper creates a 30% effective rate of tax for individuals on modest incomes and, most importantly, brings hundreds of thousands of people into the self-assessment system when, in many cases, they would otherwise have no need to complete a tax return.

Our changes to age-related allowances will remove such complexity and confusion for older taxpayers. The simplification is not only of benefit to taxpayers; a simpler tax system is also easier for the Government to administer, enabling HMRC to focus on reducing the tax gap, which I know the hon. Member for Luton North cares about passionately.

[Mr George Howarth (Knowles) (Lab)]

I apologise, Mr Hollobone, for not being here at the commencement of the debate; I had inescapable commitments elsewhere in the House. May I press the Minister to respond to a point? The arguments he puts would be better received by those affected if they did not compare the changes to their tax allowances with the fact that those at the higher end of the income scale have received benefits that amount to about £100,000, as my hon. Friend the Member for Newcastle upon Tyne North (Catherine McKinnell) pointed out. That comparison is what makes the situation so objectionable.

[Mr Gauke]

If the right hon. Gentleman looks at the measures in the 2012 Budget, he will see that the amount raised from the wealthiest, in increased stamp duty on the most valuable properties and the cap on reliefs used by the wealthiest to reduce their income tax bills, raised far more money than the cost of reducing the 50p rate of income tax—a rate that the evidence suggested was not raising anything like the sums for which the previous Government hoped. There is a good reason why the Government in which he served for many years had a top rate of income tax of less than 50p: a top rate of 50p is not a terribly effective way of raising revenue. We must place this in the context of all the other measures that the Government are taking for pensioners. The overall tax system remains favourable to them, and there are measures that protect pensioner benefits, not least the triple lock for the increases in the basic state pension.

[Kate Hoey (Vauxhall) (Lab)]

I, too, apologise for not being here earlier, particularly to support my hon. Friend the Member for Luton North (Kelvin Hopkins) in his moving of the motion.

Does the Minister not agree that so many pensioners feel aggrieved about the change because having worked hard all their lives and saved for their retirement they now discover that they are getting absolutely no interest on their savings? Many of them have been living on their savings interest, and now they do not even have that—and will not for the next few years, it seems, if the Bank of England’s new independent director is right. Does the Minister not understand just how angry many pensioners are? They feel they have been let down.

[Mr Gauke]

The hon. Lady makes an important point about the difficulties faced by many of those who rely on their savings to support themselves. It is in all our interests that we have a strong and growing economy, and in the current economic climate it is right that we have low interest rates. We acknowledge that that creates difficulties, but the alternative—higher interest rates—would have significantly damaged the economy over recent years. Importantly, we have been able to bring in the triple lock, which has enabled us to increase the state pension at a faster rate than before and has included the largest-ever cash increase. That demonstrates the Government’s commitment to supporting pensioners wherever we can.

It is also worth re-emphasising that as a result of the decision to remove age-related allowances no one will pay more tax than before. Other factors, such as wage inflation and increases to the basic state pension, may, of course, affect tax liabilities, but no one will pay more tax from one year to the next because of the policy change alone. In fact, people over the age of 65 who pay no income tax at all—about half of all pensioners—are completely unaffected by the reform.

It is also worth reminding right hon. and hon. Members that, as the Chancellor announced in the Budget two years ago, the Government remain committed to exempting pensioners from national insurance contributions. There is a strong, principled case for that, because people have contributed throughout their working lives on the basis of a return, and I distinguish that argument from the one about personal allowances. I have debated this matter on a number of occasions and have never heard a strong case for those under the age of 65 having a lower personal allowance than those over that age.

[Kelvin Hopkins]

The Minister is doing his best to provide comforting words to pensioners but the reality, according to the Institute for Fiscal Studies, is that the average annual loss in the current year from all the tax credit and benefit changes since 2010 is £245 for a single pensioner and £470 for a pensioner couple. Those are substantial sums.

[Mr Gauke]

The hon. Gentleman refers to the Institute for Fiscal Studies, and it is worth remembering that last year the IFS concluded that pensioners are the group least affected by the Government’s tax and benefit changes.

I will run through some of those changes in a moment, but I want to come back to the point about how pensioners are taxed in comparison with those who are not pensioners, taking into account national insurance contributions. There is a good reason for the national insurance measure; I am not critical of it, and it is worth bearing in mind in the context of this debate.

Let me give an example of the burdens faced by pensioners compared with those faced by people of working age. Even under the freeze, a 69-year-old with an income of £16,000 in this financial year will still pay less than half as much tax and national insurance as someone aged 30 earning the same amount. A 69-year-old further up the income scale, earning £26,000 a year, still pays only 56% of the amount of tax and national insurance their working-age children pay. Someone born before 6 April 1948 earning £26,000 would have previously been eligible for age-related allowances but, following the withdrawal of the allowance, they will still see their total tax and national insurance bill reduced by 40% when they reach state pension age.

It is only right that we do not consider the changes to age-related allowances in isolation—I appreciate that I have made that point a number of times already this afternoon. Only about 40% of pensioners currently receive the age-related allowances but, by contrast, almost every pensioner in the UK—more than 11 million people—receives the basic state pension. Those 11 million pensioners have already benefited significantly from our decision to introduce the triple lock for the basic state pension, and they will continue to do so.

Last April, the basic state pension increased by the consumer prices index inflation rate of 5.2%, which represented the largest-ever cash increase in the basic state pension. This April, the triple lock guaranteed an increase of a further 2.5%, which was larger than the corresponding increases in inflation and average earnings. In contrast, under the previous Government’s plans, the basic state pension would have increased by only 2.8% last April and only 1.6% in the current fiscal year. In addition, we must not overlook the other benefits available to this age group, including winter fuel payments, free bus passes and prescriptions, and free TV licences for those over the age of 75. As I have said, the conclusion of the IFS is that pensioners are the group least affected by the tax and benefit changes implemented by the Government.

We are doing our best to protect this group of society, and to ensure that older generations can live with the dignity and respect they deserve. Taken as part of our wider policies on pensions, our changes to age-related allowances will reduce complexity while maintaining a more generous tax and national insurance regime for pensioners than for other groups. It is perhaps for those reasons that we hear none of the main parties advocating the return of age-related allowances, and I can confirm that the Government have no plans to reverse our policy in that area.

17:28

[Kelvin Hopkins]

I am pleased to have the opportunity to respond to some of the points made in the debate. There is no getting away from the fact that the changes are having a negative effect on the income of quite large numbers of pensioners—about 4.4 million—at a time when they are suffering from the effects of austerity in other ways, with rising fuel prices being a particular problem.

The National Pensioners Convention’s point, which I mentioned in my speech, is that all those problems could be overcome if there were a substantial increase in the basic state pension. It is still among the lowest in Europe. Some 12 or 14 years ago, it was the lowest in the European Union—we were on about £90 a week for a single person, while the Germans, the next lowest, were on £150 a week. Other benefits that pensioners get add up to more than the basic state pension, but a substantial increase in the basic state pension would overcome many of the problems. That is not necessarily the policy of my hon. Friend the Member for Newcastle upon Tyne North (Catherine McKinnell) and our Front Benchers, but it is certainly my view and that of the National Pensioners Convention, and I have put that case on several occasions.

Rolling all the additions to the basic state pension that pensioners currently get into a much bigger basic state pension would be the way forward. The problem will get worse as time moves on, with the progressive crumbling and demise of occupational schemes, particularly in the private sector, which is now happening apace. A time will come when, for survival in old age, pensioners will look more to the state than to occupational schemes because, particularly in the private sector, such schemes are disappearing rapidly. Private pension schemes are often inefficient, and they are not a good way of providing for pensioners.

My view is that we must look not just to a much bigger basic state pension, but on top of that to a state earnings-related scheme with guaranteed returns at the end. With a large private pensions industry it will not be an easy job, but that is the way forward. Once we start to move in that direction, the problems we have discussed today will begin to disappear. Many pensioners still live on incomes that are far too low, and the Government’s measure has made many of those incomes still lower. As politicians or as Governments in general, we have a major job to do better by our pensioners for the longer term.

Question put and agreed to.

Resolved,

That this House has considered the e-petition relating to age-related tax allowances.

17:31

Sitting adjourned.