Finance (No. 2) Bill (First sitting)

Angela Eagle Excerpts

Committee stage
Tuesday 16th May 2023 Public Bill Committees

[Kirsty Blackman (Aberdeen North) (SNP)]

I will make a brief comment in relation to the programme motion. It is the convention of the House that a Finance Bill does not take oral evidence. That continues to be a significant issue for the knowledge of the Committee. Written evidence is very important, and everybody does their best to read it, but nothing quite compares to asking questions in an oral evidence session. The programme motion does not allow for oral evidence. The Government have made it clear on previous Finance Bills in previous years that that is because part of a Finance Bill is considered by the whole House and the rest is considered in Committee.

Given the extent of this Finance Bill and how incredibly complex it is, particularly when it comes to corporation tax, it would have been beneficial for the Committee to ask questions of experts. It would not have taken us past any potential dates. We could have scheduled an oral evidence session with, for example, the Association of Taxation Technicians and the Chartered Institute of Taxation, and taken evidence on the parts of the Bill that we are yet to consider in order to better understand what is in the Bill and the issues that it presents for professionals.

Although I will not oppose the Programming Sub-Committee’s recommendations in the programme motion, I raise my concerns, as I do for every Finance Bill Committee on which I sit, that oral evidence sessions would have made a positive difference. They would not have held up the machinery of government and the progress of the Bill, but they would have allowed us to make more informed decisions.

[Dame Angela Eagle (Wallasey) (Lab)]

It is a great pleasure to serve under your chairmanship, Ms McVey, I think for the first time. I have a great deal of sympathy with what hon. Member for Aberdeen North has just said, and I look forward to what the Minister has to say about it. It may well be that an innovation that has worked well in other Committees should spread to the Finance Bill. In the absence of any progress on that, I refer the hon. Member for Aberdeen North to the work of the Treasury Committee, of which I am a member, alongside one of her colleagues. We do extensive work pre and post Budgets and take a great deal of evidence. While it is not the same as having oral evidence to this Public Bill Committee, it is a pretty good alternative, and at the moment it is all we have.

[The Financial Secretary to the Treasury (Victoria Atkins)]

May I say what a pleasure it is to serve under your chairmanship, Ms McVey? I am delighted if this is the first Finance Bill over which you are presiding. I should declare that I used to prosecute tax fraudsters for His Majesty’s Revenue and Customs, but I have not done so since being elected to this place. I ought also, while we are in housekeeping mode, welcome all Committee members to this scrutiny. It is an important part of our legislation-making process. Particular thanks go to my hon. Friend the Member for Totnes who—I hope he will not mind my sharing—got married at the weekend and so is perhaps the first parliamentarian to spend his honeymoon in a Finance Bill Committee. My sincere apologies to Mrs Mangnall.

--- Later in debate ---

[The Chair]

I call Dame Angela Eagle.

[Dame Angela Eagle]

Thank you very much, Ms McVey. I think that the comment that I made earlier about this being your first Committee was about it being your first Committee that included me, not it being your first Committee completely. I am sure that we have an extremely experienced Chair, or you would not have been put in the position of having to Chair a Bill Committee where the Bill is this thick. I think that everyone can have great confidence in your ability to take us through the proceedings today.

I want to raise some questions for the Minister about levels of income tax, so that she could perhaps talk to us about the Government’s thinking. We have here—it is not explicitly referred to in the legislation, but it is there nevertheless—the fact that the thresholds have been frozen until 2028. That effectively drags many more people into paying these rates of income tax, at whatever level. It is called “fiscal drag” in the business.

When we analyse precisely what the Government are doing, we see that, without the headline rates of income tax being affected, 8 million people will be forced to pay higher levels of income tax the threshold has been frozen. That is particularly exacerbated in an era of high inflation, when more people will get dragged into paying higher levels of income tax because prices are going up yet thresholds are frozen.

This has been estimated to be the biggest stealth tax put into place since the doubling of VAT in the early 1990s. Looking at the situation that is expected to prevail in 2027-28—on the plans that the Government are putting forward—8 million people will be affected by fiscal drag. In other words, they will have their income tax increased even though the headline rates have stayed the same. That will mean that one in five taxpayers—20%—will actually be paying the higher rate, at 40% or above, as a result of this Government’s stealth tax.

That is at a time when people’s incomes are being squeezed from all directions. Many of us know that we have a cost of living squeeze that is driving millions to food banks, having to make the choice between heating and eating, and sometimes not being able to do either satisfactorily because of the amount of cash available at the end of a working week to buy essentials.

I will demonstrate just how many people have been dragged into the higher rates of tax by the stealth tax manoeuvre that the Government have turbo-charged for the next few years. In the 1990s, no nurses at all paid the higher rate of tax, and only 5% to 6% of machinists or electricians did. The Minister might have noticed information from the Institute for Fiscal Studies on the front page of quite a lot of newspapers this morning that demonstrates that the situation has totally changed. One in four teachers and one in eight nurses will be higher-rate taxpayers by 2027—presumably, that is before their disputes have been settled one way or the other. That is bad in itself, because it is a stealth tax.

--- Later in debate ---

[Craig Whittaker (Calder Valley) (Con)]

The points that the hon. Lady makes are valid. Another valid point is this: while it is true that more people are paying tax, is it not also true that more people are earning a lot more money than they used to?

[Dame Angela Eagle]

I am all in favour of people earning more money, but it is important that they are doing so in in real terms. Someone can earn more money in terms that do not take account of inflation, but they can actually be earning less. If the right hon. Gentleman talked to people and asked them whether they were any better off than they had been when this series of Governments came into office in 2010, he would find that people’s nominal salaries and wages might be higher in some cases, but a lot of them are worse off in reality because those earnings have not kept up with inflation. The point about the tax burden and fiscal drag makes that much worse.

[Kirsty Blackman]

On the point about how well-off people feel, does the hon. Member know that in 2008, 12% of people in the UK believed that their children would be worse off than them? Now, IPSOS has found that that number is up to 41%—some 41% of people now believe that their children will be worse off than them. Does she feel that that needs to be tackled, and that the Government are not taking it seriously?

[Dame Angela Eagle]

I agree, and the hon. Lady makes a valuable point. For societies to advance in a sensible, healthy way, succeeding generations must have optimism about things changing for the better. That also tends to lead to happier societies with people who are more likely to innovate and go the extra mile. We all want that so that we can rebuild prosperity for our nation in the years ahead in the new, more isolated circumstances in which we find ourselves, as a result of which we must remake the economic foundations of our country. I wonder how much fiscal drag helps us to do that, and I am interested to hear the Minister’s observations on how that approach will help.

There are other undesirable effects of threshold freezes of the kind encompassed by clause 1, including very high marginal tax rates for people in particular circumstances. We know from the Prime Minister’s tax return that he effectively pays 22% on his millions of earnings every year, if one combines the income tax that he pays with the way that he takes out his money through capital gains and in other areas. However, given the present tax thresholds and fiscal drag, there are people who will face marginal tax rates of 45% and 60%, which are very high—much higher than those that the Prime Minister faces.

The Treasury Committee is so concerned about that that we have begun an inquiry into spiky marginal tax rates and cliff edges. As you will know, Ms McVey, from having been Secretary of State for Work and Pensions, cliff edges and high marginal tax rates can often combine to create even greater losses of income. That is a disincentive to work harder, get more hours and move jobs when the increased wage may not compensate for the higher marginal tax rate, or a combination of the higher marginal tax rate and the cliff edge for a particular allowance. When we took evidence a few weeks ago, we discovered a marginal tax rate combined with a cliff edge that was over 100%.

There are issues surrounding the £50,000 threshold, at which point high earners start having child benefit clawed back. That has remained unchanged. It has not gone up; it is another frozen threshold. That is dragging far more people into the means test for child benefit than even the Conservative Chancellor George Osborne—we can say his name now, as he is no longer a Member of this House—intended when he introduced the policy. The Government should be aware of the combined effect of fiscal drag and unindexed rates on real people’s choices.

Freezes are a stealthy and arbitrary way to raise tax revenues. They often have a bigger impact on household incomes than more eye-catching discretionary measures do. They are particularly expected to have an impact on lower earners. By 2028, someone earning £20,000 will be £1,165 poorer under the current fiscal drag system than they would if income tax had been raised by 1%. There have been various calculations of how many pennies this stealth tax raises on the up-front rate of income tax, and they range from 3p to 4p per £1. I hope that the Minister will confirm that and try to justify why on earth the Government are raising money in that way, rather than being more transparent and up-front about rates of income tax. What will they do about the high marginal rates that the fiscal drag and frozen threshold system is landing our entire structure with? It is distorting the structure and making it very difficult to justify much of how it works for the future.

[Rob Butler (Aylesbury) (Con)]

I am interested in what the hon. Lady is saying. Will she clarify the latter point about the increase in the rate that would have been necessary had it not been frozen? Is she saying that she would rather the basic rate of income tax had been put up by 3% or 4%, such that lower-paid workers—nurses, for example, to whom she has referred—who are in the lower tax bracket would pay more tax? That seems to be the logical end point of what she has suggested.

[Dame Angela Eagle]

I am not suggesting any policy—far be it from me to do so from this side of the House. I am a mere Back Bencher, and it is not for me to make tax policy from the Opposition Back Benches. I am merely pointing out some problems that the choices that the Government appear to have made with this stealth tax are causing real people out there.

The problems are exacerbated by high marginal rates, and by very difficult and bad incentives that are quite hidden. That is why I am raising some of them here—I am attempting to draw attention to them to see whether the Minister has a response. If the Government are working on those areas, I am trying to find out what they aim to achieve by doing things this way. That is precisely what these Standing Committees are about—one gets to talk in more detail about choices that are made.

The hon. Gentleman must not imagine that I am putting forward a completely costed, different alternative, because this is not the place or time to do that. I am pointing out some of the problems, about which there is cross-party concern. I am not even making highly party political points. Far be it from me to do so—it is too early in the morning for me to do too much of that—but there are issues that we need to surface so that we can hear the Government’s official response.

I fear that we are driving into a cul de sac that will cause more problems than it solves, particularly in the interaction of the income tax system with a range of benefits, not only for the very low paid, but for medium earners. That is not being properly talked about, so by raising the matter at this point in the Bill, I am trying to get a handle on the Government’s thinking. I look forward to listening to what the Minister has to say about it, and perhaps even intervening further if she says something that piques my interest.

[Victoria Atkins]

In that case, I will try to be extremely dull. I am genuinely grateful to the hon. Lady for her questions. If I may take issue with her challenge that this is somehow hidden or a stealth tax, we debated these thresholds in the previous Finance Bill in the autumn. My right hon. Friend the Chancellor was very clear in his statement and in the following debate, as well as during the consideration of the Bill, about the difficult decisions, and we very much include the threshold decisions in that category. We were up-front and transparent about what we had to do to address some of the underlying issues we face in the economy.

I do not for a moment underestimate the hon. Lady’s intentions in raising the matter, but I must push back on the idea that this is somehow being hidden. Indeed, I remember being asked about it on many occasions both in this place and, dare I say it, on media rounds—understandably so, because this matters to people.

There is one point of agreement across the House, however, and that is the impact of inflation on people’s take-home pay. That is why the Prime Minister has set it as his first of five priorities to halve inflation by the end of this year, because it hurts all of us, but it hurts the poorest in society the most. We have heard the ongoing debate about food inflation, and none of us wants to see the difficult situations that people on the lowest incomes are finding themselves in. That is why the Treasury is doing everything that we can to support the Bank of England, which is of course operationally independent, in lowering the rate of interest.

The hon. Member for Ealing North asked me about the OBR. I am happy to quote the Chancellor, who has said in relation to the OBR’s figures overall that we respect them. It is an independent forecaster, whose job it is to make a forecast. As we all know, however, and as we have seen very recently with the Bank of England, forecasts are exactly that—forecasts. They can change, so we are working to support the Bank of England in its work. We respect the OBR, but fundamentally we are trying to ensure that the lowest paid receive as much of their income without having to pay any tax as we can afford as a country.

--- Later in debate ---

In terms of what this means nationally, it is estimated that more than 3 million people will be taken out of tax by 2023-24, compared with what would have happened if the personal allowance had risen with inflation from 2010-11. That means that as a result of our policies, we have been able to take more people out of tax completely. Indeed, 30% of individuals do not pay tax as a result of the personal allowance. It remains one of the most generous internationally, and the UK higher rate threshold is still high enough to protect the vast majority of people from paying the higher rate of income tax. Around 80% of taxpayers pay the basic rate. Indeed, average median earnings for an employee are £28,000 a year—well below the higher rate threshold of £50,270.

[Dame Angela Eagle]

I assume that those figures are for now. Is there a calculation of where fiscal drag will have left them after 2027-28? The figures will undoubtedly go down, especially if inflation persists for any length of time. It is 10% now, which means that anyone who is within 10% of the next threshold will go over it this year.

[Victoria Atkins]

The hon. Lady has hit on exactly the point. We have to be so careful with forecasts, because there are so many variables. As she has identified, inflation is one of them. Please do not think that I am speculating about what may or may not be in future fiscal events, but if there are changes to the rate of national living wage, for example, that will have an impact. There are many variables, and that means that our figures are both costed from a Treasury perspective and examined by the OBR. We very much stand by the figures set out in the autumn statement and as part of Budget considerations in the spring.

[Dame Angela Eagle]

The Office for Budget Responsibility has said that the frozen thresholds will drag 2.1 million people into the higher rate of tax, raising £26 billion a year, which is the equivalent of 4p on the basic rate. One presumes that that is net of all the other things that the Minister is talking about.

[Victoria Atkins]

The shadow Minister asked that question. We respect the work of the OBR, and of course we understand that it is an independent forecaster. However, as I said, we have never shied away from the fact that this a difficult set of circumstances. I know it is not for the hon. Lady to set tax policy on behalf of her Front-Bench team, but my hon. Friend the Member for Aylesbury posed an interesting question: what is Labour’s alternative? Outside observers may wish to take that into account.

We believe in sound money, and the rate of debt interest that we are paying each year—some £120 billion—is money that we would much rather spend on our NHS, police and defence. However, precisely because of our extraordinary efforts to protect our constituents throughout the pandemic, to help Ukraine and to provide support through the cost of living crisis that has emerged from that, we are having to take these difficult decisions in a fiscally responsible way.

--- Later in debate ---

[Kirsty Blackman]

First, given the inflation that we are facing, it is incredibly important that people who are caring, and taking on caring responsibilities, can afford to do so and are not forced to stop because of an impact on their income. This is a positive step. A not insignificant number of those who are cared for face a specific issue, such access to special diets, for which inflation has increased much more than even for food inflation. Individuals caring for anybody who is on a special diet will have seen a differentially large impact on their household spend specifically as a result of having to cater for those special diets. The changes being made therefore could not have come at a better time.

It is also positive to hear recognition for kinship carers, who are so often missed out in conversations about caring, even if people are taking on a formal role as kinship carers. We could not do without the significant amount of work that kinship carers do, so I am pleased, having previously had to argue in my council role for similar benefits for kinship carers as those that foster carers were receiving, that the Government have as a matter of course included kinship carers in the qualifying care relief, and ensured that the changes being made extend to them.

[Dame Angela Eagle]

I think that this measure will be welcomed across the Committee. As the Minister said, no one will vote against it. All of us know locally, from our constituency advice surgeries and our general work, the pressure that the entire care system is under. We know many of the things that are wrong with it and difficult in it, and how crucial it is to try to get it right, not least for the life opportunities of those people who are caught up in the system.

In the context of a welcome change, could the Minister explain the decision to index to CPI rather than RPI? The retail price index takes into account the costs of rent or housing in a way that I would have thought was directly relevant in this context. Why was it decided to use CPI rather than RPI for future indexation?

[Victoria Atkins]

We use CPI across the board. What we have tried to do is bring the value of the QCR back to its intended level. As I said, it had not changed since 2003. Index linking protects its value to foster carers in the future, so that a future Finance Bill Committee does not have to consider a similar uprating in the future.

--- Later in debate ---

[Dame Angela Eagle]

I thank the Minister. It is obviously a good thing that there will be indexation. In fact, I was talking about the lack of indexing when we were talking about the freezing of tax thresholds earlier, so I understand that point.

However, I am asking a very technical, specific question about why the Government are using CPI rather than RPI. RPI includes the cost of housing, and the cost of rent, or whatever, for the place where the caring is being done seems to me to be a relevant cost in this context. Indexing to RPI would actually be a better way of representing and indexing those costs going forward. I am asking: why CPI, rather than RPI?

[Victoria Atkins]

It is because that tends to be our measure across the board. I take the hon. Lady’s point about housing, but if someone needs help with the cost of housing, depending on their income levels, there are other ways in which they can get help from the state for that. This relief was specifically to reflect the extraordinary public service that families across our constituencies provide in helping those most vulnerable of children.

Question put and agreed to.

Clause 28 accordingly ordered to stand part of the Bill

Clause 29

Estates in administration and trusts

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

--- Later in debate ---

Finally, clause 33, which operates alongside clause 32, as I mentioned, extends the circumstances in which a pre-6 April 2015 lifetime annuity or dependents annuity under a registered pension scheme can be reduced without incurring unauthorised payment charges. That will ensure that those who receive financial services compensation scheme top-up payments as a result of the write-down under the Financial Services and Markets Bill’s proposed new section 217ZA of the Financial Services and Markets Act 2000 will not face a tax disadvantage. The primary legislation for those pensions tax changes will also apply from the date of Royal Assent of this Finance (No. 2) Bill, while additional consequential pensions tax changes concerning unauthorised payments will be made via a statutory instrument. We will not oppose clause 33.

[Dame Angela Eagle]

We often plead for financial services legislation to be made simpler, but from listening to the debate, it seems that we have not quite succeeded yet. I have a few questions, but the changes seem to be sensible; they ensure that there is no game-playing when it comes to reinsuring those bits of business that might need to be transferred from an ailing or failing insurance company to something stronger, so that those who rely on payments for their pensions or other costs can be assured that they will not lose out.

Have these technical changes been proposed as a result of an issue in the insurance world? Do insurers who wish to join larger companies or pass on some of their insurance policies want to do so because they thought that they had a tax advantage, and have buyers not been wanting to buy because they think that they might be left holding the baby, and face a big tax issue? Is this a structural problem, or does the Treasury see this as a potential problem that it wants to iron out before it manifests in the market? I suppose that is the question I am asking. If we are talking about a problem that has been holding up the efficient working of the market, what will the effect of the change be? Will it be beneficial? Has the Treasury modelled it, so that it knows the implications of the change? I am trying to get a handle on whether this is a theoretical issue, or whether there is an actual problem that has led to these changes, which seem sensible, if complex.

[Victoria Atkins]

First, in answer to the hon. Member for Ealing North, the Exchequer impact is plus-£15 million for 2022-23—all the figures are positive—plus-£50 million in 2023-24, plus-£55 million in 2024-25, and the same for 2025-26 and 2026-27. That is how long the measure has been scorecarded for. The hon. Member for Wallasey asked whether the risk was possible or actual. We legislated before significant further risk could arise on the adoption of the new accounting standard, IFRS 17.

Clause 30 addresses a possible tax mismatch in the BLAGAB reinsurance rules. Clause 31 addresses a matter brought to HMRC’s attention by the insurance sector, which has a long-standing concern that the current scope of the legislation, which treats certain sums received under a reinsurance contract as taxable income, may be unnecessarily wide and is blocking commercial transactions. In relation to the hon. Lady’s laments about the simplification of financial services legislation, I speak with the scars of having tried to prosecute insider dealing cases in my time, so I can understand why she asks about that.

Question put and agreed to.

Clause 30 accordingly ordered to stand part of the Bill.

Clauses 31 to 33 ordered to stand part of the Bill.

Clause 34

Corporate interest restriction

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