Age-related Tax Allowances

Catherine McKinnell Excerpts

Monday 9th September 2013 Westminster Hall

[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.