Budget Resolutions and Economic Situation

Lord Mackinlay of Richborough Excerpts

Wednesday 15th March 2023 Commons Chamber

[Craig Mackinlay (South Thanet) (Con)]

I congratulate the Treasury team on what I thought was an imaginative Budget, particularly on getting people back into work, including through the pension changes to get some key employees back to work, especially in the NHS. I had concerns about the corporation tax rise, but they have been broadly tempered by the full expensing.

I refer to my entry in the Register of Members’ Financial Interests as a chartered accountant and chartered tax adviser. This may come over as a little dull, but it may be instructive to the Treasury Bench. I want to take a quick gallop through corporation tax and dividend tax law over the last 50 years. Dividends were imputed with advanced corporation tax, a system introduced in 1973. It was a withholding tax at source, so the recipients of those dividends, if they were basic rate taxpayers, were deemed to have had the tax paid at source. Of course, because that tax had already been deducted, both charities and pension funds, most notably, could reclaim the tax that had been deducted.

Strangely, one of the first acts of the incoming Labour Government in 1997 was to scrap that advance corporation tax regime. For pension funds, that was a catastrophe. At one time we had world-leading and well-funded pension funds, but today the damage to them is estimated to be £250 billion and defined benefit schemes are virtually extinct. There started a long period of tax-free dividends, up to the basic rate band, for basic rate taxpayers. Because dividends are not a deduction against taxable profits, they were internally imputed to have had that rate of corporation tax attached to them, so in the hands of the basic rate taxpayer, they were free. We had a short period of a strange 10% band, but all toddled along quite nicely, up until 2016, when the 10% tax credit was abolished and replaced with a tax-free dividend allowance of £5,000. The Treasury’s assessment at the time was that owner-managed businesses were using dividends too extensively, and there was an avoidance of both ER and EE national insurance. Well, so be it. That did not last very long, because even at the £5,000 level it was deemed to have been a little overexploited. So the dividend allowance was reduced to £2,000 from April 2018, with dividends above that rate taxed at 7.5%. In the past year, we have raised that to 8.75%. Again, so be it—but we have introduced a double taxation, both as company profits and then in the hands of the recipient.

What concerns me more than anything, and the reason for my speech, is the proposal raised at the second autumn statement last year, which was confirmed today and not overturned, for the tax-free dividend amount to be reduced to £1,000 for 2023-24, and to be reduced still further to just £500 in 2024-25. My plea is for a reconsideration of that and I will give an example.

Consider a retired taxpayer, blissfully paying PAYE all their working life and in receipt of a state pension, perhaps an occupational pension as well, whose coding is working perfectly adequately. They have been in a sharesave scheme, which was the right thing to do. People have been encouraged to do that all their working lives and there are now a million people in the country in a sharesave scheme. They have been blissfully outside of doing a tax return. The system has worked easily for them.

The likelihood of ever receiving £2,000 of dividends was pretty low; possibly, the prospect of even £1,000 of dividends is fairly low. But I am afraid the likelihood of getting £500-plus of dividends through a sharesave scheme in 2024-25 is likely to be very high. Do we realistically want to catch people with fines through the door, because they have not realised what has happened and what has changed? Do we really want to drag potentially hundreds of thousands of retired taxpayers, who have never had to worry about a tax return, into the tax return system? I believe that the £500 threshold is unduly parsimonious.

Let us contrast that with two other aspects of the tax system I know where a small amount of tax-free income can be earned: the property allowance, where people can receive £1,000 of rent, perhaps by renting out a car parking space to a commuter or a holiday property for a week or two, and the trading allowance, where people can earn £1,000 that falls outside tax. So we are allowing £2,000 of tax-free income, which is available even to 60% taxpayers. That means we are potentially allowing £1,200 of tax not to be paid because that makes things administratively easy, it is not worth the hassle and the very small tax loss is worth while.

My plea to those on the Front Bench is that it may be too late to stop the £1,000 threshold coming into play for 2023-24, but it is certainly not too late to give consideration to the £500 threshold. As I say, we have allowed £2,000 of other earnings, for other things, to fall out of tax. I think the £500 limit is far too low and will drag innocent taxpayers into the tax system who perhaps have never been in it before. That is my recommendation to Ministers on the Treasury Bench.