Finance (No. 2) Bill

Jonathan Edwards Excerpts

Committee of the whole House
Wednesday 8th May 2024 Commons Chamber

[The Financial Secretary to the Treasury (Nigel Huddleston)]

It is an honour to open the debate. I will start by setting out how, because of the progress the Government have made, we have been able to cut taxes as part of our plan to reward work and grow the economy.

The Government cut national insurance at both the autumn statement and the spring Budget and have made above-inflation increases to thresholds since 2010, with the basic rate threshold rising from £6,475 to £12,570 today. Taken together, those measures mean that an average worker on £35,400 in 2024-25 will save £1,500 more in personal taxes than they otherwise would have done. Due to the significant real-terms increases to the personal allowance, it is estimated that 1.8 million people will be taken out of income tax altogether by 2024-25, compared with the threshold rising in line with inflation from 2010-11. All workers can now earn £1,000 a month before paying any tax, due to the significant increases to the national insurance starting threshold, which we changed in July 2022.

Let me turn to the first four clauses of the Bill. Income tax is the largest source of Government revenue and helps to fund the UK’s schools, hospitals and defence, and other essential services we all rely on. In 2024-25, it is expected to raise more than £302 billion. Each year, the Government must legislate to charge and set rates of income tax, which is why we are all here today. Clauses 1 to 3 impose an income tax charge and set the rates of it for 2024-25. The rates are not changed by the Bill; rather, we are confirming that they will remain the same.

Clause 1 imposes a charge on individuals to pay income tax for the year 2024-25. Clause 2 sets the main income tax rates—namely the basic rate of 20%, the higher rate of 40% and the additional rate of 45%—for non-savings and non-dividend income of taxpayers in England and Northern Ireland. Those rates are set separately from those in clause 3, as the income tax rates for non-savings and non-dividend income, such as earnings from employment, are devolved to the Scottish and Welsh Governments, and are set by their respective Parliaments. The decision to separate savings and dividends from other forms of income was made as part of the devolution settlement. It ensures that the UK system works effectively and coherently, recognising that dividend and savings income is generally more mobile and generated across the UK, and has some interactions with corporation tax, which is not devolved.

Clause 3 sets the default income tax rates at the same levels as the main rates—namely 20%, 40% and 45%—across the entire UK. These rates apply to the non-savings and non-dividend income of taxpayers who are not subject to the main rates of income tax or to Welsh or Scottish rates of income tax, such as non-UK resident individuals. The clause also sets the savings rates of income tax for all UK taxpayers, again at 20%, 40% and 45%.

As I mentioned, income tax is a vital revenue stream for our public services, without which we could not fund our schools, hospitals, defence and more. It is important that we keep it at its current level.

[Jonathan Edwards (Carmarthen East and Dinefwr) (Ind)]

I receive emails from constituents asking me why the Government are not unfreezing the personal tax thresholds.

[Nigel Huddleston]

We all know that, because of the level of intervention that we had to take, out of necessity, during the pandemic and in response to the cost of living challenges, Government intervention was far greater than any of us anticipated—to the tune of £400 billion in the pandemic and £100 billion for the cost of living challenges. That money has to be paid back, and I think most of our constituents know that. We have seen the same pattern right around the world, where tax levels have had to be higher out of necessity. That means that thresholds have not been able to move in the way that we would normally like. However, now that economic circumstances are changing, we have turned a corner and we are able to reduce taxes, such as for the 27 million people who will receive on average an extra £900 through the national insurance cuts.

[Jonathan Edwards]

I am grateful to the Minister for giving way a second time. He started by talking about some of the fiscal measures that the Government have taken to reduce tax, but by not unfreezing the personal allowances, are the Government not taking money from one pocket and putting it back in the other?

[Nigel Huddleston]

No. I advise the hon. Member and others to look at their wage slip from a few months ago—say, in December last year. They will see a direct impact because of the national insurance changes that we made in January and again in April. People will see that they are paying less national insurance than in the past. That is transparently and clearly a tax cut. We are able to reduce taxation because the direction of travel is changing.

Taxes have increased across the whole of the western world. Our tax level is projected to increase to about 37%, compared with around 39% in Germany, around 42% in Italy and around 46% in France. This is a phenomenon whereby Governments have had to intervene and spend more money and, as an obvious consequence, they have had to increase taxation to a greater level than anticipated or desired.

However, now that we are back to growth and on a firmer footing, the economy has turned a corner, and we are able to reward the hard work of the British public by reducing taxation. We are doing that in the form of income tax cuts. As the Chancellor and the Prime Minister have said on multiple occasions, we wish to continue in that direction of travel. As I said, people should look at their pay packets. I recognise that it is one thing to talk in the Chamber about implementing laws, but people will now see that in their pay packets in a meaningful way. An average worker on £35,400 will be £900 better off as a result of the national insurance cuts. That is a meaningful amount for constituents right across the country, including those in the hon. Gentleman’s constituency.

Another principle of taxation is fairness. Income tax is fair: those with the most contribute the most. The income tax system is highly progressive, with different rates of tax sitting above an internationally high personal allowance. The top 5% of income tax payers are projected to pay nearly half of all income tax in 2023-24. The top 1% are projected to pay more than 28% of income tax. Thanks to the personal allowance, almost a quarter of individuals will not pay income tax at all in 2024-25. It is important to note that the percentage paid by the top earners is greater than it was under the last Labour Government. In other words, the tax system is more progressive under the Conservatives.

Income tax is also internationally competitive. According to the OECD, the UK has some of the most generous starting allowances for income tax and social security contributions in the OECD, and the most generous in the G7—more generous than in France, Germany, Italy, Canada, Japan and the US. According to the OECD, in the United Kingdom the average single worker faced a net average tax rate of 23.7% in 2023, compared with the OECD average of 24.9%. In other words, in the United Kingdom, the take-home pay of an average single worker after tax and benefits was 76.3% of their gross wage, compared with the OECD average of 75.1%.

I have talked a lot of statistics, but what they mean is more money in people’s pockets to spend as they wish—a fundamental Conservative philosophy. We have also been able to return some money to taxpayers now that inflation is falling and the economy is improving, by reducing national insurance contributions. We have put money back into people’s pockets. We have prioritised tax cuts for those in work, and we believe that that is the best way to stimulate growth in the economy overall.

Clause 4 continues the theme of maintaining the income tax arrangements by keeping the starting rate limit for savings at its current level of £5,000 for the 2024-25 tax year. Many colleagues may be familiar with this but some may not, so briefly by way of explanation, the starting rate for savings is an extra £5,000 tax-free allowance for interest from savings, specifically for individuals who have earned incomes of less than £17,570. That supports in particular people with low earned income, such as pensioners who are reliant on savings interest.

The Government made significant changes to the starting rate for savings in 2015, when they raised the threshold to get the starting rate for savings from £2,880 to £5,000, and lowered the starting rate for savings from 10% to 0%. As many Members will be aware, the starting rate limit for savings must be legislated for each year to confirm the band of savings income to which it applies. Again, that is what we are doing today. This clause will ensure that the limit is held at this level. It ensures simplicity and fairness in the tax system, while maintaining a generous tax relief and supporting the public finances by taking fiscally responsible decisions. As well as benefiting from the starting rate for savings—whereby, as I have said, individuals with earned income of less than £17,507 can earn up to £5,000 in savings income free of tax—savers are supported by the personal savings allowance, which provides up to £1,000 of tax-free savings income for basic rate taxpayers. They can also continue to benefit from the annual ISA allowance of £20,000. Moreover, in the spring Budget 2024 the Government introduced the British ISA, which will provide a new allowance of £5,000 in addition to the existing ISA allowance, along with a new tax-free savings opportunity for people to invest in the UK. Taken together, those generous allowances mean that about 85% of savers pay no tax on their savings income. The Government are committed to continuing to help people on all incomes and at all stages of life to save. The significant increase in the starting limit in 2015 means that the taxation arrangements for savings income remain generous, and the Government therefore believe that it is appropriate to retain the starting rate for savings at its existing value at this time.

The Government are managing the public finances in a balanced and responsible way. Our approach to delivering fiscal sustainability is underpinned by fairness, with those on the highest incomes paying a larger share. By maintaining the current rates of income tax and the starting rate limit for savings thresholds, we will ensure that the highest earners contribute more to the revenue, helping the Government to take a balanced approach to revenue raising while still supporting vital public services.

[James Murray (Ealing North) (Lab/Co-op)]

I rise to speak on behalf of the Opposition to new clauses 1 and 4, which stand in my name and that of my hon. Friend the Member for Hampstead and Kilburn (Tulip Siddiq).

“This remains a parliament of record tax rises.”

Those are not my words but those of Paul Johnson, the director of the Institute for Fiscal Studies, following the spring Budget from which this Finance Bill derives. However, the IFS was not alone in its view. In response to the Budget, the Institute for Government was clear as well, saying that taxes were set to rise

“to a post-war high as a result of decisions made by Conservative chancellors over the past 14 years.”

Meanwhile, the National Institute of Economic and Social Research described the Chancellor’s announcements in March as a

“low-key budget…unlikely to unlock the UK’s growth and productivity problems”.

The verdict is clear. People in Britain are facing higher taxes, squeezed living standards and weaker public services, and they have a Government who are unable to undo the damage that they have caused. No matter what the Conservatives now say or do, the truth is that the tax burden is set to rise to its highest level in 70 years. The decisions taken by Conservative Chancellors in this Parliament—and, let’s face it, there have been a few of them—mean that the average family will face a tax bill that is £870 a year higher by 2028-29. For pensioners, it is even worse: people over the state pension ago do not even benefit from any changes in national insurance, which means that pensioner taxpayers will pay an eye-watering £960 more a year by the end of the forecast period.

People across Britain are struggling to make ends meet as they find their wages squeezed and taxes rising relentlessly, yet the Conservatives have decided to tell the British public that they have never had it so good. I note that Ministers are trying to do that again today, telling us that their plan is working, although that is not the reality of life for people who, at the next general election, will be asking themselves whether they and their families feel better off than they did 14 years ago. It is that reality that new clauses 1 and 4 seek to expose: as the Conservatives gaslight the British people, our new clauses are there to call them out.

New clause 1 does that by requiring the Government to come clean over how many people will be liable to pay income tax at 20% and 40% in the current tax year, how the number has changed over the last three years, and how it will change in the three years ahead. We want the Government to admit the impact that their six-year freezing of the income tax personal allowance and the higher rate threshold will have. According to the Office for Budget Responsibility, 3.7 million more people will be paying tax by 2028-29, and 2.7 million more will be paying the higher rate, as a result of the Government’s threshold freezes. Will the Minister repeat those figures and admit that they are correct? We believe that the Chancellor should be honest about this too, and that is what new clause 1 seeks to achieve.

We know that the outcome of the Conservatives’ decisions during the current Parliament is hitting pensioners who pay tax especially hard: because taxpayers over the state pension age do not benefit from any of the changes in national insurance, they will feel the impact of the Conservatives’ tax rises even more. That is why we tabled new clause 4—again, requiring the Chancellor to come clean about the impact of his and his predecessors’ policies. The new clause requires the Chancellor to set out the number of pensioners who will be liable to pay income tax this year and in each of the next three years, and what the average pensioner’s tax bill will be. Pensioners deserve to know the truth about how the Government’s decisions will affect them, and they have good reason to be concerned about this Government.

While Labour has guaranteed that the pensions triple lock will be in our manifesto and protected for the duration of the next Parliament if we win, the Conservatives refuse to say what impact on pensioners their £46 billion unfunded pledge to abolish national insurance altogether would have. As the shadow Chancellor, my right hon. Friend the Member for Leeds West (Rachel Reeves) said yesterday, it is a tax bombshell aimed squarely at Britain’s pensioners. The Conservatives are refusing to say how they would pay for this massive commitment, so it is hard not to suspect that they are concealing their plans to make pensioners pay the bill. Perhaps they will pay for the revenue lost through the abolition of national insurance by making changes to pension rates or to the state pension age, but if they are planning to keep pensions the same and make up the revenue by raising the basic and higher rates of income tax, that would mean an 8% increase in income tax rates.

My colleagues and I have asked Ministers time and again to come clean about how they would pay for their plans, but they resolutely refuse to do so. They could clear this up right here, right now, by either abandoning their unfunded commitment or explaining how they would pay for it. I would happily give way if the Minister would like to do that, but I suspect that he will not. We know that the Conservatives find the reality of their tax-raising record so hard to bear that they would rather hang on to a reckless, unfunded plan to abolish national insurance to make them feel better about themselves and to desperately try to keep their divided party together. It is crystal clear that for the Conservatives it is party first, country second.

We also know that the Conservatives’ high tax record goes hand in hand with their record of low growth in the economy. Indeed, one of the reasons taxes are so high is the fact that economic growth has been so weak over the past 14 years. Again, no matter what the current set of Ministers say, the idea that the economy is turning a corner is simply not reflected in reality. The truth is that our economy is smaller per person than it was when the right hon. Member for Richmond (Yorks) (Rishi Sunak) became Prime Minister. Our country is forecast by the OECD to have economic growth of just 1% next year, weaker than that in every other G20 country except Russia. If, under the Conservatives, the UK economy had grown at the average OECD rate, it would now be £140 billion larger—and that growth would have provided an extra £50 billion in tax revenues to be invested in our public services. Instead, economic growth is on the floor, taxes are going up, and public services are falling over. That is the Conservative doom loop that we are in. We know that the only way out of the doom loop of ever-rising taxes with nothing to show in return is to get the economy growing with Labour’s plan.

Labour’s plan for economic growth is driven by the need for stability, investment and reform. Stability, something so sorely lacking in the recent years of Conservative chaos, must be the basis of a secure and responsible approach to the economy, and with strong fiscal rules, a new fiscal lock and respect for independent institutions, we will put stability at the heart of our approach.

[Jonathan Edwards]

At the beginning of his speech the hon. Gentleman mentioned Paul Johnson, whom the press has quoted today as saying that the Government and the Opposition are tied to the same fiscal path. Is that an ideological decision or a general election tactic? I am genuinely interested in hearing the answer.

[James Murray]

We in the Labour party believe that having fiscal rules that are iron-clad is essential to being trusted to manage the economy in a responsible way that puts family security and family finances first. Having strong fiscal rules and stability underpinning every other decision that we make is absolutely essential to everything that a Government might hope to do. Indeed, that stability forms the foundation for getting the economy growing, because with stability we will be able to work in partnership with businesses to remove the barriers to investment, using catalytic public investment to unlock more than £20 billion from the private sector to invest in the industries of the future. To support that investment, we will reform the systems that our economy needs to thrive, from reform of our planning system and employment rights to devolving powers to elected Mayors on transport, skills, enterprise, energy and planning. That is how Labour will begin to grow the economy if we win the next general election.

We know that a new approach and a new Government are needed, because that is what people across the country are telling us. People want a new approach whereby they can feel better off, rather than struggling to make ends meet as their taxes rise relentlessly. The Conservatives are desperate to distract from the mess they have created. They go from the simply unbelievable, like the Chancellor claiming yesterday that they had abolished low pay, to the unbelievably reckless, like their £46 billion unfunded plan to abolish national insurance. But no matter what they say, or how hard they try to pretend that their plan is working and that people in Britain have never had it so good, people know the reality of life. People know that taxes are at record levels.

Today we want the Conservatives to at least come clean and admit how many more people are paying tax as a result of their decisions in this Parliament, and how hard they are hitting pensioners in particular. Frankly, however, no matter whether they come clean, come the general election, people across Britain will ask themselves whether they and their family feel better off today than they did 14 years ago. The answer to that question is the reality from which the Conservatives cannot hide.

--- Later in debate ---

[Ben Lake (Ceredigion) (PC)]

New clause 5, in my name, would require the UK Government to review the impact of the tax measures announced in the spring Budget on Wales, Scotland and Northern Ireland. The Committee will, of course, recognise that the nations and regions of the UK differ in key respects—in their strengths, their weaknesses and their needs. To a large extent, the UK tax system operates as though economic and social conditions are uniform across these isles, so I would like the Government to consider what impact this universal approach to central taxation is having on different parts of the UK, in the hope that a better understanding of such matters will help to inform and improve tax policy decisions.

The laudable ambition to level up the nations and regions of the UK is testament to the different circumstances prevailing across these isles. The Welsh tax base is different from others in the UK. Wages in Wales are much lower than the UK average, productivity is lower, and our proportion of elderly citizens is higher. We should ensure that the tax system reflects that reality and, at the very least, we should make sure that we fully understand the differential impact of tax decisions, whether it be the freezing of the personal allowance, reductions to national insurance contributions, or decisions on corporation tax, on different areas.

I concede, of course, that some fiscal devolution has taken place and that the Welsh Government have the power to set supplementary Welsh rates of income tax. However, these powers are not as advanced as those possessed by the Scottish Parliament, which allow the Scottish Government to create new income tax band thresholds to better tailor their tax system to the specific needs of the Scottish people.

A review of the impact of income tax policy specifically on Wales could include looking at how it interacts with the current Welsh rates of income tax and inform the debate on any further devolution of tax-raising powers to Wales in the future. Extending the reviews to other devolved nations would allow for a comparative study on how UK tax policy interplays with the different fiscal devolution settlements in place across these islands, which would also be to the benefit of future tax policy decisions and any Government levelling-up strategy.

[Jonathan Edwards]

Following Brexit, the UK Government could have been extremely radical: they could have devolved corporation tax to Wales, Scotland and Northern Ireland, and they could have fully devolved income tax and VAT. Is it not amazing that following Brexit, and all the pain that it has caused, there is a complete lack of ambition about using any powers that Brexit enables?

[Ben Lake]

I could not agree more. We were told that one of the supposed benefits of withdrawing from the European Union would be the liberty to tailor our tax powers; to devolve them to different parts of the UK in a bespoke way, so as to promote growth and better reflect the needs of the people. I agree that it is remarkable that the UK Government have thus far failed to make real the supposed benefits of Brexit. This review of tax policy could touch on those things. It would also be useful given the important link between tax decisions and public spending and, indeed, economic growth.