Finance Bill

Lord Davies of Brixton Excerpts

2nd reading & 3rd reading & Committee negatived
Tuesday 20th December 2022 Lords Chamber

[Lord Davies of Brixton (Lab)]

My Lords, I thank the Minister for his introduction. This is clearly a niche debate—even more niche than some. I will make a general point and then move on to a specific issue that, to no one’s surprise, will involve pensioners.

For the general point, I want to cast our minds back to the Rooker-Wise amendment, so called after my noble friend Lord Rooker, when he was a Member of Parliament in 1977, along with his colleague Audrey Wise. They were responsible for one of the few examples of Back-Benchers making a significant impact on a Finance Bill. The amendment linked the personal tax allowance to the rate of inflation to prevent the effective erosion of non-taxable income. When the personal allowance remains the same, in the normal course of events, because of inflation and increases in general earnings, people effectively end up having to pay more tax. I did a bit of research on this. The Institute of Economic Affairs, not normally an organisation that I would quote, refers to this as an increase in taxation by stealth, and that is indeed the reason why the Government are doing it.

The Minister said the proposals were honest and fair, but I do not think it is honest and fair to increase general personal taxation by freezing allowances. It is covert. The Institute for Fiscal Studies described it as covert tax increases. It comments, in terms of the Budget, that the freezes to income tax allowances and thresholds constitute a very big tax increase indeed. This is a big tax increase, with the Government hoping that people essentially will not notice that their income is being increasingly taxed because of increases in line with incomes. It would obviously be much more honest and fair to continue increasing the allowances and to adjust the standard rate to recoup the same amount of taxation. I am not making a point about the global sum of taxation; I am making the point that it would be fairer and more honest to increase the standard rate rather than fiddle with—well, freeze—personal allowances, which are covert increases.

Obviously, we know why the Government are doing this: they are committed not to increase the standard rate because it would look bad. But my specific question on this issue is, how many more people by 2028 will the decision to freeze the allowances drag into the tax net? I am talking about people on low incomes. How many people on low incomes will have to start paying income tax because of the decision to freeze allowances? That is the general point.

There is a specific problem—an administrative problem, in my view—with freezing the allowances for pensioners. I have been looking at the figures and, because of the triple lock, which apparently we all support, there will be, according to the figures from the OBR, a 10% real increase in the state pension, the new state pension and the basic state pension, over the period up to 2028, which I believe is very much to be welcomed. But, at the same time as the state pension is going up, the personal allowance is frozen. That means that currently the state pension, taking the new state pension as the relevant figure to illustrate the situation, is 77% of the personal allowance. By 2028, it will be 100% of the personal allowance.

Now, people who have higher incomes pay more tax—that is reasonable. The problem is that the state pension is not functionally part of the PAYE system. Nobody pays income tax on their state pension. The state apparently has no way of deducting income tax from the state pension, which means that as the state pension gets to the same level as the personal allowance—and many people have additional amounts of state pension because of the state earnings-related pension scheme of the past—there will be many people whose only income is from the state pension and it will be in excess of the personal allowance. We have got away with that situation in the past because of the gap between the state pension and the personal allowance, but I believe there will be a major administrative and political problem as soon as people start receiving state pension in excess of the personal allowance. I have not seen any commentary on this, but the Government need to be clear what they intend to do about this problem.

My specific question is: what are the Government going to do about the large numbers of people who are due to pay tax on their state pension because of this scissors effect? How can we resolve the problem and make sure that people who are not part of the current PAYE system do not end up being sent a significant bill for outstanding tax at the end of the year?

--- Later in debate ---

[Lord Harlech (Con)]

My Lords, it is a privilege to close this debate on the Finance Bill on behalf of the Government. I thank all noble Lords for their constructive and considered contributions and the welcome to the Dispatch Box. I will try to address many of the points raised in today’s debate, but will begin by reminding the House of what this Bill is designed to achieve.

We are taking these changes forward rapidly now because we are serious about fiscal sustainability and know how essential it is for economic stability and growth. As my right honourable friend the Chancellor set out at the Autumn Statement, we are facing hugely significant challenges, including on the cost of living, exacerbated by Putin’s invasion of Ukraine.

The UK is not alone in dealing with these issues, with one-third of the global economy forecast to be in recession this year or next. However, it is clear that we must prioritise restoring sustainability in our own public finances; only then will we be able to face down the economic storm, while protecting the most vulnerable. That stability will provide the foundation that is essential for economic growth.

The Autumn Statement set out a clear plan to deal across all these areas, with three priorities: stability, growth and public services. Even in these difficult economic times, we are still protecting public services by investing billions of pounds in the health service and education. We will continue to emphasise these facts as we move on with this work.

This small, focused Bill forms the essential next part of that plan. It implements tax measures which will provide certainty to markets and help stabilise the public finances, and does so in a fair way, with the heaviest burden falling on those with the broadest shoulders. In summary, the Bill makes changes to the energy profits levy to ensure that oil and gas companies experiencing extraordinary profits pay their fair share of tax. It also takes forward changes to R&D tax reliefs, to ensure the taxpayer gets better value for money and to continue to support valuable research and development needed for long-term growth. The Bill’s changes to personal tax ensure that while we are asking everyone to contribute a little more towards sustainable public finances, the better-off will shoulder a greater burden. The changes to the taxation of electric vehicles ensure that all motorists start to pay a fairer tax contribution, while continuing to provide generous incentives to support EV uptake.

Let me turn to points raised during the debate. The noble Lord, Lord Davies of Brixton, raised the issue of public sector pensions. It cannot be overstated how much the Government value the work of all public sector staff. Public sector pension schemes are mainly defined benefit schemes and are among the most generous schemes available. The tax relief offered on pension contributions is expensive, costing the Exchequer £67.3 billion in 2020-21, with around 58% relieved at higher and additional rates. The annual allowance affects only the highest-earning pension savers. The Government estimate—

[Lord Davies of Brixton (Lab)]

Whoever wrote the brief clearly assumed I was going to talk about public service pensions, but I conspicuously did not mention them, as they are not relevant to this Bill. I do not want to dump an official in it, but I did not raise that issue; I raised a completely separate issue.

[Lord Harlech (Con)]

I thank the noble Lord for the intervention. I will have to go back and check Hansard. I heard him raise pensions in general but also public sector pensions, but if I am wrong, I apologise, and I stand to be corrected.

All noble Lords raised the issue of the personal tax thresholds. Our mantra throughout this process has been to make sure that those with the broadest shoulders carry the most weight, which is the fairest approach to take. The changes to personal tax ensure that, although we are asking everyone to contribute a little more towards sustainable public finances, we do so in a fair way, with the better off shouldering a greater burden.

We have tried to balance the needs of the country as a whole with the need to protect the most vulnerable. However, as I mentioned, we must continue to improve the health of our public finances, which is why the personal allowance has been frozen. The changes for most will remain small, with the average taxpayer paying only an additional £38 in income tax and NICs by 2028, and the personal allowance will still be £2,150 higher in April 2028 than it would have been if it had been uprated by inflation since 2010.

The noble Baroness, Lady Bennett of Manor Castle, raised the issue of a wealth tax. The Government’s priority is restoring stability, but we will try to do this in a fair and compassionate way which protects the most vulnerable and ensures that those on higher incomes pay a fair share. The Autumn Statement reduces the additional rate threshold, which will raise revenue from the top 2% of taxpayers. The income tax and gains tax systems are also being reformed to reduce the generosity of certain allowances, which will bring the treatment of investment income and capital gains closer in line with employment income.

This year, the Government raised the threshold at which workers start paying national insurance contributions to £12,570 and have reversed the health and social care levy. This comes on top of the energy price guarantee to support households with their energy bills over the winter, and a further £37 billion of support for the cost of living.

The noble Baroness, Lady Kramer, raised council tax. The Government expect that local authorities will exercise restraint in setting council tax, balancing the extra income for local services against the tax burden on residents for the cost of living pressures. Local authorities have the flexibility to design their own working-age local council tax support schemes to protect their most vulnerable residents. The UK does not have a single wealth tax but has several taxes on assets and wealth. As set out by the Wealth Tax Commission report in December 2000, the UK’s taxes on wealth are on a par with those of other G7 countries.