Finance Bill (First sitting)

Roger Mullin Excerpts

Thursday 30th June 2016 Public Bill Committees

Basic rate limit for 2017-18

[Roger Mullin (Kirkcaldy and Cowdenbeath) (SNP)]

I beg to move amendment 3, in clause 2, page 2, line 4, at end add—

“(3) The Chancellor shall assess the effect on taxation revenue of increasing the basic rate limit in line with the Consumer Prices Index for 2017-18 and by no more than increases in that index until 2021-22.”

It is a great pleasure, Sir Roger, to be with you again in this Public Bill Committee. Last year I served on this very same Committee, and it led to one of the great interventions, which was of great assistance to me at the time. I hope that there is not the same occurrence this time. I can see that some hon. Members are rather confused; I will explain it to them later.

Some hon. Members will be aware that I raised a point of order in the House about whether, in the current circumstances—after the referendum—we should be proceeding as we are with the Bill. To my mind, more important things have occurred that need debating. None the less, we are here. I intend to adopt the rather rare, for me, practice of speaking in this Committee only when I have something to say. Our contributions may be slightly fewer than they were in the past, but they will be no less worthy—[Interruption.] How helpful I am.

This is a rather simple amendment, which we will not press to a Division, probing the Government on the proposed increase in the basic rate limit. Particularly at a time of austerity, when people are having to make such great sacrifices, the decision to give this boost to those with significantly above-average earnings strikes us as worthy of further explanation from the Government. The amendment is a sensible proposal that the Government report on and model what would happen if the rise in the basic rate limit was restricted to consumer prices index levels year after year. It is so self-explanatory that I need not detain the Committee any longer.

[Mr Gauke]

It is a great pleasure to respond to the hon. Gentleman. I note that he will speak only when he has something to say—an approach that he contrasted with that of the previous year. I feel that that is a little harsh on his contributions last year, which were always valuable and welcomed by the Committee. No flies on him; that is the recollection of one or two of us.

Before turning to the amendment, let me say a word about clause 2, which sets the income tax basic rate for 2017-18. The change takes a significant step towards meeting my party’s manifesto commitment to increase the threshold at which people pay the higher rate of tax. It will ensure that the Government continue to encourage those who want to progress, while lifting over half a million people out of the higher tax band altogether. This Government have already made significant progress on cutting taxes for working people and ensuring that those on the very lowest incomes pay no income tax at all.

In addition to supporting the low-paid, the Government are committed to supporting those on middle incomes who want to progress. The number of families who have to pay the higher rate of income tax has grown almost without fail over the past three decades. Upon its introduction in 1988, it was paid by around one in 18 taxpayers. Without the action taken at Budget 2016, it was projected to rise to one in six—that is more than 5 million individuals paying income tax at 40%. That is why we committed to increasing the point at which the higher rate of income tax is applied to £50,000 by the end of this Parliament. Summer Budget 2015 took the first steps to meeting that commitment, increasing the higher rate threshold from £42,385 in 2015-16 to £43,000 from April this year.

This Finance Bill goes further. Clause 2 will increase the basic rate limit from £32,000 in 2016-17 to £33,500 in 2017-18. That is the amount of income on which the 20% tax is due. The income tax higher rate threshold, which is the sum of the personal allowance and the basic rate limit, will therefore increase from £43,000 in 2016-17 to £45,000 in 2017-18. Above that level, 40% tax is due. That increase to the higher rate threshold will be the biggest above-inflation cash increase since it was introduced by Lord Lawson in 1988-89. By 2017-18, some 585,000 fewer individuals will be paying the higher rate of tax than did in 2015-16—a reduction of more than 10%. As a result, a higher number of taxpayers on modest incomes will benefit from a lower rate of tax, including our most highly qualified and experienced nurses and teachers.

The amendment requests that the Government report on the impact of increasing the basic rate limit in line with inflation, rather than increasing the basic rate limit as set out in clause 2. I can confirm that the cost to the Exchequer of increasing the basic rate limit to £33,500 was published in the 2016 Budget. As such, the relevant information is already freely available to the hon. Gentleman and to members of the public. I can also confirm, however, that not implementing the clause would mean increasing the income tax paid by some families by £220 in 2017-18, dragging more middle earners into paying the higher rate of tax and breaking an important manifesto commitment that the British people elected the Conservative party to deliver. I urge the Committee to reject the amendment.

The clause will allow the Government to make progress on our commitment to increasing the threshold at which people pay the higher rate of tax, while supporting those on middle incomes who want to progress. It will ensure that there are more than half a million fewer higher rate taxpayers in 2017-18, compared with 2015-16, and will cut the income tax bill of millions of taxpayers on modest incomes. I commend the clause to the Committee.

[The Chair]

Mr Mullin, you now have the opportunity to respond. You must also indicate whether you wish to press your amendment to a vote or withdraw it.

[Roger Mullin]

I beg to ask leave to withdraw the amendment.

[Rob Marris]

I wanted to speak on stand part, not to the amendment.

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[The Chair]

Now let us go back one pace, which we should not do but will.

[Roger Mullin]

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 2 ordered to stand part of the Bill.

Clause 3

Personal allowance for 2017-18

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

[Mr Gauke]

Clause 3 sets the income tax personal allowances for 2017-18. The change will help working people to keep more of what they earn, and it is a big step towards keeping our manifesto commitment to a £12,500 tax-free personal allowance by the end of the Parliament. The Government’s record on personal allowances is already strong. Over the previous Parliament, the personal allowance increased by more than 60%, from £6,475 in 2010-11 to £10,600 in 2015-16. Our reforms have already taken 4 million people out of paying income tax altogether.

The Government want to go further by increasing the personal allowance to £12,500 by the end of the Parliament and by ensuring that no one working 30 hours a week on the national minimum wage pays any income tax at all. Clause 3 marks another significant step towards our meeting those commitments by raising the personal allowance from £11,000 in 2016-17 to £11,500 in 2017-18 —an increase of £500. The change made by the clause will ensure that 30 million people pay less tax in 2017-18 than at the start of this Parliament, with 1.3 million taken out of paying income tax altogether. Therefore, by April 2017, a typical basic rate taxpayer will pay over £1,000 less income tax than when we took office six years ago.

Clause 3 builds on the Government’s determination to support those in work by ensuring that people can keep even more of the money they earn. It takes a significant step towards meeting our commitment to raise the personal allowance to £12,500 and means that more of the lowest-paid are taken out of paying income tax altogether. I commend the clause to the Committee.

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[Roger Mullin]

This is a very important move by the Government, and we broadly welcome it for two main reasons. First, as the Minister has already rightly indicated from comments by people such as Professor Mirrlees and others, ordinary savings have been overtaxed for many years. Ordinary savings are increasingly important for a lot of people who have lived their working lives on modest incomes. For example, there was a demonstration yesterday by Women Against State Pension Inequality—the so-called WASPI women, many of whom have very modest savings. The measure is of some assistance, albeit small, to many of the people who are in the most vulnerable of circumstances. That must be welcomed.

Secondly, there is always the dilemma of simplification. When moving towards something that is relatively sophisticated, trying to simplify it normally introduces some hazards, so I am particularly interested in the Minister’s response to the questions posed by Labour Front Benchers in that regard. On the whole, we think the right thing is being done, so we will support it.

[Mr Gauke]

I am grateful to both hon. Gentlemen for the points raised on these measures, and I am grateful to the hon. Member for Kirkcaldy and Cowdenbeath for his strong support. He is absolutely right on the concerns of the overtaxing of ordinary savings. The hon. Member for Wolverhampton South West essentially raised two concerns—one about cliff edges and one about circumstances that could involve a substantial amount of income on which no tax is paid. My first point is that both circumstances are likely to be pretty unusual.

First, the allowance has been set at a level at which 95% of savers will not have tax to pay on their savings income, so the question of a cliff edge simply does not apply for the majority of savers. Had we not designed it in such a way, and had there been a differential treatment in terms of the size of allowance for higher rate taxpayers versus basic rate taxpayers, I suspect the Committee would criticise us for the fact that the largest beneficiaries, in terms of the cash benefit, would be higher rate taxpayers and not basic rate taxpayers.

The design of the personal savings allowance means that no one can gain by more than £200 a year, regardless of their circumstances, which is an important means to ensuring that there is no disproportionate benefit to higher rate taxpayers. That is why there is a difference. Our concern is that trying to address the cliff-edge problem would add a degree of complexity to the tax system that would be unfortunate and disproportionate, given the nature of the issue that has been identified.

Secondly, I certainly do not deny that someone could have £22,000 of tax-free income with a combination of all the various policies in this area. That is absolutely true if we take into account the tax-free personal allowance, the starting rate for savings, the personal savings allowance and the dividend allowance. However, in reality that is an uncommon set of circumstances that we believe will be extremely rare. Again, it is not apparent to me how we could try to address that problem without adding considerable further complexity—for example, a system in which, if someone made use of one allowance, they could not use another allowance—and we would be rightly open to criticism for adding that unnecessary complexity to the system.

We are trying to end the distortive effects that we have had up to now, to come back to the comments of Professor Mirrlees and others on the effect of the existing taxation system on savings. That is why we have taken these decisions. I hope that that helps the Committee and that, notwithstanding the perfectly fair points made by the hon. Member for Wolverhampton South West, it will support these clauses.

Clause 4 ordered to stand part of the Bill.

Clause 5

Rates of tax on dividend income, and abolition of dividend tax credits etc

[Roger Mullin]

I beg to move amendment 4, in clause 5, page 8, line 28, at end add—

“(12) The Chancellor of the Exchequer shall commission a review of how the changes to the tax on dividend income implemented by this Act affect directors of micro-business companies, to include—

(a) the impacts across the distribution of directors’ net income;

(b) whether company failure rates have been affected; and

(c) whether the law could be amended to minimise the impact on directors with low income.

(13) The Chancellor shall report to Parliament about his findings within six months of the passing of this Act.”

[The Chair]

With this it will be convenient to discuss the following:

Clause stand part.

Government amendments 127 to 133.

That schedule 1 be the First schedule to the Bill.

[Roger Mullin]

I have been very co-operative thus far, but we now come to an amendment that we feel very strongly about. Sir Roger, I need some advice on matters of procedure. We have very recently become aware of further information that we want to explore, so we will probably want to return to this amendment on Report, rather than fully deal with it here.

[The Chair]

In that case, let me advise the hon. Gentleman that, although it is perfectly proper to debate the amendment now, if he wants to return to it on Report he will need to withdraw it. If it is voted on here, the likelihood is that the Chairman of Ways and Means—it is not in my gift—will not select it for further debate. The trick is to talk about it now, withdraw it and see whether you can get a second bite of the cherry.

[Roger Mullin]

I am indebted to you once again, Sir Roger, for your very helpful explanations of the wonderful procedures of this House.

Let me explain, rather more briefly, precisely what our concerns are. Our concerns are predominantly about the effect that the clause will have on microbusinesses—businesses that employ between one and nine people. I was really surprised to find out that HMRC does not model for different sizes of businesses in this area. I believe it has confirmed that in discussions. According to research that has been done by accountancy companies such as Crunch, there will be harm, or potential disbenefits, to some people who get very modest incomes indeed from running very small businesses. We want to ensure that, in encouraging proper taxation and an entrepreneurial climate, we do not unwittingly, through unintended consequences, put at hazard very new microbusinesses that are earning very modest sums of money indeed.

As I said, information is coming our way that we would like to explore further and do modelling on, so our intention is to withdraw the amendment and return to it on Report. I will leave my comments there.

[The Chair]

The withdrawal will come at the appropriate moment. [Interruption.] He really cannot have it all ways. For the moment, the question is that the amendment be made. It is even possible that another Member might wish to move it.

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[Mr Gauke]

I am grateful for the hon. Lady’s concern about my back, which is appreciated.

I want to reiterate a point I made earlier, which is that one behavioural impact of the current tax system is that it tends to encourage people to incorporate. The tax system tends to favour incorporated microbusinesses over those that are unincorporated. It is not obvious that that should happen.

The other point, of course, is that we continue to be engaged with organisations such as the FSB, and the Government have done a lot to support microbusinesses. However, one behavioural effect in the light of what has happened with corporation tax reductions, which I strongly defend, is that people who otherwise would not incorporate have been doing so. Often they face burdens and form-filling that they probably do not want, but they incorporate for an understandable reason: to take advantage of a more beneficial tax regime. However, I think that we should seek to rebalance that, if I may put it that way.

I, too, have met Jason Kitcat of Crunch Accounting. We have looked at his analysis and there are some complicated issues with regard to the impact of the changes. However, I reiterate that the dividend tax remains progressive overall. Those with higher incomes will pay more tax on their dividends than those on lower incomes. Achieving a perfectly smooth result would require a more complex system, and that is why we have not gone down that route. However, we continue to be engaged. I hope that I have provided the Committee with some reassurance.

[Roger Mullin]

I thank the Minister for his comments, some of which have been helpful, although they have not fully persuaded me that the Government have fully thought through the impact on microbusinesses. There are many reasons why very small business operators might choose to move from being unincorporated to being incorporated. For example, if such businesses have wide seasonal fluctuations in income, it is one way of adapting their way of taking income out of the business—without having to take out a regular income in the traditional way. That is only one of many reasons why a company might make that decision.

I am grateful to the Minister for his explanation. Although I shall withdraw the amendment, I intend to return to the matter on Report. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 5 ordered to stand part of the Bill.

Schedule 1

Abolition of dividend tax credits etc

Amendments made: 127, in schedule 1, page 259, line 20, at end insert—

In section 651 (meaning of “UK estate” and “foreign estate”)—

(a) in subsection (4), for “680(3) or (4) (sums” substitute “664(2)(c) or (d) or 680(4) (sums not liable to tax and sums”, and

(b) in subsection (5), for “680(3) or (4)” substitute “664(2)(c) or (d) or 680(4)”.

In section 657 (tax charged on estate income from foreign estates), for “680(3) or (4)”, in both places, substitute “680(4)”.

In section 663 (applicable rate for purposes of grossing-up under sections 656 and 657), after subsection (4) insert—

(5) The aggregate income of the estate, so far as it consists of income within section 664(2)(c) or (d), is treated for the purposes of this section as bearing income tax at 0%.”

In section 670 (applicable rate for purposes of Step 2 in section 665(1)), after subsection (4) insert—

“(4A) The aggregate income of the estate, so far as it consists of income within section 664(2)(c) or (d), is treated for the purposes of this section as bearing income tax at 0%.”

In section 680 (income of an estate that is treated as bearing income tax)—

(a) in subsection (2) omit “(3) or”, and

(b) omit subsection (3) (sums treated as bearing tax at the dividend ordinary rate).

In section 680A (estate income treated as dividend income), in each of subsections (1)(a) and (4)(a), after “at the dividend ordinary rate” insert “or as bearing tax at 0% because of section 663(5)”.”

Amendment 128, in schedule 1, page 259, line 20, at end insert—

In section 854(6) (carrying on by partner of notional business: meaning of “untaxed income”)—

(a) omit the “or” at the end of paragraph (b), and

(b) after paragraph (c) insert—

“(d) income chargeable under Chapter 5 of Part 4 (stock dividends from UK resident companies), or

(e) income chargeable under Chapter 6 of Part 4 (release of loan to participator in closed company).””

Amendment 129, in schedule 1, page 265, line 31, at end insert—

( ) in paragraph (b), for “680(3)(b) or (4)” substitute “680(4)”, and”

Amendment 130, in schedule 1, page 265, line 39, at end insert—

‘( ) In section 498 (discretionary payments by trustees: types of tax to be included in trustees’ tax pool)—

(a) in subsection (1)—

(i) in Type 1 (tax at special rates for trustees on income not attracting tax credits), omit “2, 3 or”, and

(ii) omit Types 2 and 3 (tax at dividend trust rate on income attracting dividend tax credits), and

(b) omit subsection (2) (interpretation of Types 2 and 3).”

Amendment 131, in schedule 1, page 269, line 8, at end insert—

( ) the amendments in section 854(6) of ITTOIA 2005,”

Amendment 132, in schedule 1, page 269, line 9, leave out “sections 425,” and insert “section 425 except the amendment in section 425(5)(b), and the amendments in sections 498,”

Amendment 133, in schedule 1, page 269, line 33, at end insert—

‘( ) The amendments in sections 651 to 680A of ITTOIA 2005 (but not the repeal of section 680(3)(a) of that Act) and the amendment in section 425(5)(b) of ITA 2007—

(a) so far as they relate to income within section 664(2)(c) of ITTOIA 2005 (stock dividends), have effect in relation to stock dividend income treated as arising in the tax year 2016-17 or at any later time, and

(b) so far as they relate to income within section 664(2)(d) of ITTOIA 2005 (release of loans), have effect in relation to amounts released or written off in the tax year 2016-17 or at any later time.”—(Mr Gauke.)

Schedule 1, as amended, agreed to.

Clause 6

Structure of income tax rates

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

[Mr Gauke]

Clause 6 separates the rates of income tax that apply to savings income from the main rates of income tax. These changes ensure that the Government meet their commitment to guaranteeing that MPs representing constituencies in England, Wales and Northern Ireland are given the decisive say on any income tax rates that affect only their constituents. As hon. and right hon. Members are aware, earlier this year the Scotland Act 2016 received Royal Assent. It provides the Scottish Parliament with unprecedented powers over income tax, including the ability to determine the rates of income tax on earned income at the points at which those apply to Scottish taxpayers.

The fiscal framework agreed by the UK and Scottish Governments confirms that the powers will take effect in 2017-18. This means that from April 2017 Members of the Scottish Parliament will have the final say on Scottish income tax. As a matter of fairness, it is only right that, once these powers come into force, MPs in England, Wales and Northern Ireland are given the decisive say over rates of income tax that affect only their constituents.

The clause separates out the main rates of income tax into three distinct groups in order to meet this objective. The main rates will continue to apply to non-savings, non-dividends income, such as employment, pensions and property income, for taxpayers in England, Wales and Northern Ireland. The savings rates will apply to savings income of all UK taxpayers. The default rates will apply to a limited category of income tax payers who will not fall into either of these two categories; the category is made up primarily of non-residents and some trustee income. This will mean that, from April 2017, changes to the main rates of income tax will no longer affect Scottish taxpayers. Changes to the savings rates or default rates will continue to remain a reserved matter for the UK Government, in line with the recommendations of the Smith commission.

The clause will meet the Government’s commitment to ensuring that English votes for English laws applies to income tax. As a result, following the Finance Bill 2017, MPs representing constituencies in England, Wales and Northern Ireland will have a decisive say on the main rates of income tax that affect only their constituents.