Clause 1 - Income tax charge for tax year 2023-24

Finance (No. 2) Bill – in a Public Bill Committee am 9:30 am ar 16 Mai 2023.

Danfonwch hysbysiad imi am ddadleuon fel hyn

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

Photo of Esther McVey Esther McVey Ceidwadwyr, Tatton

With this, it will be convenient to debate clauses 2 to 4 stand part.

Photo of Victoria Atkins Victoria Atkins The Financial Secretary to the Treasury

Clause 1 legislates the charge for income tax for 2023-24. Clauses 2 and 3 set the main, default and savings rates of income tax for 2023-24 and clause 4 maintains the starting rate for savings nil rate band for tax year 2023-24.

Before I get into the meat of these clauses, it might help to remind hon. Members that, as I have already said, because some measures in the Bill have already been debated on the Floor of the House, many measures will not be debated here in this Public Bill Committee. There is no mystery as to why some clauses are not appearing.

Income tax is one of the most important revenue streams for the Government, expected to raise approximately £268 billion in 2023-24. These clauses are legislated annually in the Finance Bill. Clause 1 is essential; it allows for income tax to be collected in order to fund the vital public services on which we all rely. Clause 2 ensures that the main rates of income tax for England and Northern Ireland continue at 20% for the basic rate, 40% for the higher rate and 45% for the additional rate.

Clause 3 sets the default and savings rates of income tax for the whole of the UK. The starting rate in clause 4 applies to the taxable savings income of individuals with low earned incomes of less than £17,570, allowing them to benefit from up to £5,000 of savings income free of tax. Clause 4 will maintain the starting rate limit at its current level of £5,000 for 2023-24, in order to ensure simplicity and fairness within the tax system while maintaining a generous tax relief. Clauses 3 and 4 are important pillars of the Government’s savings strategy, because we wish to help those with low earned income to save.

In addition to the starting rate whereby eligible individuals 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. Savers can also continue to benefit from the annual ISA allowance of £20,000. Taken together, those generous measures result in around 95% of savers paying no tax on their savings income.

Finally, the Government’s efforts to encourage those on the lowest incomes to save include the Help to Save scheme, which provides savers with a 50% bonus on their savings. The Government have recently extended the scheme while we consult on longer-term options to continue to support low-income savers, which is a good example of our commitment to levelling up opportunity across the whole country. I hope that Committee members feel able to promote the scheme to their constituents, and I encourage them to do so. We are committed to helping people of all incomes, at all stages of life, to save. Recent reforms, coupled with the significant increase to the starting rate limit in 2015, mean that the taxation arrangements for savings income are very generous.

Photo of James Murray James Murray Shadow Financial Secretary (Treasury)

It is a pleasure to serve on this Committee with you as Chair, Ms McVey. As we heard from the Minister, clause 1 imposes a charge to income tax for 2023-24. It is a formality in every Finance Bill, which provides the legal basis for Parliament to impose an annual income tax. Of course, we will not oppose that clause. Clause 2 provides the main rates of income tax for 2023-24, which will apply to the non-savings, non-dividend income of taxpayers in England and Northern Ireland. As the Minister said, the rates include the 20% basic rate, the 40% higher rate and the 45% additional rate.

With respect to the other nations of the UK, the explanatory notes make it clear that income tax rates on non-savings, non-dividend income for Welsh taxpayers are set by the Welsh Parliament. The UK main rates of income tax are reduced for Welsh taxpayers by 10p in the pound on that income. The Welsh Parliament sets the Welsh rates of income tax, which are then added to the reduced UK rates. Income tax rates and thresholds on non-savings, non-dividend income for Scottish taxpayers are set by the Scottish Parliament. We do not oppose clause 2. However, the income tax rates within it will interact with the level of personal allowance and relevant thresholds to determine how much income tax people pay. I will briefly ask the Minister about them.

Committee members will remember that in the March 2021 Budget, and in the Finance Act that followed, the then Chancellor—now Prime Minister—froze the basic rate limit and personal allowance for income tax for four years. In the recent autumn statement 2022, and in the following Finance Act, the current Chancellor extended those freezes by a further two years. That means that the current 2023-24 tax year is the second of a six-year freeze. The Office for Budget Responsibility has made clear, in its March 2023 economic and fiscal outlook, that the Government’s six-year freeze in the personal allowance will take its real value in 2027-28 back down to the level in 2013-14. When the Minister responds, I would be grateful if she could confirm whether she accepts that conclusion from the Office for Budget Responsibility.

As we have heard, clause 3 sets the default rates and saving rates of income tax for the year 2023-24. Clause 3 specifically sets the default rates that will apply to the non-savings, non-dividend income of taxpayers who are not subject to the main rates of income tax, Welsh rates of income tax or Scottish income tax. It also sets the savings rates that will apply to savings income of all UK taxpayers. We will not be opposing the measure.

Finally, clause 4 sets the starting rate limit for savings for 2023-24, which remains at £5,000, as we heard. As we know, the starting rate for savings can apply to an individual’s taxable savings income, which includes—but is not limited to—interest on deposits with banks or building societies. The extent to which an individual’s savings income is liable to tax at the starting rate for savings, rather than the basic rate of income tax, depends on their total non-savings income, which can include income from employment, profits from self-employment, pensions income, and so on.

If an individual’s non-savings income is more than their personal allowance plus the starting rate limit for savings, the starting rate is not available for that tax year. Where an individual’s non-savings income in a tax year is less than the personal allowance plus the starting rate limit, their savings income is taxable at the starting rate up to the starting rate limit. We will also not be opposing clause 4.

As I have set out, we will not be opposing any of the four clauses in this first grouping of the debate, but I look forward to the Minister’s response on my specific point about the Office for Budget Responsibility.

Photo of Esther McVey Esther McVey Ceidwadwyr, Tatton

I call Dame Angela Eagle.

Photo of Angela Eagle Angela Eagle Llafur, Wallasey

Thank you very much, Ms McVey. I think that the comment that I made earlier about this being your first Committee was about it being your first Committee that included me, not it being your first Committee completely. I am sure that we have an extremely experienced Chair, or you would not have been put in the position of having to Chair a Bill Committee where the Bill is this thick. I think that everyone can have great confidence in your ability to take us through the proceedings today.

I want to raise some questions for the Minister about levels of income tax, so that she could perhaps talk to us about the Government’s thinking. We have here—it is not explicitly referred to in the legislation, but it is there nevertheless—the fact that the thresholds have been frozen until 2028. That effectively drags many more people into paying these rates of income tax, at whatever level. It is called “fiscal drag” in the business.

When we analyse precisely what the Government are doing, we see that, without the headline rates of income tax being affected, 8 million people will be forced to pay higher levels of income tax the threshold has been frozen. That is particularly exacerbated in an era of high inflation, when more people will get dragged into paying higher levels of income tax because prices are going up yet thresholds are frozen.

This has been estimated to be the biggest stealth tax put into place since the doubling of VAT in the early 1990s. Looking at the situation that is expected to prevail in 2027-28—on the plans that the Government are putting forward—8 million people will be affected by fiscal drag. In other words, they will have their income tax increased even though the headline rates have stayed the same. That will mean that one in five taxpayers—20%—will actually be paying the higher rate, at 40% or above, as a result of this Government’s stealth tax.

That is at a time when people’s incomes are being squeezed from all directions. Many of us know that we have a cost of living squeeze that is driving millions to food banks, having to make the choice between heating and eating, and sometimes not being able to do either satisfactorily because of the amount of cash available at the end of a working week to buy essentials.

I will demonstrate just how many people have been dragged into the higher rates of tax by the stealth tax manoeuvre that the Government have turbo-charged for the next few years. In the 1990s, no nurses at all paid the higher rate of tax, and only 5% to 6% of machinists or electricians did. The Minister might have noticed information from the Institute for Fiscal Studies on the front page of quite a lot of newspapers this morning that demonstrates that the situation has totally changed. One in four teachers and one in eight nurses will be higher-rate taxpayers by 2027—presumably, that is before their disputes have been settled one way or the other. That is bad in itself, because it is a stealth tax.

The Government are not levelling with people about the rates of tax. Trying to make it look as though tax rates are staying the same while dragging millions of people into higher-rate tax is not transparent policymaking; it is a stealthy way of raising money. The Government have therefore managed to deliver a dubious double whammy of a massively increased tax burden—the highest in 70 years—and a range of failing public services. The gathering view, which we all heard on the doorsteps across the local elections, is that nothing works in this country any more, there is a problem with everything and the Government are failing to deliver.

I suspect that that dubious double whammy caused some of the results that we saw in the local elections. I wonder what the Minister might have to say about being more transparent and up-front about the massive stealth tax rises indicated by this level of fiscal drag.

Photo of Craig Whittaker Craig Whittaker Assistant Whip 9:45, 16 Mai 2023

The points that the hon. Lady makes are valid. Another valid point is this: while it is true that more people are paying tax, is it not also true that more people are earning a lot more money than they used to?

Photo of Angela Eagle Angela Eagle Llafur, Wallasey

I am all in favour of people earning more money, but it is important that they are doing so in in real terms. Someone can earn more money in terms that do not take account of inflation, but they can actually be earning less. If the right hon. Gentleman talked to people and asked them whether they were any better off than they had been when this series of Governments came into office in 2010, he would find that people’s nominal salaries and wages might be higher in some cases, but a lot of them are worse off in reality because those earnings have not kept up with inflation. The point about the tax burden and fiscal drag makes that much worse.

Photo of Kirsty Blackman Kirsty Blackman Shadow SNP Spokesperson (Cabinet Office)

On the point about how well-off people feel, does the hon. Member know that in 2008, 12% of people in the UK believed that their children would be worse off than them? Now, IPSOS has found that that number is up to 41%—some 41% of people now believe that their children will be worse off than them. Does she feel that that needs to be tackled, and that the Government are not taking it seriously?

Photo of Angela Eagle Angela Eagle Llafur, Wallasey

I agree, and the hon. Lady makes a valuable point. For societies to advance in a sensible, healthy way, succeeding generations must have optimism about things changing for the better. That also tends to lead to happier societies with people who are more likely to innovate and go the extra mile. We all want that so that we can rebuild prosperity for our nation in the years ahead in the new, more isolated circumstances in which we find ourselves, as a result of which we must remake the economic foundations of our country. I wonder how much fiscal drag helps us to do that, and I am interested to hear the Minister’s observations on how that approach will help.

There are other undesirable effects of threshold freezes of the kind encompassed by clause 1, including very high marginal tax rates for people in particular circumstances. We know from the Prime Minister’s tax return that he effectively pays 22% on his millions of earnings every year, if one combines the income tax that he pays with the way that he takes out his money through capital gains and in other areas. However, given the present tax thresholds and fiscal drag, there are people who will face marginal tax rates of 45% and 60%, which are very high—much higher than those that the Prime Minister faces.

The Treasury Committee is so concerned about that that we have begun an inquiry into spiky marginal tax rates and cliff edges. As you will know, Ms McVey, from having been Secretary of State for Work and Pensions, cliff edges and high marginal tax rates can often combine to create even greater losses of income. That is a disincentive to work harder, get more hours and move jobs when the increased wage may not compensate for the higher marginal tax rate, or a combination of the higher marginal tax rate and the cliff edge for a particular allowance. When we took evidence a few weeks ago, we discovered a marginal tax rate combined with a cliff edge that was over 100%.

There are issues surrounding the £50,000 threshold, at which point high earners start having child benefit clawed back. That has remained unchanged. It has not gone up; it is another frozen threshold. That is dragging far more people into the means test for child benefit than even the Conservative Chancellor George Osborne—we can say his name now, as he is no longer a Member of this House—intended when he introduced the policy. The Government should be aware of the combined effect of fiscal drag and unindexed rates on real people’s choices.

Freezes are a stealthy and arbitrary way to raise tax revenues. They often have a bigger impact on household incomes than more eye-catching discretionary measures do. They are particularly expected to have an impact on lower earners. By 2028, someone earning £20,000 will be £1,165 poorer under the current fiscal drag system than they would if income tax had been raised by 1%. There have been various calculations of how many pennies this stealth tax raises on the up-front rate of income tax, and they range from 3p to 4p per £1. I hope that the Minister will confirm that and try to justify why on earth the Government are raising money in that way, rather than being more transparent and up-front about rates of income tax. What will they do about the high marginal rates that the fiscal drag and frozen threshold system is landing our entire structure with? It is distorting the structure and making it very difficult to justify much of how it works for the future.

Photo of Rob Butler Rob Butler Ceidwadwyr, Aylesbury

I am interested in what the hon. Lady is saying. Will she clarify the latter point about the increase in the rate that would have been necessary had it not been frozen? Is she saying that she would rather the basic rate of income tax had been put up by 3% or 4%, such that lower-paid workers—nurses, for example, to whom she has referred—who are in the lower tax bracket would pay more tax? That seems to be the logical end point of what she has suggested.

Photo of Angela Eagle Angela Eagle Llafur, Wallasey

I am not suggesting any policy—far be it from me to do so from this side of the House. I am a mere Back Bencher, and it is not for me to make tax policy from the Opposition Back Benches. I am merely pointing out some problems that the choices that the Government appear to have made with this stealth tax are causing real people out there.

The problems are exacerbated by high marginal rates, and by very difficult and bad incentives that are quite hidden. That is why I am raising some of them here—I am attempting to draw attention to them to see whether the Minister has a response. If the Government are working on those areas, I am trying to find out what they aim to achieve by doing things this way. That is precisely what these Standing Committees are about—one gets to talk in more detail about choices that are made.

The hon. Gentleman must not imagine that I am putting forward a completely costed, different alternative, because this is not the place or time to do that. I am pointing out some of the problems, about which there is cross-party concern. I am not even making highly party political points. Far be it from me to do so—it is too early in the morning for me to do too much of that—but there are issues that we need to surface so that we can hear the Government’s official response.

I fear that we are driving into a cul de sac that will cause more problems than it solves, particularly in the interaction of the income tax system with a range of benefits, not only for the very low paid, but for medium earners. That is not being properly talked about, so by raising the matter at this point in the Bill, I am trying to get a handle on the Government’s thinking. I look forward to listening to what the Minister has to say about it, and perhaps even intervening further if she says something that piques my interest.

Photo of Victoria Atkins Victoria Atkins The Financial Secretary to the Treasury

In that case, I will try to be extremely dull. I am genuinely grateful to the hon. Lady for her questions. If I may take issue with her challenge that this is somehow hidden or a stealth tax, we debated these thresholds in the previous Finance Bill in the autumn. My right hon. Friend the Chancellor was very clear in his statement and in the following debate, as well as during the consideration of the Bill, about the difficult decisions, and we very much include the threshold decisions in that category. We were up-front and transparent about what we had to do to address some of the underlying issues we face in the economy.

I do not for a moment underestimate the hon. Lady’s intentions in raising the matter, but I must push back on the idea that this is somehow being hidden. Indeed, I remember being asked about it on many occasions both in this place and, dare I say it, on media rounds—understandably so, because this matters to people.

There is one point of agreement across the House, however, and that is the impact of inflation on people’s take-home pay. That is why the Prime Minister has set it as his first of five priorities to halve inflation by the end of this year, because it hurts all of us, but it hurts the poorest in society the most. We have heard the ongoing debate about food inflation, and none of us wants to see the difficult situations that people on the lowest incomes are finding themselves in. That is why the Treasury is doing everything that we can to support the Bank of England, which is of course operationally independent, in lowering the rate of interest.

The hon. Member for Ealing North asked me about the OBR. I am happy to quote the Chancellor, who has said in relation to the OBR’s figures overall that we respect them. It is an independent forecaster, whose job it is to make a forecast. As we all know, however, and as we have seen very recently with the Bank of England, forecasts are exactly that—forecasts. They can change, so we are working to support the Bank of England in its work. We respect the OBR, but fundamentally we are trying to ensure that the lowest paid receive as much of their income without having to pay any tax as we can afford as a country.

That is why we are so proud of the fact that we have been able to increase the personal allowance in taxation and national insurance to £12,570 per year. That means that we can earn around £1,000 a month without paying a penny in tax or NI on it. Not only will that help the very poorest in our constituencies to manage the cost of living, but it will build the economy as a whole. We want to help people to keep more of their money as they move up the income scale.

My right hon. Friend the Member for Calder Valley made an interesting point about putting some of the figures that we have heard in context. Some of the groups of people that we have heard about are earning more, and that context is important. Of course, we acknowledge the impact that inflation is having. None the less, we have seen wage increases over the last decade. We are very proud of the significant work that we have done to introduce and supplement the national minimum wage and national living wage. Indeed, in the Budget my right hon. Friend the Chancellor set out our plans to increase them. That will have a real impact on those who are on the lowest wages.

In terms of what this means nationally, it is estimated that more than 3 million people will be taken out of tax by 2023-24, compared with what would have happened if the personal allowance had risen with inflation from 2010-11. That means that as a result of our policies, we have been able to take more people out of tax completely. Indeed, 30% of individuals do not pay tax as a result of the personal allowance. It remains one of the most generous internationally, and the UK higher rate threshold is still high enough to protect the vast majority of people from paying the higher rate of income tax. Around 80% of taxpayers pay the basic rate. Indeed, average median earnings for an employee are £28,000 a year—well below the higher rate threshold of £50,270.

Photo of Angela Eagle Angela Eagle Llafur, Wallasey 10:00, 16 Mai 2023

I assume that those figures are for now. Is there a calculation of where fiscal drag will have left them after 2027-28? The figures will undoubtedly go down, especially if inflation persists for any length of time. It is 10% now, which means that anyone who is within 10% of the next threshold will go over it this year.

Photo of Victoria Atkins Victoria Atkins The Financial Secretary to the Treasury

The hon. Lady has hit on exactly the point. We have to be so careful with forecasts, because there are so many variables. As she has identified, inflation is one of them. Please do not think that I am speculating about what may or may not be in future fiscal events, but if there are changes to the rate of national living wage, for example, that will have an impact. There are many variables, and that means that our figures are both costed from a Treasury perspective and examined by the OBR. We very much stand by the figures set out in the autumn statement and as part of Budget considerations in the spring.

Photo of Angela Eagle Angela Eagle Llafur, Wallasey

The Office for Budget Responsibility has said that the frozen thresholds will drag 2.1 million people into the higher rate of tax, raising £26 billion a year, which is the equivalent of 4p on the basic rate. One presumes that that is net of all the other things that the Minister is talking about.

Photo of Victoria Atkins Victoria Atkins The Financial Secretary to the Treasury

The shadow Minister asked that question. We respect the work of the OBR, and of course we understand that it is an independent forecaster. However, as I said, we have never shied away from the fact that this a difficult set of circumstances. I know it is not for the hon. Lady to set tax policy on behalf of her Front-Bench team, but my hon. Friend the Member for Aylesbury posed an interesting question: what is Labour’s alternative? Outside observers may wish to take that into account.

We believe in sound money, and the rate of debt interest that we are paying each year—some £120 billion—is money that we would much rather spend on our NHS, police and defence. However, precisely because of our extraordinary efforts to protect our constituents throughout the pandemic, to help Ukraine and to provide support through the cost of living crisis that has emerged from that, we are having to take these difficult decisions in a fiscally responsible way.

Photo of Ashley Dalton Ashley Dalton Llafur, West Lancashire

It is a pleasure to serve under your chairmanship, Ms McVey. This is my first Public Bill Committee, so I am definitely the baby in the room. There is just one thing I would like the Minister to clarify. When she was responding to the point raised by my hon. Friend the Member for Wallasey about the OBR projections, she said very clearly that she respected and understood them. However, does she agree with them?

Photo of Victoria Atkins Victoria Atkins The Financial Secretary to the Treasury

The hon. Lady will know that I have just answered her shadow Minister’s question on that. I will quote the Chancellor:

“I respect the OBR’s figures. The OBR is an independent forecaster”— the hon. Lady must use the correct terminology—

“it is their job to make a forecast.”

However, I do observe that forecasts can change, which is why these variables are so important.

Question put and agreed to.

Clause 1 accordingly ordered to stand part of the Bill.

Clauses 2 to 4 ordered to stand part of the Bill.