§ I turn to the incidence of direct taxation upon individuals. As last year, I propose no change in the standard rate of Income Tax or in the Surtax rates. I do, however, propose to make a change in the way the standard rate is expressed. This would in any event have been necessary as from next year, because of decimalisation. To do it this year will help us to acclimatise, and will also enable me to stress a point to which I attach considerable importance. The standard rate of 8s. 3d. will therefore become 41.25 per cent.—its exact equivalent; and the 6s. reduced rate will become 30 per cent. As part of this change I would greatly have liked to separate off the effective earned income rate, that is to say to show the actual percentage of tax paid on earned income. This would be a good deal easier to understand than the present system under which the effect of the standard and reduced rates is substantially lessened by the earned income relief. Unfortunately, despite intensive effort, this proved to be quite impossible without imposing a very considerable administrative burden on the Inland Revenue. This is because of the complicated impact upon allowances—of which there are many—of incomes which are partly earned and partly—perhaps 1031 only in very small part—unearned. This I fear is typical of many aspects of our tax system. An apparent simplification, unless allowed to be either expensive or unfair, cannot be achieved except at an unacceptable administrative cost.
§ I nevertheless believe that it is desirable to use the decimalisation change-over to express more forcefully to most people what is their real rate of Income Tax. Many are convinced that they pay much more than they do, believing the rate on overtime, for example, to be at least 8s. 3d. in the £, if not more. This is not the case. Up to an earned income of £4,005 a year, or £77 a week, the standard rate is abated by the two-ninths earned income allowance. This brings the standard rate of 41.25 per cent. down to just over 32 per cent..32.08 per cent. to be exact. So long as his total earned income does not exceed £77 a week, it is therefore impossible for the ordinary man to pay as much as a third in tax on any part of his earnings, whether regular or overtime. If he thinks he is, he is deceiving himself. Apart from some special cases, this is the maximum marginal rate of tax for earned income up to that level. The average rate is of course lower—it may be much lower. At £35 a week for a married man with two children under 11, it is 18 per cent. I would like to see these rates of tax lower, but this is not a reason for exaggerating the present burden.
§ I referred last year to the fact that, whatever the evidence or lack of it, high direct taxation is widely believed to be disincentive, and that this could have a stultifying effect upon the development of the economy. That was one reason why, with considerable difficulty, I avoided increases in direct taxation last year, and why I am not proposing any now. Indeed, I have carefully considered whether, even in a year as difficult as this, it would be justifiable for incentive reasons, and for the encouragement of savings, to mitigate slightly the rates of tax on high earned incomes.
§ I have come to the conclusion that, desirable though such a reduction would in many ways be, I must concentrate this year on more vulnerable sections of the community. I would emphasise, however, that I regard an increase in one of 1032 the earned income allowances as a high priority for a later Budget.
§ I follow this by saying that the first income tax concession I have to announce is one which I foreshadowed last year, the desirability of raising the threshold. I believe that the level of income at which tax starts to be paid is too low. In present circumstances I cannot afford to pay too high a cost for a threshold change, and this rules out a straight increase in personal allowances with benefits all the way up the scale.
§ I have, therefore, decided on a scheme which will take 1,100,000 people out of tax altogether, and significantly reduce the tax liability of another 600,000. Of the 1,100,000 who will be taken entirely out of tax, about 185,000 will be married men, about 500,000 will be earning wives, and about 415,000 will be single persons.
§ To achieve this result I propose to increase the single person's allowance—and, with it, the wife's maximum earned income allowance—by £35, from £220 to £255, and the married man's allowance by the same amount, from £340 to £375. At the same time, I propose that the two bands of income at present taxed at the reduced rates of tax—£100 at 4s. in the £ and £200 at 6s.—should be replaced by a single band of £260, all taxed at 30 per cent.
§ The maximum relief for those who remain liable to income tax will be £6 18s. For people who at present pay tax on more than £36 a year the benefit will taper off rapidly to 10s. People on the standard rate will be liable to a nominal increase of 1s. 3d. a year, or just over 1d. a month. This is not, I need hardly say, a result I have sought for its own sake. It is an inevitable result of concentrating limited benefits where they are most needed.
§ The cost of these changes will be £14 million in a full year and £10 million in 1969–70.
§ There are certain other concessions I am able to make. First, I propose to increase from £75 to £100 the additional personal allowance which is given to widows and widowers and to certain other people who have single-handed responsibility for a young child resident with them.1033
§ Second, in view of the increases in National Insurance retirement pensions which will be payable this autumn, I propose again to increase the income limits up to which elderly people of 65 or over qualify for age exemption. The income limits were last year increased to £415 for single persons and £665 for married couples. I propose to raise them for 1969–70 to £425 for single people and £680 for married couples; this will be broadly in step with the pensions increases which will be payable in 1969–70.
§ I propose a similar consequential change in income limit of a dependent relative up to which dependent relative allowance is given in full. The full allowance for maintaining an elderly or infirm relative is given at present if the dependant's income does not exceed £235. This income limit is based on the standard National Insurance retirement pension of £4 10s. a week, so that an individual maintaining an elderly relative whose only income is the standard retirement pension is entitled to the full dependent relative allowance. I propose to raise the dependant's income limit for 1969–70 to £245, broadly in step with the increased pension which will be payable this year.
§ I propose a further concession on what is called age relief to help elderly people living on a fairly modest income from their savings. This relief enables a taxpayer aged 65 or over whose total income does not exceed £900 to claim relief equivalent to the two-ninths earned income relief on his investment income. I propose to raise the £900 income limit to £1,000. I think it right in a Budget which as I shall show in a moment is designed to encourage saving to help people over 65 who are living on a modest income from past savings.
§ Taken together, these concessions will have a significant effect on the living standards of people who are particularly vulnerable to increases in taxation and the cost of living. The total cost in addition to the threshold scheme is £6 million in a full year, and £3 million in 1969–70.