HC Deb 21 March 1972 vol 833 cc1382-90

Tax-Credit System

Before I come to my final proposals I must refer to one other important area of long-term reform. Last year I announced that we were carrying out a study into ways of simplifying the whole structure of the P.A.Y.E. system, in particular the possibility of introducing a non-cumulative system. As we promised, we have also during the past year been considering the implications of a negative income tax.

The future of P.A.Y.E. is, of course, mainly a question of the mechanics of tax collection. A negative income tax raises much wider questions of the whole approach to social payments and the relief of poverty. Yet it soon became apparent that in practice the two studies were closely linked.

The present P.A.Y.E. system is well established: it is fair and it is respected. The unification of income tax and surtax and the ending of the complicated earned income relief will make it easier to understand and to operate. Yet certain well-known disadvantages will still remain. The process of annual coding is complex and time-consuming, and it is difficult for the man in the street to understand. Even after unification the P.A.Y.E. system will require the employment of some 35,000 in the Inland Revenue and perhaps as many again in industry.

As the House knows, while we have been searching for a simpler system I decided that the Inland Revenue computerisation programme should be suspended. I am well aware of the disruption and disappointment that that decision caused. Yet I am sure that it would have been a great mistake to go on with a vast new mechanisation programme only to have to make radical changes, possibly before it was completed.

In Britain we have two systems existing side by side—a taxation system which embodies a set of reliefs and allowances based on one set of principles, and a social security system which embodies a different set of benefits and allowances based on a different set of principles. Each has been amended and added to again and again over the years. It is obvious that immense difficulties are involved in trying to bring these two separate systems together in a simpler and more general system.

But there can be few in this House who have not at some time or other been attracted to the idea of some form of negative income tax. The theoretical attraction of such a scheme, as hon. Members will know, is that there should be a single assessment of income which would suffice either for calculating the tax due if the income is above a certain level or for calculating the social benefit to be paid if it is below that level. Such a scheme would provide a fairer and more accurate method of directing help to many people in need, and it would tidy up the present borderline between taxation and social benefits. It would provide a smoother graduation from the area of benefit to that of taxation, and so it would avoid some of the worst features of what has become known as "poverty surtax", with all that that implies by way of disincentive to earn more.

One of the difficulties of making progress hitherto has been that no really detailed scheme, which took account of all the complications of our two systems of taxation and social security, and which could reasonably be regarded as practicable and acceptable, has been put forward as a basis for discussion.

Last year a comprehensive and detailed scheme was worked out by Mr. Cockfield, my special adviser on taxation, it was a new tax-credit system combining many of the features both of a form of negative income tax and of a radical simplification of P.A.Y.E. After consider-in gthis, my right hon. Friend the Secretary of State for Social Services and I decided to set up a working group of senior officials—some full time on this particular project—to examine the new scheme. Their studies have confirmed our own belief that this new system is both practicable and desirable.

Because this is a development of such immense importance, and a development which is, I believe, in principle acceptable to hon. Members in all parts of the House, it seems to me to be eminently suitable for examination by an all-party Select Committee of this House. I therefore propose to publish later in the year a Green Paper setting out the scheme in detail. I hope that the House will in due course agree that it should be referred to a Select Committee for study and report.

It is essential that there should be plenty of time for full public discussion, but I would expect that if such a scheme found general acceptability we should be able to legislate during the course of this Parliament. The preparatory work before such a massive change could actually come into operation would, of course, take longer.

I must ask the House to await the publication of the Green Paper later in the year, but hon. and right hon. Members will be interested in the following salient features of the tax-credit system.

It would cover about 90 per cent. of the population. For these people all the main personal tax allowances—the single, married and child allowances—would be abolished and replaced by a simple system of credits which would be payable whether or not the recipient was a taxpayer. Credits would normally be set off against tax payable, but where the credit was greater than the tax the difference would be paid as an addition to the wage or other income.

Family allowances and all the complications of the claw-back would likewise go and be superseded by a child credit. In almost all cases credits would also supersede the family income supplement

The National Insurance Scheme, reconstructed as proposed in the White Paper "Strategy for Pensions", would continue, as would the supplementary benefit scheme. But the number of people who would need to draw supplementary benefit would be substantially reduced.

The P.A.Y.E. system would be reduced by a system embodying a simple non-cumulative tax deduction at the basic rate of 30 per cent., with supplementary deductions for the small proportion of taxpayers liable at the higher rates of tax.

Under the present system there are 450 P.A.Y.E. codes which have to be operated by nearly a million employers. All this would disappear completely. The task of the employer would be made easier, and the system would be far simpler for the taxpayer to understand. For the great majority of taxpayers there would be no year-end assessment.

The scheme, as well as applying generally to those who are in employment and come within the national insurance scheme, would also cover retirement and other national insurance pensioners and those who receive short-term national insurance benefits. The credits would continue to be paid during unemployment and sickness and, as a corollary, the corresponding benefits would be brought within the tax net as was originally provided when the present national insurance scheme was introduced by the post-war Labour Government. As the House will recall, their subsequent exclusion from tax rested solely on administrative grounds which will disappear under the new system.

Finally, the scheme would save some 10,000 to 15,000 civil servants.

If this scheme commends itself to the House, it would provide a substantial and comprehensive benefit to lower-paid workers and to a very large number of retirement pensioners. It would provide this benefit without individual means-testing, but the benefit would, in essence, be selective because its value would fall progressively as income increased.

This new system represents the most radical reform, improvement and simplification of the P.A.Y.E. and social service systems for a quarter of a century. Not only that, but it would also mean a considerable improvement in the position of very many people in the more hard-pressed sections of the community. I commend it to the House.

Unified tax

Last year we legislated for the new unified system of direct personal taxation, which will become operative in April next year. The Finance Act, 1971, provisionally fixed the basic rate of tax and the level of personal allowances which would apply under the new system. I explained, however, why I could not then—two years ahead—settle the higher rates of tax and the details of the surcharge on investment incomes. But I was pressed from both sides of the House to give some indication before the Budget of 1973.

I agree that in such an important change as we are making the people who will be affected should know broadly where they stand. Moreover, many large concerns these days use computers to calculate their employees' pay and tax. If the higher rates of tax were not to be announced until this time next year, they would be faced with some difficult problems in amending their computer programmes. All the rates of tax which next year will operate under the unified system will, therefore, be provisionally fixed this year.

The House will recall that the present complicated dual system of income tax and surtax will be abolished and will be replaced by the higher rates of income tax. The schedule of these rates is set out in the Resolution which will be circulated shortly. But I can summarise the proposals in this way. On the first £5,000 of taxable income—that is, after account has been taken of personal allowances—tax will be charged at the basic rate of 30 per cent. The rate for the slice of taxable income between £5,000 and £6,000 will be 40 percent. and the rates for successive slices above that amount will rise in steps of 5 per cent. until a maximum rate of 75 per cent. is reached at the level of £20,000. This will provide a much simpler, smoother and more easily understood scale.

I now turn to the investment income surcharge which the House will recall is to be imposed on the larger investment incomes. I have made it abundantly clear that I regard the present form of discrimination against investment income as unacceptable. Indeed, among the advanced countries of the world the United Kingdom and France are the only two which draw such a distinction to any significant degree. One of the foundations of the unified tax system is that only the larger investment incomes should attract the surcharge; in other words, that the first slice of investment income should be charged at the same rates as earned income. To fix a low starting point would undermine this principle.

I have decided, therefore, that the surcharge will be imposed only on the excess of investment income over £2,000. As well as benefiting retired people living on income from past savings, this will also be of considerable help to people such as divorced and separated wives who depend on what the income tax rules treat as investment income. The House will be interested to know that it is estimated that no less than 30 per cent. of the tax reductions arising from the new unified system will go to the 11 per cent. of taxpayers who have retired. Furthermore, the fact that from next year the first £2,000 of investment income is to be treated exactly the same as earned income will be an important encouragement to the personal saving we shall need to finance investment.

The rate of the surcharge will be 15 per cent. This will, of course, be in addition to other tax, so that a taxpayer whose income is within the basic rate band will pay in all 45 per cent. on any investment income which is liable to surcharge; that is, on that part of any investment income over £2,000.

The net cost of these changes will be £300 million in a full year.

Surtax

When the new unified system of tax is in full operation the surtax office will be run down and eventually close. This poses a transitional problem. And so to meet the very difficult staffing position before unification takes over I propose to adopt precisely the same device as the right hon. Member for Birmingham, Stechford (Mr. Roy Jenkins) adopted in his last Budget in almost identical circumstances. For the short time before surtax goes, the surtax starting point will be raised by £500, with marginal relief, but when income exceeds the new limit surtax will continue to be charged at the same rates as at present on the excess over £2,000. The result will be that, at a cost of £14 million for the full year, 130,000 taxpayers who are just within the surtax net will be taken out of charge for this year, over a third of whom have not paid surtax before. I should perhaps add that but for this change the cost of collection of the £14 million would be £1¼ million. The details of this change are in the Financial Statement and Budget Report.

I know that the whole House will join with me in congratulating the two Revenue Departments on the way in which they have tackled the programmes of reform, and I hope the House will allow me to give my personal thanks to my three outstanding Treasury colleagues.

Personal allowances

The various changes that I have so far announced would raise output in 'he first half of next year by under ½ per cent. But the House will recall that my Budget judgment was that output should be raised in that period by around 2 per cent. in order to increase our rate of economic growth to 5 per cent

I come, therefore, to my final proposal. Last year I reduced the standard rate of income tax and I made a start on raising tax thresholds by increasing all the child allowances and so raising the starting points of tax for all families with children. This year I believe a broader approach to the problem of the threshold is called for.

There will, therefore, be no change in the standard rate. Instead there will be increases in both the single person's allowance and the married allowance. This is undoubtedly the best means of helping taxpayers generally right across the board. If effect is to be given to these changes quickly and without an impossible work burden, the increases must this year be of the same amount. Otherwise it would be necessary to recode a very large number of taxpayers, and it is simply not within the capacity of the Inland Revenue to do this at this time. It has, in fact, arranged to speed up the preparation of the new tax tables so that on this occasion the reductions can be reflected in the first pay packet after 3rd May.

We on these benches believe that the British people have been taxed too heavily for too long. We have already made a start, but we must go further. The personal allowances will, therefore, be increased at a cost of £960 million in 1972–73 and £1,200 million in a full year. The single person's allowance and the married allowance will each be raised by £135. The House will not be surprised to know that these are the largest increases which have ever been made in these allowances. The single person's allowance will be raised from £325 to £460 and the married allowance from £465 to £600.

The income limits for age exemption will also be raised, to £634 for a single person and to £929 for a married couple. The limit for small income relief will be raised to £550.

The increase in the personal allowances will mean that the point at which a person starts to pay tax will be raised very considerably. For the single man and the married man without children the starting point will go up by £174 a year of £3.34 a week. If one considers the family man with children the change is even more impressive. Before last year's Budget a married man with two young children started paying tax when his earned income reached £16.15 a week. As a result of last year's increase in child allowances and this increase in the married allowance, his tax threshold will be up by £5.31, so that he will in future not start to pay tax on his earned income until it reaches £21.46 a week.

Another way of expressing this year's changes is that, while all those below the new starting points will be totally exempt from tax, everyone in the land who remains liable to income tax—and there are over 21 million of them will pay £1 a week less tax. And, of course, in the case of those married couples where the earnings of husband and wife are each over the threshold, they will pay £2 a week less tax. About 2¾ million people who would have paid tax this coming year will be freed of liability altogether.

Conclusion

The other day my right hon. Friend the Prime Minister said that the nation expected Government, employers and unions alike to act in the national interest to defeat inflation.

Over the past year the Government have made the biggest ever cuts in indirect taxation. Both public and private industry have supported the C.B.I, initiative on price restraint. Since last summer the rate of rise in prices has been halved.

Today I have announced a £1,000 million cut in income tax which will increase by £1 a week the take-home pay of every taxpayer above the new starting point.

I am the first to admit that a year ago when prices were rising much faster it was not easy for some to accept the need for moderation in pay claims. But today the situation is quite different, and I believe that the British people will now have no patience with any group whose actions endanger our hopes for prices and employment.

In total, the reductions in taxation which I have announced today amount to some £1,200 million in 1972–73, together with the other reductions which have been made since this Government came to office, the burden of taxation in this coming year will have been reduced by over £3,000 million.

To sum up, this is our purpose: to revitalise British industry so that it can open up the new frontiers of Europe; to achieve a rate of growth twice as fast as in the past decade; and to secure a growing prosperity which can be sustained into the foreseeable future and which will benefit all our people.

Mr. Deputy Speaker

Perhaps at this point I might remind the House of the procedure to be followed. Under Standing Orders, the Motion entitled "Provisional Collection of Taxes" must be decided without debate. When that has been disposed of, I will call the right hon. Gentleman to move the Motion entitled "Amendment of the Law", and on that Motion the Budget debate will take place today, and on succeeding days. The remaining Motions will not be put until the end of the debate on Monday.