HC Deb 11 July 1978 vol 953 cc1321-9

'If the claimant has paid any premium in respect of a policy of insurance against loss of income caused by his being unable to work through illness or injury, he shall be entitled to a deduction from the income tax with which he is chargeable equal to income tax at the basic rate on the amount of the premium.'. [Mr. Newton.]

Brought up, and read the First time.

6.30 p.m.

Mr. Newton

I beg to move, That the clause be read a Second time.

Mr. Deputy Speaker

With this we may take new clause no. 6—Tax treatment of income from permanent health insurance— 'Where an individual's income for any year of assessment consists of or includes amounts paid as benefits arising from a policy of insurance against loss of income caused by his being unable to work through illness or injury, those amounts shall not be investment income for the purposes mentioned in section 32(3) of the Finance Act 1971.'.

Mr. Newton

The new clauses originate from a recommendation put to the Chancellor of the Exchequer by the Law Society in its pre-Budget recommendations. They relate to the tax treatment of premiums on, and the income secured from, policies for permanent health insurance.

Quite a number of people, particularly the self-employed, find it necessary and prudent to take out policies, apart from any benefits they may be entitled to under the national insurance system, to protect themselves against the loss of income which may occur if they are unable to work for a long time as a result of ill health or an accident. This seems to be a perfectly sensible, legitimate and prudent thing to do for many people, perhaps especially for those who are self-employed.

As the law stands, if a man takes out such an insurance there is no tax relief on the premiums and, if he loses income within the terms of the policy because of ill health or accident, the benefits will be taxable not as earned income, but as investment income. That seems to be wrong.

There appears to be one qualification which allows income to be taxed as investment income. I have a letter from the Company Pensions Information Centre which says: the current situation is that for policies where the benefits are expressed as being payable to the employee (whether it is a private or a group policy) these benefits will be liable for tax as unearned income under Schedule D of the Income and Corporation Taxes Act 1970. If on the other hand the benefits under a group policy are expressed as being payable to the employer as reimbursement of wages he is paying, then tax liability does not exist as this is merely an indemnifying amount. The benefit that the employee would receive is technically wages (and not the proceeds of the policy) and would then be subject to P.A.Y.E. tax. There is, therefore, an anomaly under which, if a policy is more or less by chance drawn up in one way, the benefit going to the individual will be treated as investment income and may be subject to the surcharge. However, if the policy is organised through the employer and is drawn up in another way, with the money being channelled through the employer in the form of something which legally counts as wages, only ordinary earned income tax will be payable. That is an anomaly within the overall anomaly which is difficult to defend.

Against a background in which the self-employed, who, I imagine, are likely to be among those particularly affected by the new clauses, already feel deeply aggrieved by the inadequacy of the provision for them under the national insurance system in relation to the contributions they pay, it seems to add insult to injury to deny them relief on premiums paid to secure proper protection and then to tax as investment income any benefits they may secure if they take out such protection.

This whole matter raises wider questions of the treatment of different sorts of income as investment income, but I wish to concentrate only on the relatively narrow point contained in the new clauses, which I commend to the House.

Mr. Percy Grieve (Solihull)

I support the new clause moved cogently and succinctly by my hon. Friend the Member for Braintree (Mr. Newton), who drew attention to yet one more anomaly in our overall tax system. It illustrates that the heavier and more complex taxes become, the more anomalies are created and the less just becomes the whole tax and fiscal system.

As my hon. Friend said, the distinctions drawn in our tax law between investment income and earned income bristle with anomalies. The most striking is the distinction drawn between what hap- pens to the man who provides for his old age by saving or setting aside capital and the man who provides by contributing to a pension which may be treated, in whole or in part, as earned income even after he has retired.

It is clearly anomalous that someone who has provided against blindness, sickness accident or any of the adversities which may afflict a man should find that the income that he has provided for himself is treated as investment income and may be liable to the 15 per cent. surcharge. That is grossly unjust and that is why I support the new clauses.

On the fundamental point of whether premiums should attract tax relief, they are very much in the same class as the premiums paid for life insurance which get some relief. On that basis, I commend both new clauses to the House.

Mr. Joel Barnett

The hon. Member for Braintree (Mr. Newton) said that it was prudent for a man to take out health insurance, and I do not necessarily disagree with that. The question at issue is whether the premiums should be allowable for tax relief. New clause no. 6 seeks to make the income from such insurance ineligible for investment income surcharge.

The hon. Gentleman said that he had spoken briefly because it was a relatively simple matter. In fact, it is a fundamental matter for the income tax system because the hon. Gentleman is seeking to make a fundamental change. The personal tax system is related to the capacity to pay, whether through the personal allowances or through the level of income. That has been a general rule. It was endorsed by the Royal Commission and it has generally been found acceptable. Once we start on the path of allowing relief on the ground that the personal choice of an individual in one instance is good and in another is not and that we should make an allowance on that item of expenditure that is good, we are making a fundamental change.

No matter how much we may feel that we want to exempt a certain piece of expenditure, we should not pretend that we are dealing with a simple matter. It is a matter of great importance. Apart from that, it runs directly counter to what I thought was a general view of most hon. Members in the House, namely, that we want a minimum number of reliefs so as to get the basic rates of tax as low as possible. The more we start extending reliefs on what we believe might be meritorious items of expenditure, the more we narrow the tax base and are required, in meeting the amount of revenue needed, to maintain tax rates at a higher level than all of us wish to see. That is not a simple matter but a fundamental change.

New clause no. 6 seeks to turn the income from sickness benefit into earned income. We appreciate that when people are sick or have had an accident we should have a great deal of sympathy for them. We would not want to harm them in any way. However, no one can dispute that the income paid under the policy is not earned income. It cannot be under any reasonable definition of the phrase.

In any event, I assure the House that the situation is nothing like as serious as the hon. Member for Braintree and the hon. and learned Member for Solihull (Mr. Grieve) implied because of the way in which the law now operates. The income from such a policy is now assessable under case 3 of schedule D as an annual payment. To ensure that it is an annual payment that is being taxed, the Inland Revenue issued an extra-statutory concession—28(A)—under which assessments are not made until payments have been continued for a full year. That means that in practice at least one year of such benefit under the policy would not be liable to the investment income surcharge and would not be liable to income tax at all. In practice, it will be for much longer than a year that the income will not be liable to any tax, let alone the surcharge.

Mr. Grieve

Does not what the right hon. Gentleman has said carry the implication that for a relatively short illness a man receives more favourable treatment than for a permanent disablement?

Mr. Barnett

The hon. and learned Gentleman is turning to an entirely different matter. He is now talking about tax benefits for someone who is permanently disabled. With respect, the clauses are not seeking to deal with permanent disablement.

I was saying that for the policies that we are talking about in new clause no. 5 the income arising from them for one year, and probably nearer two years, will escape tax altogether. If we legislated to remove the investment income surcharge, clearly there would need to be a review. We cannot remove the surcharge from income when we are not charging it to tax. We would have to review the whole procedure and the treatment generally. We would have to re-examine how the scheme worked.

I believe that the present system is welcomed by the vast majority of those receiving benefit from such policies. As I have said, they are not paying any tax. As for the investment income surcharge, which new clause no. 6 seeks to deal with, there is now an exemption from the surcharge for up to £1,700 a year. As the hon. and learned Gentleman implied in his intervention, a substantial premium would have to be paid for a very long time to produce investment income in excess of that figure so as to require the surcharge, to operate. In addition, it would be well over a year—probably nearer two years—before there was any tax liability.

6.45 p.m.

I am always willing to examine these matters to ascertain whether there is hardship, but as matters stand there does not seem to be a hardship that needs to be met by the acceptance of new clause no. 6. As I have said, new clause no. 5 proposes a fundamental change in our tax system. I cannot recommend it to the House.

Mr. Nigel Lawson (Blaby)

I must confess that when listening to the Chief Secretary I wondered who on earth had written his brief. The right lion. Gentleman's speech was not up to his usual standard.

My hon. Friend the Member for Braintree (Mr. Newton) deserves the congratulations of the House on having brought to our attention this small but important matter. It is especially important to those who are affected by it. As my hon. Friend said, the Law Society inspired him to draft the two clauses.

It may be helpful if I deal with the Chief Secretary's arguments in the order in which the clauses appear on the Notice Paper. I confess that I find new clause no. 5 to be not entirely as compelling as new clause no. 6. The right hon. Gentleman was wholly wrong to say that it proposes a fundamental change. He knows as well as everyone else in the House that there is an allowance for life assurance premiums.

Mr. Joel Barnett

That is the only one.

Mr. Lawson

That has been allowed. It has been an important allowance for a long time. New clause no. 5 merely proposes an extension of that aspect of our fiscal system. It proposes a small and logical extension. To say that it would make a fundamental change in our tax system is nonsense.

The compelling argument was deployed by my hon. Friend the Member for Braintree, who extremely cogently moved the classes, and my hon. and learned Friend the Member for Solihull (Mr. Grieve) that the income arising from the policies covered by the clauses should not attract the investment income surcharge. That is right.

The right hon. Gentleman did not rest his case on the cost of the new clause. Obviously the cost would be negligible We do not need to worry about the cost He said that the income should be charged as investment income because it manifestly is not earned income. It seems that he has forgotten that in the past few years, as a result of pressure from the Opposition Benches, the Government have conceded that maintenance payments should no longer be subject to the investment income surcharge. Maintenance payments are in the hands of the wife who receives them. They are not earned income directly, but for tax purposes they are treated as earned income rather than investment income because they approach more closely earned income than investment income. That is the case that the Government have accepted. They should also accept that income in respect of earnings that have been forgone because of extended periods of illness approximate much more closely to earned income than investment income.

The right hon. Gentleman destroyed his case by saying. first, that my hon. Friend was making a bad point, only to say that it is such a good point that there is an extra-statutory concession that goes part of the way to meeting it. He destroyed his case by saying that if it were not that there would be considerable hardship as a result of the operation of the investment income surcharge there would not have been the extra-statutory concession. He tried to say that the whole issue is covered by the threshold for the surcharge. He claimed—I did not take down his words verbatim—that a person would have to pay a very high premium to obtain an income of more than £1,700 a year if he became permanently ill. Perhaps the Chief Secretary will pay attention. I know that he finds great difficulty in listening to anybody except himself. I know that he loves the sound of his own voice, but perhaps he will pay attention to this point.

In fact, the Chief Secretary is wrong about this matter as about others. The premium payable for a permanent health insurance policy is very low. Fortunately, most people do not suffer illness or injury which requires them to be out of work for very long periods—possibly years. Therefore, the premium is relatively low. It is conceivable that, with a modest premium, people could obtain more than the £1,700 threshold.

The Chief Secretary totally failed to meet the indefensible anomaly brought to light by my hon. Friend the Member for Braintree (Mr. Newton) who compared the situation where a company insures an individual under one of these policies and the situation where the individual takes out a permanent life assurance policy. That is the nub of the point. If a company takes out insurance and collects money from the insurance company when a worker falls ill in order to make good his wages, that is held to be earned income and there is no investment income surcharge. Yet, if the individual on his own initiative, because the company is not prepared to do that, or for whatever reason—he may be self-employed and there may be no company to do it for him—takes out a permanent life assurance policy and the same sequence of events follows—the same illness and the same payment—because the money is paid direct to him, not via a company, that is regarded as unearned income and investment income surcharge is payable.

For that reason, if for no other. I advise my right hon. and hon. Friends to support new clause no. 6 in the Lobby. I hope that my hon. Friend the Member for Braintree will assist by seeking leave to withdraw new clause no. 5.

Mr. Newton

I beg to ask leave to withdraw the motion.

Motion and clause, by leave, withdrawn.