HC Deb 13 March 1984 vol 56 cc303-4

Since we took office in 1979, we have cut the basic rate of income tax from 33 per cent. to 30 per cent. and sharply reduced the confiscatory higher rates inherited from the last Labour Government. We have increased the main tax allowances not simply in line with prices but by around 8 per cent. in real terms. It is a good record, but it is not enough. The burden of income tax is still too heavy.

During the lifetime of this Parliament, I intend to carry forward the progress we have already made. For the most part, this will have to wait for future Budgets, particularly since I have thought it right this year to concentrate on setting a new regime of business taxation for the lifetime of a Parliament—and beyond. But, as a result of the changes to taxes on spending which I have just announced, I can take a further step in this Budget.

I propose to make no change this year in the rates of income tax. So far as the allowances and thresholds are concerned, I must clearly increase these by the amounts set out in the statutory indexation formula, based on the 5.3 per cent. increase in the retail price index to December. The question is how much more I can do, and how to direct it.

I have decided that, this year, the right course is to use every penny I have in hand, within the framework of a revenue-neutral Budget, to lift the level of the basic tax thresholds, for the married and single alike. It makes very little sense to be collecting income tax from people who are at the same time receiving means-tested benefits. Moreover, low tax thresholds worsen the poverty and unemployment traps, so that there is little if any financial incentive to find a better job or even any job at all. There is, alas, no quick or cheap solution to these problems. But that is all the more reason to make a further move towards solving them now.

I propose to increase the other thresholds in line with the statutory indexation requirement, but by no more. The first higher rate of 40 per cent. will apply when taxable income reaches £15,400 a year and the top rate of 60 per cent. to taxable income over £38,100. The single age allowance will rise from £2,360 to £2,490 and the married age allowance from £3,755 to £3,955.

For the basic thresholds, statutory indexation would mean putting the single and married allowances up by £100 and £150 respectively. I am glad to say that I can do considerably better than that. I propose to increase the basic thresholds by well over double what is required by indexation. The single person's allowance will be increased by £220, from £1,785 to £2,005; and the married man's allowance by £360, from £2,795 to £3,155.

This is an increase of around 12.5 per cent., or some 7 per cent. in real terms. It brings the married man's tax allowance for 1984–85 to its highest level in real terms since the war. It means that the great majority of married couples will enjoy an income tax cut of at least £2 a week, and it means that a large number of people, those with the smallest incomes of all, are taken out of income tax altogether. Some 850,000 people—over 100,000 of them widows—who would have paid tax if thresholds had not been increased will pay no tax in 1984–85. That is 400,000 more taken out of tax than if the allowances had merely been indexed.

All these changes will take effect under PAYE on the first pay day after 10 May. Their cost is considerable—some £1.8 billion in 1984–85, of which roughly half represents the cost of indexation.

This is as far as I can go on income tax this year, within a broadly revenue-neutral Budget for 1984–85. But, so long as we hold to our published planned levels of public spending, there is an excellent prospect of further cuts in income tax in next year's Budget. These would be on top of the measures I have announced in this Budget which, as I have already told the House, will reduce taxation in 1985–86 by well over £1¾ billion, with business taking the lion's share.

Forward to