HC Deb 18 March 1986 vol 94 cc181-3

Finally, I turn to income tax. In my Budget speech last year I undertook to issue a Green Paper on the reform of personal taxation. As the House is aware, I am publishing the Green Paper today. It discusses a range of options which will in due course be opened up by the computerisation of PAYE, from the relationship between income tax and employees' national insurance contributions to the closer integration of the tax and benefit systems.

In particular, however, it outlines a possible reform of the present system of personal allowances. The responses to my predecessor's 1980 Green Paper revealed widespread dissatisfaction with the existing arrangements, but—perhaps inevitably—no clear consensus as to what should replace them.

Married women increasingly resent the fact that a wife's income is treated for tax purposes as that of her husband, depriving her of the independence and privacy she has a right to expect. There is growing complaint, too, of the way in which, in a number of respects, the present system penalises marriage itself, and it cannot be right that the tax system should come down hardest on a married couple just at the time when the wife stops work to start a family. Yet that is what happens today.

The alternative system set out in the Green paper, of independent taxation with allowances tranferable between husband and wife, would remedy all these defects. To be acceptable, however, it would need to be accompanied by a substantial increase in the basic tax threshold.

The Government are committed to reducing the burden of income tax, and the proposal in the Green Paper suggests one way of doing that which would achieve a number of other worthwhile objectives—including the ability to take more people out of the unemployment and poverty traps for a given amount of tax relief than is possible under the present tax system. Given the timetable of computerisation, none of this could in practice be implemented until the 1990s, but we need to start planning for the 1990s today. The Government will therefore carefully consider the responses to today's Green Paper before taking any decision on how to proceed.

Meanwhile, I have to set the tax rates and thresholds for the coming year, but first I have two minor proposals to announce, both of which I hope the House will welcome. First, pensions paid by the German and Austrian Governments to victims of Nazi persecution are free of tax in both Germany and Austria. In this country, however, the tax relief on such pensions is set at 50 per cent. In future, I propose that pensions paid to victims of Nazi persecution should be free of tax altogether.

Secondly, the House will be aware that, as from next year, social security benefit upratings will be moved to April, to coincide with the tax year. This will enable them to be fully taken into account before PAYE codes are issued for 1987–88. However, to bridge the gap between the November 1985 and April 1987 upratings, my right hon. Friend the Secretary of State for Social Services proposes to have a special transitional uprating in July, the details of which he has recently announced. But, as hon. Members will know from their postbags, it could be confusing for many old-age pensioners and widows to undergo a special mid-year tax recoding on account of the July uprating. I have therefore decided that for pensioners and widows the benefit increases payable in July will be exempt from income tax in 1986–87. The cost of this will be £15 million.

Since we first 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 penal higher rates we inherited from Labour. We have increased the main tax thresholds by some 20 pr cent. more than inflation—and the greater part of that 20 per cent. has been achieved during the present Parliament.

It is a good record, but it is not good enough. The burden of income tax is still too great. Nothing could be further from the truth than the claim that we have a choice between cutting tax and cutting unemployment, for the two go hand in hand. It is no accident that the two most successful economies in the world, both overall and specifically in terms of job creation—those of the United States and Japan—have the lowest level of tax as a proportion of GDP. Reductions in taxation motivate new businesses and improve incentives at work. They are a principal engine of the enterprise culture, on which our future prosperity and employment opportunities depend.

The case for higher tax thresholds is well understood. In my two previous Budgets I have raised the married man's allowance to its highest level in real terms since the war, higher as a proportion of average earnings than in either Germany or the United States. But we should not overlook the need for reductions in the basic rate of tax too. The basic rate is the starting rate of tax and it is the crucially important marginal rate of tax for some 95 per cent. of all employees and 90 per cent. of all self-employed and unincorporated businesses.

Clearly, given the massive fall in oil revenues, this is not a year for substantial reductions in tax of any kind, but, provided the economy continues to grow as it has been growing, and provided we continue to maintain firm control of public expenditure, the scope should be there in the years ahead.

Meanwhile I propose for 1986–87 to raise all the main thresholds and allowances by the statutory indexation figure of 5.7 per cent. rounded up. The single person's allowance will therefore rise by £130 to £2,335 and the married man's allowance by £200 to £3,655. Similarly, the single age allowance will rise by £160 to £2,850 and the married age allowance by £250 to £4,505. The age allowance income limit becomes £9,400. I propose to raise all the higher-rate thresholds by exactly £1,000. This is fully in line with statutory indexation for the first—40 per cent.—higher rate, but less than half statutory indexation for the top—60 per cent.—rate.

Given the need for caution in the light of current circumstances, I do not have scope this year for a reduction in the basic rate of income tax beyond one penny in the pound. But this reduction from 30 per cent. to 29 per cent. still represents the first cut in the basic rate of income tax since my predecessor took it down from 33 per cent. to 30 per cent. in 1979. So long as this Government remain in office, it will not be the last.

There will, of course, be a consequential reduction in the rate of advance corporation tax, and I also propose a corresponding cut in the small companies' rate of corporation tax from 30 per cent. to 29 per cent.

The combined effect of the various income tax changes I have just announced is to concentrate the benefit, modest as I readily concede it to be, not on the rich but on the great majority of ordinary taxpayers. As a result of the adjustments I have made to the higher-rate thresholds, the gain for those at the top of the income scale is more or less confined to what they would have received under simple indexation alone. By contrast, the married man on average earnings will be some £2.60 a week better off, an improvement of £1.45 a week over simple indexation alone.

The income tax changes I have announced today will take effect under PAYE on the first pay day after 17 May. They will cost £935 million in 1986–87 over and above the cost of statutory indexation.

Seven years ago, when my predecessor cut the basic rate of income tax from 33 per cent. to 30 per cent. he added: Our long-term aim should surely be to reduce the basic rate of income tax to no more than 25 per cent." [Official Report, 12 June 1979; Vol. 968, c. 261.] I share that aim.

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