HC Deb 15 March 1988 vol 129 cc1006-13

I now turn to income tax.

The way to a strong economy is to boost incentives and enterprise. And that means, among other things, keeping income tax as low as possible.

Income tax has now been reduced in each of the last six Budgets—the first time this has ever occurred. And the strength of the economy over that period speaks for itself.

However, reforming income tax is not simply a matter of cutting the rates. I also have to look at all the various allowances and reliefs to ensure that they are still justified. With this in mind, I have a number of proposals to announce.

First, forestry. I accept that the tax system should recognise the special characteristics of forestry, where there can be anything up to 100 years between the costs of planting and the income from selling the felled timber.

But the present system cannot be justified. It enables top rate taxpayers in particular to shelter other income from tax, by setting it against expenditure on forestry, while the proceeds from any eventual sale are almost tax free.

The time has come to bring it to an end. I propose to do so by the simple expedient of taking commercial woodlands out of the income tax system altogether. That is to say, as from today, and subject to transitional provisions, expenditure on commercial woodlands will no longer be allowed as a deduction for income tax and corporation tax. But, equally, receipts from the sale of trees or felled timber will no longer be liable to tax.

It is, perhaps, a measure of the absurdity of the present system that the total exemption of commercial woodlands from tax will, in time, actually increase tax revenues by over £10 million a year.

At the same time, in order to further the Government's objectives for the rural areas, I have agreed with my right hon. Friends who have responsibilities for forestry and for the environment that, in parallel, there should be increases in planting grants. Full details of the new grant scheme will be announced next week.

The net effect of these changes will be to end an unacceptable form of tax shelter; to simplify the tax system, abolishing the archaic schedule B in its entirety; and to enable the Government to secure its forestry objectives with proper regard for the environment, including a better balance between broad-leaved trees and conifers.

One of the legacies of the years of penal top tax rates is the complicated special relief for large redundancy payments. This is no longer justified. I propose to increase the exemption limit for these payments from £25,000 to £30,000, and to abolish the additional relief for larger amounts.

Next, benefits in kind—perhaps better known as perks. One of the biggest tax-induced distortions in the economy today is the growing tendency to provide remuneration in kind rather than in cash. It must be right to move towards a system of lower taxes all round and fewer tax breaks of this kind.

Far and away the most widespread benefit in kind is the company car, which is substantially undertaxed. Independent studies, based on figures supplied by the AA, suggest that an employee with a typical company car may be taxed on only about a quarter of its true value.

This discrepancy is too great to be allowed to continue. On the other hand, the scale of the undertaxation is so great that it cannot be put right in a single year. But in a Budget when I am able to reduce tax rates, there is a strong case for a substantial increase in the taxation of these benefits. I therefore propose to double the car scales for 1988–89. This increase replaces the 10 per cent. increase which I had already announced for 1988–89. The yield will be £260 million in 1988–89.

The scales for the taxation of car fuel adequately reflect the value of the benefit, and I propose to leave them unchanged for 1988–89.

However, the taxation of the benefit of free car parking threatens to become an administrative nightmare. I therefore propose to exempt this particular benefit from tax altogether.

Next, mortgage interest relief.

This Government are committed to the further spread of home ownership. Mortgage interest relief has an important role to play in achieving that aim.

However, in addition to the decision to apply the £30,000 limit to the house or flat, which I have already announced, and which will remove the most widely-resented tax penalty on marriage, I have a further reform to propose in this area.

This concerns the parallel tax relief for home improvement loans. Most of these loans are for fittings such as double glazing, and have played a significant part in the recent growth of consumer credit without in any way contributing to the expansion of home ownership. This may be partly due to the substantial scope for abuse, as loans ostensibly taken out for home improvements are used for other purposes, a matter which was the subject of a recent report from the Public Accounts Committee.

I propose, therefore, to end tax relief for all new home improvement loans taken out after 5 April. Existing home improvement loans will be unaffected. This is expected to yield £80 million in 1988–89.

Finally, I can turn to income tax itself. The statutory indexation formula means that I should increase all the principal income tax allowances and bands by the increase in the RPI over the year to last December, or 3.7 per cent. rounded up. I propose to do more than that—indeed twice as much.

Thus the single allowance will go up not by £90, as required by indexation, but by £180, to £2,605; and the married allowance will go up not by £150 but by £300, to £4,095. The additional personal allowance and the widow's bereavement allowance will accordingly rise by £120 to £1,490. Similarly, the single age allowance will rise by £220 to £3,180 and the married age allowance by £360 to £5,035. The higher allowances for taxpayers aged 80 and over, which I introduced in the last Budget, will correspondingly be increased by £240 and £360 to £3,310 and £5,205 respectively, and the new age allowance income limit will be £10,600. The upper limit of taxable income for the basic rate band will be increased to £19,300.

The increases I have just announced mean that the basic tax thresholds will be fully 25 per cent. higher, in real terms, than they were in 1978–79, Labour's last year. Indeed, the married man's tax threshold will he at its highest level in real terms for nearly half a century.

Given these substantial increases in the main allowances, I am taking the opportunity to simplify the system by abolishing three minor personal allowances which have been unchanged, in cash terms, for over 20 years: the housekeeper allowance, the dependent relative allowance, and the son's or daughter's services allowance.

In our general election manifesto last year, we committed ourselves to reducing the basic rate of income tax to 25 pence in the pound as soon as it was prudent to do so. This pledge followed a reduction of twopence in the pound to 27 pence in last year's Budget.

At the time, this was regarded with some scepticism, not to say cynicism, by the Opposition, who no doubt recalled that Labour Governments used to reduce tax only in front of an election, and at all other times increased it. Indeed, shortly before last year's Budget, the right hon. Gentleman the Deputy Leader of the Labour party, the right hon. Member for Birmingham, Sparkbrook (Mr. Hattersley), said: I must advise the Chancellor of something that he already knows: whichever party wins the general election, the tax cuts that he makes in this Budget will be reversed."—[Official Report, 20 January 1987; Vol. 108, c. 772.] The time has come to put the right hon. Gentleman out of his misery. So far from reversing the 1987 Budget tax reductions, I propose to take this, the first opportunity since the general election, to fulfil our manifesto pledge. The basic rate of income tax for 1988–89 will be 25 pence in the pound.

The small companies' rate of corporation tax will similarily be reduced to 25 per cent. This means that the basic rate of income tax and the corporation tax rate for small companies will both be at their lowest level since the war.

Mr. Alex Salmond (Banff and Buchan)

This is an obscenity. The Chancellor cannot do this. [Interruption]

Mr. Deputy Speaker


Mr. Salmond

This Budget is an obscenity.

Mr. Deputy Speaker

Order. I name Mr. Alex Salmond.

Motion made, and Question put,

That Mr. Alex Salmond be suspended from the service of the House.—[Mr. Wakeham.]

The House proceeded to a Division

Mr. Patrick Cormack(seated and covered) (Staffordshire, South)

On a point of order, Mr. Deputy Speaker. May I draw your attention to Standing Order No. 39, which gives the Chair the power to decide, in determining a Division, whether to ask hon. Members to rise in their places if they want a Division, and to do likewise if they do not? I think it is manifest this afternoon that this is a ridiculous spoiling tactic. I ask you to consider implementing this Standing Order in future, rather than allowing important proceedings of the House to be interrupted in order to gain notoriety for idiots.

Mr. Deputy Speaker

I take account of what the hon. Member for Staffordshire, South (Mr. Cormack) says. I think that in the circumstances the House has proceeded correctly.

The House having divided: Ayes 354, Noes 19.

Division No. 215] [4.43 pm
Adams, Allen (Paisley N) Clarke, Rt Hon K. (Rushcliffe)
Adley, Robert Colvin, Michael
Aitken, Jonathan Coombs, Anthony (Wyre F'rest)
Alexander, Richard Coombs, Simon (Swindon)
Alison, Rt Hon Michael Cormack, Patrick
Allen, Graham Couchman, James
Amess, David Cran, James
Amos, Alan Cunningham, Dr John
Anderson, Donald Currie, Mrs Edwina
Arbuthnot, James Davies, Q. (Stamf'd & Spald'g)
Arnold, Jacques (Gravesham) Davis, David (Boothferry)
Arnold, Tom (Hazel Grove) Day, Stephen
Ashby, David Devlin, Tim
Ashdown, Paddy Dewar, Donald
Aspinwall, Jack Dickens, Geoffrey
Atkins, Robert Dobson, Frank
Baker, Rt Hon K. (Mole Valley) Doran, Frank
Baker, Nicholas (Dorset N) Dorrell, Stephen
Baldry, Tony Douglas-Hamilton, Lord James
Banks, Robert (Harrogate) Dover, Den
Barnes, Mrs Rosie (Greenwich) Dunn, Bob
Barron, Kevin Durant, Tony
Batiste, Spencer Dykes, Hugh
Beaumont-Dark, Anthony Eggar, Tim
Beggs, Roy Emery, Sir Peter
Beith, A. J. Evans, David (Welwyn Hatf'd)
Bell, Stuart Evans, John (St Helens N)
Bellingham, Henry Evennett, David
Bendall, Vivian Fairbairn, Nicholas
Bennett, Nicholas (Pembroke) Fallon, Michael
Biffen, Rt Hon John Farr, Sir John
Biggs-Davison, Sir John Faulds, Andrew
Blackburn, Dr John G. Favell, Tony
Blair, Tony Fearn, Ronald
Blaker, Rt Hon Sir Peter Fenner, Dame Peggy
Bottomley, Peter Field, Barry (Isle of Wight)
Bottomley, Mrs Virginia Field, Frank (Birkenhead)
Bowden, Gerald (Dulwich) Finsberg, Sir Geoffrey
Bowis, John Forman, Nigel
Boyes, Roland Forsyth, Michael (Stirling)
Braine, Rt Hon Sir Bernard Forsythe, Clifford (Antrim S)
Brandon-Bravo, Martin Forth, Eric
Bray, Dr Jeremy Foster, Derek
Brazier, Julian Foulkes, George
Bright, Graham Fowler, Rt Hon Norman
Brittan, Rt Hon Leon Fox, Sir Marcus
Brooke, Rt Hon Peter Franks, Cecil
Brown, Gordon (D'mline E) Freeman, Roger
Brown, Michael (Brigg & Cl't's) French, Douglas
Brown, Nicholas (Newcastle E) Galbraith, Sam
Browne, John (Winchester) Gardiner, George
Bruce, Ian (Dorset South) Gill, Christopher
Buck, Sir Antony Gilmour, Rt Hon Sir Ian
Budgen, Nicholas Glyn, Dr Alan
Burns, Simon Goodlad, Alastair
Burt, Alistair Goodson-Wickes, Dr Charles
Butcher, John Gow, Ian
Butler, Chris Gower, Sir Raymond
Butterfill, John Grant, Sir Anthony (CambsSW)
Campbell, Menzies (Fife NE) Greenway, Harry (Ealing N)
Carlile, Alex (Mont'g) Griffiths, Peter (Portsmouth N)
Carlisle, Kenneth (Lincoln) Grist, Ian
Carrington, Matthew Ground, Patrick
Cash, William Grylls, Michael
Channon, Rt Hon Paul Gummer, Rt Hon John Selwyn
Chapman, Sydney Hamilton, Hon Archie (Epsom)
Chope, Christopher Hanley, Jeremy
Clark, Hon Alan (Plym'th S'n) Hannam, John
Clark, Dr David (S Shields) Hargreaves, A. (B'ham H'll Gr')
Clark, Dr Michael (Rochford) Hargreaves, Ken (Hyndburn)
Clark, Sir W. (Croydon S) Harris, David
Haselhurst, Alan Mans, Keith
Hattersley, Rt Hon Roy Maples, John
Hawkins, Christopher Marland, Paul
Hayes, Jerry Marlow, Tony
Hayward, Robert Marshall, John (Hendon S)
Heath, Rt Hon Edward Martin, David (Portsmouth S)
Heathcoat-Amory, David Maude, Hon Francis
Heddle, John Mawhinney, Dr Brian
Henderson, Doug Maxwell-Hyslop, Robin
Heseltine, Rt Hon Michael Meacher, Michael
Hicks, Mrs Maureen (Wolv' NE) Meyer, Sir Anthony
Hicks, Robert (Cornwall SE) Miller, Hal
Higgins, Rt Hon Terence L. Mitchell, Andrew (Gedling)
Hill, James Mitchell, David (Hants NW)
Hind, Kenneth Moate, Roger
Holland, Stuart Monro, Sir Hector
Holt, Richard Montgomery, Sir Fergus
Hordern, Sir Peter Moonie, Dr Lewis
Howard, Michael Morris, Rt Hon J. (Aberavon)
Howarth, Alan (Strat'd-on-A) Morrison, Hon Sir Charles
Howarth, George (Knowsley N) Moss, Malcolm
Howe, Rt Hon Sir Geoffrey Mowlam, Marjorie
Howell, Rt Hon David (G'dford) Neale, Gerrard
Howell, Rt Hon D. (S'heath) Nelson, Anthony
Howell, Ralph (North Norfolk) Neubert, Michael
Howells, Geraint Newton, Rt Hon Tony
Hughes, Robert (Aberdeen N) Nicholls, Patrick
Hughes, Robert G. (Harrow W) Nicholson, David (Taunton)
Hunt, David (Wirral W) Nicholson, Emma (Devon West)
Hunt, John (Ravensbourne) O'Neill, Martin
Hunter, Andrew Onslow, Rt Hon Cranley
Ingram, Adam Oppenheim, Phillip
Irvine, Michael Owen, Rt Hon Dr David
Irving, Charles Page, Richard
Jack, Michael Paice, James
Jackson, Robert Parkinson, Rt Hon Cecil
Janman, Tim Patnick, Irvine
Jessel, Toby Patten, John (Oxford W)
John, Brynmor Pawsey, James
Johnson Smith, Sir Geoffrey Peacock, Mrs Elizabeth
Jones, Robert B (Herts W) Porter, Barry (Wirral S)
Jopling, Rt Hon Michael Porter, David (Waveney)
Kellett-Bowman, Dame Elaine Portillo, Michael
Kennedy, Charles Powell, William (Corby)
Key, Robert Price, Sir David
Kilfedder, James Radice, Giles
King, Roger (B'ham N'thfield) Raffan, Keith
Kinnock, Rt Hon Neil Raison, Rt Hon Timothy
Kirkwood, Archy Randall, Stuart
Knapman, Roger Rathbone, Tim
Knight, Greg (Derby North) Redwood, John
Knowles, Michael Reid, Dr John
Knox, David Rhodes James, Robert
Lamont, Rt Hon Norman Rhys Williams, Sir Brandon
Lang, Ian Riddick, Graham
Latham, Michael Ridley, Rt Hon Nicholas
Lawrence, Ivan Ridsdale, Sir Julian
Lawson, Rt Hon Nigel Rifkind, Rt Hon Malcolm
Lee, John (Pendle) Roberts, Allan (Bootle)
Leigh, Edward (Gainsbor'gh) Roberts, Wyn (Conwy)
Lennox-Boyd, Hon Mark Robertson, George
Lightbown, David Roe, Mrs Marion
Lilley, Peter Rooker, Jeff
Livsey, Richard Rossi, Sir Hugh
Lloyd, Sir Ian (Havant) Rowe, Andrew
Lloyd, Peter (Fareham) Rumbold, Mrs Angela
Lord, Michael Ryder, Richard
Luce, Rt Hon Richard Sackville, Hon Tom
Lyell, Sir Nicholas Sainsbury, Hon Tim
Macdonald, Calum A. Shaw, David (Dover)
Macfarlane, Sir Neil Shaw, Sir Giles (Pudsey)
McKay, Allen (Barnsley West) Shaw, Sir Michael (Scarb')
MacKay, Andrew (E Berkshire) Sheldon, Rt Hon Robert
Maclean, David Shephard, Mrs G. (Norfolk SW)
Maclennan, Robert Shepherd, Colin (Hereford)
McLoughlin, Patrick Shersby, Michael
McNair-Wilson, M. (Newbury) Sims, Roger
Madel, David Skeet, Sir Trevor
Major, Rt Hon John Smith, Andrew (Oxford E)
Malins, Humfrey Smith, Rt Hon J. (Monk'ds E)
Smith, Tim (Beaconsfield) Thurnham, Peter
Soames, Hon Nicholas Townend, John (Bridlington)
Speller, Tony Tredinnick, David
Spicer, Sir Jim (Dorset W) Trippier, David
Spicer, Michael (S Worcs) Viggers, Peter
Squire, Robin Waddington, Rt Hon David
Stanbrook, Ivor Wakeham, Rt Hon John
Steel, Rt Hon David Waldegrave, Hon William
Steen, Anthony Walden, George
Stern, Michael Walker, Bill (T'side North)
Stevens, Lewis Wallace, James
Stewart, Andy (Sherwood) Waller, Gary
Stewart, Ian (Hertfordshire N) Ward, John
Stokes, John Wardle, Charles (Bexhill)
Straw, Jack Watts, John
Sumberg, David Wells, Bowen
Summerson, Hugo Whitney, Ray
Tapsell, Sir Peter Widdecombe, Ann
Taylor, Mrs Ann (Dewsbury) Wilkinson, John
Taylor, Ian (Esher) Wilshire, David
Taylor, John M (Solihull) Winterton, Nicholas
Taylor, Teddy (S'end E) Wood, Timothy
Temple-Morris, Peter Yeo, Tim
Thatcher, Rt Hon Margaret Young, Sir George (Acton)
Thompson, D. (Calder Valley)
Thompson, Patrick (Norwich N) Tellers for the Ayes:
Thorne, Neil Mr. Robert Boscawen and
Thornton, Malcolm Mr. Tristan Garel-Jones.
Abbott, Ms Diane Mahon, Mrs Alice
Canavan, Dennis Nellist, Dave
Clay, Bob Primarolo, Dawn
Corbyn, Jeremy Salmond, Alex
Cryer, Bob Sedgemore, Brian
Ewing, Mrs Margaret (Moray) Skinner, Dennis
Grant, Bernie (Tottenham) Thomas, Dr Dafydd Elis
Heffer, Eric S.
Jones, leuan (Ynys Môn) Tellers for the Noes:
Lambie, David Mr. Andrew Welsh and
McGrady, Eddie Mr. Dafydd Wigley.
Madden, Max

Question accordingly agreed to.

Ordered, That Mr. Alex Salmond be suspended from the service of the House.

Mr. Deputy Speaker

then directed that the hon. Member withdraw from the House and he withdrew accordingly.

Mr. Brian Wilson (Cunninghame, North)

On a point of order, Mr. Deputy Speaker. Is it in order to point out that the cretinous performance that we have just witnessed owed everything to self-publicity and nothing to social concern, as testified by the attendance record of members of the Scottish National party in the Social Security Bill Committee—

Mr. Deputy Speaker

Order. Let us get back to the Budget.

Mr. Lawson

To repeat, Mr. Deputy Speaker, the basic rate of income tax for 1988–89 will be 25 pence in the pound.

The small companies' rate of corporation tax will similarly be reduced to 25 per cent. This means that the basic rate of income tax and the corporation tax rate for small companies will both be at their lowest level since the war.

Life assurance premium relief remains in place for policies taken out before the 1984 Budget. It has traditionally been given at half the basic rate of income tax. I therefore propose to reduce it from 15 per cent. to 121 per cent. But, to give life offices time to adjust, this change will not take effect until 6 April 1989.

I also propose to reduce the additional rate which applies to the income of discretionary trusts and for certain other purposes from 18 per cent. to 10 per cent.

It is now nine years since my predecessor, in his first Budget in 1979, reduced the top rate of income lax from the absurd 83 per cent. that prevailed under Labour to 60 per cent. where it has remained ever since. At that time, this was broadly in line with the European average for the top rate of tax. It is now one of the highest. And not only do the majority of European countries now have a top rate of tax below 60 per cent. but in the English-speaking countries outside Europe—not only the United States and Canada, but in Labour Australia and New Zealand, too—the top rate is now below 50 per cent., sometimes well below.

The reason for the worldwide trend towards lower top rates of tax is clear. Excessive rates of income tax destroy enterprise, encourage avoidance, and drive talent to more hospitable shores overseas. As a result, so far from raising additional revenue, over time they actually raise less.

By contrast, a reduction in the top rates of income tax can over time result in a higher, not a lower, yield to the Exchequer. Despite the substantial reduction in the top rate of tax in 1979, and the subsequent abolition of the investment income surcharge in 1984, the top 5 per cent. of taxpayers today contribute a third as much again in real terms as they did in 1978–79, Labour's last year; while the remaining 95 per cent. of taxpayers pay about the same in real terms as they did in 1978–79.

After nine years at 60 per cent., I believe the time has come to make a further reduction in the top rate of income tax. At present there are no fewer than five higher rates of income tax; 40 per cent., 45 per cent., 50 per cent., 55 per cent. and 60 per cent. I propose to abolish all the higher rates of tax above 40 per cent.

This major reform will leave us with one of the simplest systems of income tax in the world, consisting—

Mr. Dave Nellist (Coventry, South-East)


Mr. Deputy Speaker


Mr. Lawson

This major reform will leave us—

Mr. Nellist

Will the Chancellor give way?

Mr. Lawson

This major reform—

Mr. Nellist

Will the Chancellor give way?

Mr. Deputy Speaker

Order. The hon. Gentleman knows that, if he persists, I shall have no option but to use the disciplinary power.

Mr. Nellist

Mr. Deputy Speaker—

Mr. Deputy Speaker

Order. There will be plenty of time and opportunity to debate these matters in the days ahead.

Mr. Lawson

This major reform—

Mr. Nellist

What about the National Health Service?

Hon. Members


Mr. Deputy Speaker


Grave disorder having arisen in the House, MR. DEPUTY SPEAKER, pursuant to Standing Order No. 45 (Power of Mr. Speaker to adjourn House or suspend sitting), suspended the sitting for 10 minutes.

Sitting suspended at 5.1 pm.

5.11 pm
Mr. Deputy Speaker

resumed the Chair.

Mr. Lawson

This major reform will leave us with one of the simplest systems of income tax in the world, consisting of a basic rate of 25 per cent. and a single higher rate of 40 per cent. And, indeed, a system of personal taxation in which there is no rate anywhere in excess of 40 per cent.

I believe that 40 per cent. is an acceptable top rate of tax. But, bearing in mind that the basic rate of income tax is also the starting rate, 25 per cent. is still too high.

Since we first took office in 1979, we have reduced the basic rate of income tax from 33 per cent.—one third—to 25 per cent. —a quarter. Our aim should now be to get it down to a fifth—a rate of 20 pence in the pound —as soon as we prudently and sensibly can.

Meanwhile, I have today been able to reduce income tax at all levels, with increases in both the personal allowances and the basic rate limit, and reductions in both the basic and higher rates. The tax reduction for a married man on average earnings will be worth nearly £5 a week. The changes will take effect under PAYE on the first pay day after 14 June. They will cost £4¼ billion in 1988–89 over and above statutory indexation, of which three quarters represents the cost of increasing tax thresholds and reducing the basic rate.

The total cost of all the measures in this year's budget, again on an indexed basis, is a shade under £4 billion.

Forward to