§ I now turn to the taxation of savings, where I have a number of measures to announce. As I do so, I am conscious that the majority of personal savings are the fruits of earnings that have already been taxed.
§ I start with saving in shares. The development of the personal equity plan, which stands to the immense credit of my right hon. Friend, the Member for Blaby (Mr. Lawson), has been an important boost for share ownership. I am pleased to report to the House that last year was a record one for PEPs, with 300,000 plans taken out, to the value of some £750 million. To build on this success, I propose to raise the overall annual limit on investment in PEPs by a quarter, from £4,800 to £6,000. Within that, the annual limit on investment in unit and investment trusts will be increased by the same percentage to £3,000.
§ I am also sympathetic to the problems that investment and unit trusts face in qualifying for PEP treatment. This arises from the requirement that 75 per cent. of their portfolio should be invested in ordinary United Kingdom equities. I propose therefore to relax this rule to 50 per cent. I also propose to raise the PEP limit for those trusts that do not satisfy this rule from the present £750 to £900.
§ Last year, my right hon. Friend put employee share ownership plans, or ESOPs as they are known, on the statute book. ESOPs are a vehicle for giving employees a direct stake in the business for which they work. They are an attractive option and deserve further encouragement. One impediment to their growth has been that the transfer of shares to the work force can mean that the company owner faces an immediate tax charge. To prevent this, I propose to introduce a rollover relief from capital gains tax for sales of shares to ESOPs. I believe that this will remove an obstacle to their development and give this form of employee share ownership the fillip that it deserves.
§ In a moment, I will turn to some new and significant tax changes for savers, but first, I wish to discuss a reform which was announced in the 1988 Budget and which comes into effect next month—independent taxation for women. There is too little understanding yet of what this change will mean, but it will fundamentally change the financial affairs of women.
§ At present, the taxation of married women's income is wholly inconsistent with their role in society. In tax law, their income is still considered to belong to their husbands. The effect of this is twofold: it denies married women any privacy or independence in tax matters, and too often it results in heavier taxation than is fair. It is time for the system to go, and go it will from April.
§ In future, a husband and wife will be taxed entirely separately. Every married woman will have a tax 1025 allowance of her own to set against her income—whether this income is from earnings, pension or savings. Three and three quarter million people will gain, of whom two million have incomes of less than £5,000 a year. One million elderly married couples will pay less tax, and 200,000 pensioner couples will be taken out of tax altogether.
§ No one will be sorry to see the old system go. One of its worst features was its treatment of the savings of married women. Whether they had other income or not, the interest on their savings was added to their husband's income and taxed at his rate. This was a clear penalty on thrift. From April, all that will end. This may well be the area where the reform has its greatest effect and will be most welcomed.
§ However, independent taxation has thrown into sharp relief another aspect of the tax system that affects all savers, and which no longer deserves to survive.
§ Some women will see the benefit of independent taxation automatically, if they have their money invested in national savings, or other accounts which pay interest gross of tax, but many women with only small savings prefer to save with high street banks or building societies, and so, frankly, do many other small savers. For all these savers, income tax—or rather, a proxy for it, called the composite rate—is deducted before the interest ever gets to the saver, and whether or not the saver is liable to pay tax.
§ Composite rate tax was introduced originally in 1894, and put on the statute book in 1951. It currently stands at just under 22 per cent. It is deducted at source. It cannot be reclaimed in any circumstances. This means that basic rate taxpayers gain by about 3 per cent.—the difference between the composite rate and the basic rate of income tax, which is what they should pay. And it means that non-taxpayers are worse off by 22 per cent.
§ The attraction of composite rate has always been that it allows small amounts of tax to be collected with ease from very large numbers of people. It is very convenient and very cost-effective, but the fact remains that, with composite rate tax, we tax people on low incomes who should not be taxed.
§ It has, of course, always been possible for these people to avoid taxation entirely, by saving in accounts that pay interest gross or tax-free, or where tax can be reclaimed, but the convenience of using banks and building societies has meant that many of them have not done so.
§ The scale of the problem is compelling. Once independent taxation is implemented, there will be 14 million people—nearly one quarter of the population—who have savings income that does not merit taxation, but which will be taxed under present legislation. They include some 5 million married women with little or no other income of their own, 4 million pensioners, 2.5 million other adults, and 2.5 million children with small savings accounts—often funded with small gifts of money from grandparents, or savings from pocket money.
§ There is no way out of this problem other than to abolish composite rate tax entirely. This I propose to do with effect from 6 April 1991, the earliest practicable date. From then on, tax will fall on those who should pay it, and will not fall on those who should not pay it.
§ We shall discuss with the banks and building societies how to effect this enormous organisational change. I envisage a scheme of self-certification that will allow non-taxpayers to be paid their interest without deduction of tax. For other savers, tax will continue to be deducted 1026 at source, but at basic rate. However, unlike composite rate tax, any tax deducted will be reclaimable by any non-taxpayers who, for any reason, may not have been able to self-certify for gross payment.
§ This change will significantly reduce the amount of tax paid by millions of married women, pensioners, children and others with small savings, and by removing the penalty of composite rate tax, it will play an important part in encouraging the savings habit. Meanwhile, the Department of National Savings also has a part to play in encouraging the savings habit. I am therefore announcing today a 1 per cent. increase in the interest rates paid on national savings investment account and income bonds, where interest is already paid gross. This too will help encourage saving, particularly by non-taxpayers.
§ However, as well as removing the tax impost for non-taxpayers, I wish to do more to encourage the saving habit among taxpayers—all of them.
§ In the 11 years that we have been in office, a series of Budgets have removed penal rates of tax, abolished the investment income surcharge and introduced important new schemes to encourage saving and investment. I intend now to build further on those measures, for everyone, and that means going beyond the incentives to saving that we have built up so far. These schemes have been immensely successful in spreading share ownership, and will continue to be so in the future, but I now want to extend savings incentives to the mass of ordinary taxpaying savers—and potential savers—who prefer to put their money in the familiar security of high street banks and building societies.
§ My next measure is addressed precisely to them. I propose to introduce a wholly new tax incentive which will reward saving and encourage people to build up a stock of capital. The scheme will work as follows. Every adult will be entitled to one tax-exempt special savings account, TESSA for short. All commercial banks or building societies will be able to offer such an account. The essence of the scheme is to encourage people to save regularly over a five-year period. The incentive for them to do so is that all the interest earned on their capital will be entirely free of tax, provided only that the capital itself is left undisturbed over the five-year period.
§ The annual limit on the amount that can be invested will be £1,800 or £150 a month. In the first year, anyone who has capital that they are willing to tie up for longer can put this money in their account from the outset, up to a limit of £3,000, but the overall limit of £9,000 for the whole plan applies nonetheless.
§ To cope with the circumstances of many small savers—particularly pensioners—who use the interest on their savings for their everyday expenses, it will be possible to withdraw interest as it accrues, but only up to the net-of-tax level. At the end of the five years, the depositor then gets a bonus representing the money which would otherwise have gone in tax. The depositor will get this provided none of the capital has been withdrawn before the five years is up. They can, of course, withdraw the capital at any time, but without tax relief.
§ This scheme is convenient, flexible and simple. It extends a form of PEP treatment to ordinary savings. It caters for those who want to save monthly, annually, or in irregular amounts. It represents a substantial incentive to save, and I am confident that it will play its part in reviving the culture of thrift. I also believe that it is both desirable and fair to reduce tax on small savings.1027
§ This new relief will be available from next January. Its cost will depend on take-up, but could be at least £200 million in the first full year, and rising thereafter.
§ This Budget has contained a whole range of savings incentives. It has done so because I believe it is economically right to encourage savings, and because I believe also that it is socially right—not least because of the independence and security it offers to savers as they build up capital of their own. However, there is little point in encouraging savings if we leave in the system an over-severe penalty for doing so. I turn, therefore, to the social security system and to what has become known as the capital rule.
§ As the House knows, people with capital over £3,000 start to have their benefits reduced, and those with more than a certain level of savings—£6,000 in the case of income support and family credit and £8,000 in the case of housing benefit and community charge benefit—become completely ineligible for all means-tested benefits, however low their incomes.
§ There must, of course, be some upper limits above which help is no longer given, but the present limits are widely resented as a penalty on thrift and self-provision. [Interruption.] This is particularly so in the case of elderly people with some capital but only modest incomes. They believe it is unfair that they must use the money carefully saved during their working lives while others, less provident, have immediate access to the benefit system.
§ I have therefore reviewed the present limits with my right hon. Friend the Secretary of State for Social Security, and we have decided that they should be raised. The limit for income support and family credit, where the stress is less great, will rise from £6,000 to £8,000, but the problem is most acute for those whose savings disqualify them from housing benefit and from community charge benefit. [Interruption.] I propose therefore, to double the capital cut-off for both these benefits, from £8,000 to £16,000—for housing benefit and for community charge. This new limit will be of particular help to couples, but it will also apply to single people and therefore extend help to some widows and widowers who would otherwise continue to be excluded.
§ This measure will benefit—
§ Mr. Deputy Speaker
That is clearly not a point of order for the Chair. Mr. Chancellor of the Exchequer.
§ Mr. Dick Douglas (Dunfermline, West)
On a point of order, Mr. Deputy Speaker. You are in the Chair, as Chairman of Ways and Means. Important tax concessions and changes are being made. A principle of taxation in this country—
§ Mr. Deputy Speaker
Order. The hon. Gentleman knows that that is not a point of order for me to deal with. I am anxious to hear what the Chancellor has to say.
§ Mr. Deputy Speaker
I very much hope that it is. It does the House's reputation little good to have the Chancellor's speech interrupted by points of order which are not matters for the Chair.
§ Mr. Wilson
It is precisely in the interest of the House's reputation that I ask, on a point of order, whether the Chancellor will make clear immediately whether the concessions that he has announced will be retrospectively applied to Scotland.
§ Mr. Deputy Speaker
Order. That is not a matter for the Chair. Points of order must be for me and not for Ministers.
§ Mr. Jim Sillars (Glasgow, Govan)
On a point of order, Mr. Deputy Speaker. Given that many of us, especially Opposition Members, were unable to hear what the Chancellor said because of the noise, would it be in order to get him to repeat the last two passages to see whether that tax concession will be retrospective in Scotland, which got the poll tax a year earlier?
§ Mr. Deputy Speaker
Order. I am not going to listen to any more bogus points of order. I hope that the hon. Gentleman shares my anxiety to hear what the Chancellor has to say.
§ Mr. Major
For the avoidance of doubt, Mr. Deputy Speaker, I shall repeat that this measure will benefit around a quarter of a million people, two thirds of them pensioners who are at present wholly excluded from benefit. The total cost will be £120 million a year, which will be met from the reserve and will not increase the public expenditure totals.
To avoid delay, my right hon. Friend is laying the necessary regulations today—[Interruption.]—so that the limits will be increased when benefits are uprated at the beginning of April. He will discuss the operational implications of this change with local authorities immediately.