§ I turn finally to income tax. My priority in this Budget has been to set out a clear strategy for reducing public sector borrowing over the medium term. I am therefore unable this year to reduce the basic rate of income tax. I also propose to leave the higher rate of tax unchanged at 40 per cent.
§ However, in my Budget last year, I opened up an alternative route for moving over time towards our ultimate objective—a 20p basic rate of income tax for everyone. The new lower rate band I announced last year at a stroke took 4 million taxpayers on low incomes down to the 20 per cent. rate, cutting their marginal rate of tax by a fifth.
§ In this Budget, I have taken my reform a step further. The Government's 20p pledge not only involves a reduction in marginal tax rates for 19 million basic rate taxpayers, but, also, when the basic rate is eventually brought down to 20p, tax reliefs for basic rate taxpayers will, of course, be worth 20p in the pound, too. In this Budget, I have brought forward that change by restricting three specific tax reliefs to 20 per cent., not just for basic rate taxpayers, but for all taxpayers.
§ First, I have reduced the tax credit on dividends to 20 per cent., to cut the rate of advance corporation tax which companies pay on dividends. Secondly, I will be reducing the rate of relief on mortgage interest payments to 20 per cent., to cut the subsidy on borrowing and to pay for a reduction in the tax on housing transactions. Thirdly, I will be restricting the tax relief for married couples to 20 per cent., to make it worth the same for all taxpayers.
§ All these measures are sensible reforms in their own right. When revenue has to be raised, it is far better to do this by broadening the tax base than by increasing tax rates; but, in addition, the restrictions I have introduced will also allow me to make further progress in getting income tax rates down.
§ I therefore propose to increase the width of the new 20p band in 1993–94 by £500 to £2,500. That will help all taxpayers currently paying tax at 25 per cent., and it means that, in the coming year, nearly 5 million taxpayers will 196 face a marginal rate of income tax of only 20 per cent. Already, for about a fifth of all taxpayers, I will have delivered on our promise of a 20p rate in the first Budget of the Parliament, and I will have done so by a sensible and fair reform of the tax system.
§ But I can also go further. The measures I have announced today will also allow me to make a further extension of the 20p rate in 1994–95. From 1 April next year, I propose that the 20p band should cover the first £3,000 of taxable income, £500 more than in the year ahead; and we shall continue to widen the 20p band in the years to come—year by year, we will make our progress towards our objective: a 20p basic rate of tax for everyone.