HL Deb 19 November 1976 vol 377 cc1591-6

11.8 a.m.

Baroness HORNSBY-SMITH

My Lords, I beg leave to ask the Question which stands in my name on the Order Paper.

The Question was as follows:

To ask Her Majesty's Government what action they propose taking to remedy the reduction in benefits to 50,000 widows with children as a result of the replacement of family allowances by the Child Benefit Scheme.

Lord WELLS-PESTELL

My Lords, the proposal announced by my right honourable friend the Chief Secretary to the Treasury in another place on 16th November is that, for 1977–78, £52 of the taxable dependency allowance for each child of a widow or retirement pensioner should be exempted from tax. This will ensure that those who are liable to tax on other income are not any worse off as a result of the introduction of child benefit in April 1977. I am arranging for the full text of his Statement to be circulated in the Official Report.

Following is the Statement referred to:

Proposals for tax changes in 1977–78 consequential on the phasing-in of child benefit

  1. 1. It is the Government's intention, as was announced in the statement made by the Secretary of State for Social Services on 23rd September, that from April 1977 child tax allowances should be phased out and replaced by child benefit. By April 1979 it is intended that child tax allowances at the current £300 rate for children under 11 should be entirely phased out, leaving only residual allowances for older children which will themselves be subsumed in child benefit as soon as possible thereafter.
  2. 2 For 1977–78 it is proposed that, as the first steps in the phasing, child benefit, at the previously announced rates of £1 for the first child —£1.50 for families now getting child interim benefit—and £1.50 for each subsequent child, should be exempt from tax clawback, and that child tax allowances should be reduced as compared with their current rates by an amount corresponding to the restrictions which would, under the Government's earlier proposals, otherwise have had to be made to take account of tax and clawback on the child benefit. These restrictions would have been £104—£52 for tax and £52 for clawback—in respect of the £1 benefit payable for the first child, and £130-£78 for tax and £52 for clawback—for each subsequent child. It is therefore proposed that the child tax allowance for a first child should be reduced by £104 and the allowance for each subsequent child by £130. Legislation will accordingly be introduced in next year's Finance Bill to exempt child benefit from tax and clawback and to reduce child tax allowances as follows:
    3. 1593
  3. 3 These new rates of allowance will apply whether or not child benefit is actually paid or is paid for less than a full year and irrespective of the rate paid for a particular child.
  4. 4 A separate statement will be made shortly on the treatment of parents of children who live outside the United Kingdom.
  5. 5 With regard to parents of students, those who are liable to a parental contribution will benefit from adjustments to be made in the parental contribution scales for student grants in the academic year commencing in September 1977, and subsequent years, to take account of the reduction in child tax allowances. Child benefit is not in any event payable for any child aged 19 or over, and in view of the adjustments to be made in student grant arrangements, it is proposed as from October 1977 to exclude from entitlement to child benefit students under 19 on advanced courses.
  6. 6 The "first child" for the purposes of the new rates of allowance will be the eldest child for whom the taxpayer is entitled to child allowance. Where a child tax allowance falls to be apportioned, the allowance to be apportioned will be the highest rate of allowance which would he due to any claimant.
  7. 7 Widows and others receiving taxable social security benefits—including pensioners—who have dependent children for whom they receive taxable dependency allowances are at present subject to tax, but not to clawback, on any family allowance received. When from April 1977 the first £1 of the dependency allowance for the first child is replaced by the £1 child benefit, the proposed reductions in child tax allowances, which take account of both tax and of a £52 clawback element, would leave some widows, etc., liable to pay more tax if no adjustment were made. It is, therefore, proposed for 1977–78 to exempt from tax £52 of the taxable dependency allowance for each child. No tax adjustment is to be made for war widows, whose dependency allowances are not taxable, but their dependency allowances for the first child will be reduced by 30p a week instead of £1, and for subsequent children increased by 35p. This will ensure that those who are liable to tax on other income are not any worse off.
  8. 8 One-parent families who receive the child interim benefit of £1.50 for the first child, and who will in future receive child benefit at a special rate of £1.50 for the first child, will have their child tax allowances for the first child reduced by £104, as for first children generally. This is less than the total restriction in allowances of £130 which they at present suffer to take account of tax and clawback on their benefit, but it would be difficult operationally for the Revenue to cope with a different rate for first children in one-parent families. These families will, therefore, be better off in 1977–78 by an amount equivalent to £26 allowances—£130 less £104—vis., about 18p a week. This is not intended to be a permanent feature, and they will be put on the same footing as other families as soon as that is practicable.
  9. 9 The changes proposed for 1977–78 will leave the great majority of taxpayers, including taxpayers at the higher rates in the same position, both in terms of take-home pay and net family income, as they would have been under the 1594 Government's earlier proposals. The father's take-home pay will go down as compared with 1976–77 by 70p, while the mother will receive the new tax-free child benefit of £1 Thus the family as a whole will be 30p a week better off.
  10. 10 A minority of higher rate taxpayers could be slightly worse off than they would have been under our earlier proposals, but this only arises for those paying at a marginal rate of 55 per cent. or over for whom it would have been advantageous to renounce child benefit had it been subject to tax and clawback, and then only if they had in fact chosen to do so. We do not consider that the position so far as 1977–78 is concerned calls for any special measures, given that the losses are small and only arise for a minority in the higher ranges of the higher rates. The position for subsequent years, when further reductions in child tax allowances are to be made without any compensating tax and clawback adjustments, is under consideration.
  11. 11 The Inland Revenue will, as has already been stated, be taking account of the changes proposed for 1977–78 in its revisior of PAYE code numbers this winter. Such codings are, of course, by their nature provisional, and the revised codes will not actually take effect until 6th April 1977. This is the date from which changes in tax allowances for 1977–78 to be made in next year's Finance Bill will be effective.

Baroness HORNSBY-SMITH

My Lords, is the noble Lord aware that that Answer will be received most gratefully, because there has been deep concern among widows with children that they may be worse off? Can the noble Lord say whether these tax concessions will coincide with the change in the payments so that there is no intervening gap when these people will be drawing less?

Lord WELLS-PESTELL

That is the intention, my Lords. I said that the introduction of child benefit in 1977 was when the other matters would come into being.

Baroness ELLES

My Lords, can the Minister say what will be the effect of withdrawing the child relief on those who pay tax? Will there not in fact be a trap at the tax threshold in that those who had the benefit of £110 or £130 relief per child will not get that any more but the child benefit will not make up that difference?

Lord WELLS-PESTELL

My Lords, the Question was solely on the matter of widows, and that I have dealt with. There are many other factors which, I agree, have to be taken into account. There are beneficiaries with non-[...]axable benefits who could, I recognise, lose £l of non-taxable benefit and get back 30p after allowing for tax changes when child benefit is introduced, but we must bear in mind what was said by my right honourable friend the Prime Minister in another place when he pointed out that the taxation of short-term benefits was less an issue of principle than of practicalities. While short-term unemployment and sickness benefits remain non-taxable, people receiving them enjoy a much higher effective tax threshold than persons in work or beneficiaries with taxable benefits. In any case, as the noble Baroness knows, a person who is absent from work for a short time will still show a profit over the tax year because of the introduction of child benefit for the first child. We do not consider therefore that a case for special treatment arises in that particular situation.

Baroness ELLES

My Lords, the Minister will of course be aware that I was not discussing the question of whether or not unemployment benefit should be taxed; I am concerned with widows and others—particularly widows—who pay tax and who will lose the tax benefit for child relief. I was asking whether there would be a trap affecting those who just come into the tax threshold when this tax relief is withdrawn and they get the new child benefit which will not match up with the tax relief that they originally received.

Lord WELLS-PESTELL

My Lords, in April 1977 the dependency allowance for the first child will be reduced by £1 to take into account the introduction of £1 child benefit for the first child. The total benefit income of the widow will thus remain the same as before; the reduction is made on the principle that family allowances child benefit dependency allowances are all part of the same provision for children of beneficiaries.

Lord TREFGARNE

My Lords, while I hesitate to intervene in this rather technical matter, may I ask the noble Lord whether it is the case that widows who do not pay tax will in fact be rather worse off under these new provisions?

Lord WELLS-PESTELL

My Lords, I have not been into that. I have been asked to deal with the question of 50,000 widows and I have dealt with it to the satisfaction of the noble Baroness who asked the Question.

Baroness WARD of NORTH TYNE-SIDE

My Lords, do these matters also apply to Service widows?

Lord WELLS-PESTELL

My Lords, that is rather wide of the Question but, so far as war widows are concerned, the answer is that because their dependency allowances are already tax free this will take the form of a reduction of 30p instead of £1 in the dependency allowance for the first child and a cash increase of 35p for younger children. War widows' pensions are unlike other benefits because they are taxable only in part.