I now turn to my main proposals for income tax. The cuts that I made last year were an important start on reducing the oppressive burden of direct taxation. At every income level, taxpayers now retain a significantly larger share of their incomes, which they are free to spend or save as they choose. I intend to do more in the future, but at a time when output is falling and we are making further heavy cuts in public expenditure I cannot afford to protect income taxpayers fully from the effects of inflation. This, then, must be a year of consolidation.
At first sight that would suggest increases in the personal allowances which fall some way short of the rise in prices during 1979, but this would have a number of undesirable effects. It would lower the starting point of income tax in real terms, compared with a year ago. It would increase the number of taxpayers. It would narrow the gap between tax thresholds and the main social security benefits, and it would impose particularly heavy burdens on those with the smallest incomes. All those effects would be most undesirable.
Given the limited scope available, I have considered how to avoid these consequences. I mean to do so by adopting an alternative approach. I propose to increase the main income tax allowances by 18 per cent. or so, which is in line with the rise in prices and in conformity with the indexation requirement of the 1977 Finance Act. This will bring substantial relief to all taxpayers. But in order to afford this I intend to remove the lower rate band of taxation, levied at 25 per cent. on the first £750 of taxable income. This combination will protect the position of the very poorest taxpayers whilst ensuring that basic rate taxpayers receive some, though not complete, protection from the rise in prices.
The single allowance will thus be increased by £210 to £1,375 and the married allowance by £330 to £2,145. The corresponding allowances for people over 65 will go up by £280 to £1,820, and by £440 to £2,895. The income limit for the age allowance will go up to £5,900. Also, the additional personal allowance available mainly to single parents will go up by £120 to £770. The revenue cost of these increases in 1980–81 will be some £1,800 million, offset by a saving of £750 million from ending the lower rate band. I cannot this year make any further reductions in the income tax rates, so the basic rate will remain at 30 per cent. and the higher rates will also remain unchanged.
The case for the lower rate band was never at all clear. The 25 per cent. rate was not the effective marginal rate for more than a small number of full-time adult workers. For those on lower incomes an increase in the personal allowances would always have been more valuable than the lower rate band, and the existence of this lower rate band added significantly to the complexity of the tax system. Its disappearance will simplify and shorten the PAYE tables and reduce the administrative burden on employers and on the Inland Revenue, where there will be a valuable staff saving of 1,300 persons.
I am in no doubt that it is right, in a year when difficult choices have to be made, to concentrate on raising the tax thresholds for everybody, as I have proposed, by about 18 per cent. I am also in no doubt that it is necessary to abate the tax reductions that follow from that change by the abolition of the lower rate band. Taken together, these changes are equivalent to an effective increase in tax reliefs of 11 per cent. for a married couple and rather less than that for single taxpayers. The 18¾ per cent. rise in child benefit implies a broadly comparable annual rate of increase—about 11 per cent.—over its April 1979 level.
Next, I come to higher-rate taxpayers. Given the substantial improvements last year it would not be appropriate to give major relief to higher-rate taxpayers this year. However, our progressive income tax system operates in such a way that those who pay tax at higher rates experience sharply increasing tax burdens in times of inflation. In the ordinary course it would be right to increase the higher-rate threshold and bands by the same proportion as the increase in personal allowances. That would imply 18 per cent. this year. But this year the improvements in personal allowances are partially offset by abolition of the lower rate band.
That change will have only limited significance for those on higher incomes, so I have decided not to raise the higher-rate thresholds fully in line with inflation, as I have done for the main personal allowances, but to put them up by only about 11 per cent. That is, as I have explained, broadly equivalent to the total net increase in tax reliefs that I have proposed for married couples paying tax at the basic rate.
In money terms the threshold for the higher rates will be raised to £11,250 and the threshold to the top rate of 60 per cent. to £27,750. There will be corresponding increases at the intervening points. So far from making the rich richer, these restricted improvements will result in an increase in the real burden of income tax for the higher rate taxpayer. The cost of increasing the higher-rate thresholds is £100 million in 1980–81 compared with a cost of £140 million if they had been fully indexed. I am also limiting this year's increase in the threshold to the investment income surcharge to 10 per cent., that is, to £5,500. However, with a view to consistent treatment in future years I shall include provisions in the Finance Bill that should ensure, with effect from next year, that the higher-rate thresholds and bands, together with the investment income surcharge threshold, are covered by indexing legislation in the same way as the main personal allowances.
For the typical married couple with two children the net effect of my Budget changes will be to increase their weekly income by £2·68 per week from November. For a single man with the same earnings the increase will be 49p per week.
The income tax changes that I propose will be given effect when new tax tables have been printed and distributed. They will be made together and will produce a net increase in take-home pay on the first pay day after 31 May.
Other income tax proposals
I am proposing two other small income tax changes that have long merited action.
I propose to exempt from tax and payments made to holders of certain gallantry awards, such as the Distinguished Conduct Medal and the Conspicuous Gallantry Medal. These will in future be treated in the same way as annuities payable to holders of the Victoria Cross and George Cross.
I want also to do something more for widows in the difficult time immediately following bereavement. I therefore propose to increase the present single allowance that widows receive for the tax year in which they are bereaved. The addition for that year will, at its maximum, bring the single allowance for widows up to the level of the married allowance.
Taxation of Husband and Wife
We have also been reviewing the treatment for tax purposes of husband and wife. This is a complex and important subject. I am grateful in particular to the Equal Opportunities Commission for the light which its publications have shed on this aspect of sex discrimination. In view of my relationship with the former deputy chairman of that body I hope that it is not improper for me to mention its work, but, as I have observed, it is easier to define the problems than to find the answers. Certainly, radical changes should not be made in haste. I propose, therefore, to issue later this year a Green Paper on this subject. I hope that it will stimulate further constructive debate. leading us ultimately to acceptable solutions.