Turning now to income tax more generally, I do not propose this year to increase the basic rate limit, the level of taxable income above which people begin to pay higher rate tax. Compared with indexation, this will save £180 million in 1992–93 and £290 million the following year.
Nor do I propose any increase in the married couple's allowance for couples under 65 or the allowances that are linked to it. But I do have one significant change to announce. The introduction of independent taxation in 1990 brought privacy and independence to married women by ending the rule that a wife's income was assumed to be her husband's. This change was widely welcomed. However, it did not eliminate completely the discriminatory features of the old system.
At present, the husband receives the benefit of the married couple's allowance unless his income is too low to make use of it. That means that the husband's tax allowances are almost always greater than those of his wife. It also means that couples where the wife is a higher rate taxpayer and the husband is not pay more tax than couples where the husband is the higher rate taxpayer. That cannot be right. It is hardly surprising that the MCA has been described by some as the male chauvinist allowance.
I propose to change this system. From 1993–94, couples will have a choice. If they take no action, the husband will continue to receive the MCA as now. They will be able to decide that the wife should receive the whole allowance, or that they should split it; or the wife will be able to claim half at her own request. This measure will have only a small effect on revenue—£10 million in 1993–94—but it will make the tax system much fairer to married women.
The Government have cut the basic rate of income tax by 8p since we took office in 1979, to 25p. And, as the House knows, we are committed to reducing the basic rate to 20p as and when it is prudent to do so. I reaffirm that commitment today.
For the year ahead, I propose that the personal allowance should be uprated only in line with inflation. It will rise from £3,295 to £3,445. But having reflected carefully on the priorities for this year's Budget, I have decided that for the year ahead it is right to leave the basic rate at 25p in the pound.
I believe that it is possible, desirable and, indeed, prudent to take a substantial step this year towards our goal of a 20p basic rate for all taxpayers. It is neither necessary nor desirable that anyone earning more than their personal allowances should start paying income tax at a rate of 25 per cent. With national insurance contributions on top, that means that the Government take a third of every extra £1 earned even from the low paid. In my view, that is simply too much; and I believe that we can and should reduce that burden.
So I propose this year to cut the rate of income tax by 5p, to 20p, for the first £2,000 of taxable income. That will benefit every taxpayer in the country, but it will be of proportionately greater benefit to those on low incomes. It represents a decisive first step towards the Government's objective of a 20p basic rate.
In the next Parliament, we will gradually move closer to that goal. We will be able to do that in two possible ways: either by extending the width of the 20p band so that it covers increasing numbers of basic rate taxpayers, or by reducing the basic rate itself.
Next year, nearly 4 million people on low incomes will already be paying tax only at the 20p rate. Their income tax bill will be cut by a fifth. That will improve their work incentives and make it more worth while for those not currently in work to take lower paid jobs.
Nearly 25 million people—every taxpayer in the country—will see their starting rate of tax reduced to 20p. Combined with the indexation of the personal allowance, that will reduce taxes for the large majority of taxpayers by at least £2·64 a week.
Mortgage interest tax relief at source will continue to be given at 25 per cent. for everybody, irrespective of whether they are a non-taxpayer, a 20p taxpayer, a basic rate taxpayer, or a higher rate taxpayer. But those in the 20p band will only be liable for tax at 20 per cent. on their savings.
The new 20p band will cost £1·8 billion in 1992–93 and £2·3 billion in the following year, broadly equivalent to the cost of a penny off the basic rate. But, in comparison with a penny off the basic rate, the 20p band will be of particular benefit to those on the lowest incomes. Indeed, about three-quarters of the cost will go to taxpayers earning less than average male earnings.
I now turn to the question of value added tax. I have a very important announcement to make, to which I hope the whole House will listen carefully. I have no need, no proposals and no plans either to raise or to extend the scope of VAT.
The total impact of the taxation proposals I have put forward today, taken together with measures announced since my last Budget, will reduce the burden of taxation by around £1·5 billion, equivalent to ¼ per cent. of GDP, in the next financial year.