[3rd Allocated Day]
Further considered in Committee (Progress reported, 13 July)
[Mr Nigel Evans in the Chair]
Rates of insurance premium tax
With this it will be convenient to discuss the following: amendment 19, page 2, line 23, leave out ‘“6 per cent”’ and insert ‘“5 per cent in the case of motor insurance, and 6 per cent in any other case”’.
Amendment 15, page 2, line 26, at end add ‘, subject to a report having been laid by the Secretary of State containing an assessment of the consequences of the changes in subsection (1) on consumers and the insurance industry.’.
Amendment 48, page 2, line 32, leave out subsection (4).
The amendments aim to tease out from the coalition Government and, in particular, the Exchequer Secretary, who is responding to this debate, what the Government’s attitude is towards people who do the right thing and try to relieve the burden on the public sector and the national taxpayer. Although it would be wrong to suggest that the inspiration for the amendments came from the Secretary of State for Transport, he was on to an important principle recently when he said that if a pensioner has a bus pass but can afford to pay their fare, they should not use the pass but pay the fare themselves and thereby relieve the local taxpayer of the costs consequent upon the use of that subsidised bus pass. It is a subsidy of general application—it goes to people irrespective of their means and ability to pay.
We know that quite a lot of people choose to buy medical and personal health care in the private sector without burdening the state and the taxpayer. If those people choose to do that through personal health insurance, this Budget will increase the financial penalty on them. In other words, it will be a disincentive to people taking responsibility for their own personal health care through personal health insurance. Many years ago, it was the policy of the then Conservative Government that those who subscribed to personal health care insurance should have their subscriptions tax deductible. That was based on the worthy principle that, if we did that, we would encourage more people to take responsibility for their own health care. We have moved a long way from that now.
My hon. Friend is making a powerful speech, and I am grateful to him for giving way. Does he support the Government’s aim of coming up with suggestions that will reduce the charge to the taxpayer? Obviously, if more people take private medical insurance, there is less of a burden on the state and it is a win-win situation for the Government.
Almost every contribution I make in the House is designed to try to help the Government and often to try to get better value for money for taxpayers.
If we were under any illusions about how important and critical the situation is in relation to health care, we should bear in mind that yesterday, in response to a question from my hon. Friend the Member for Pendle (Andrew Stephenson) about the NHS White Paper, the Prime Minister said that
“when we look at the NHS, we know that there are expensive drugs coming down the track, expensive treatments and an ageing population, and more children born with disabilities and living for longer. There are cost pressures on our NHS that mean that even small real-terms increases will be an heroic thing to achieve.”—[Official Report, 14 July 2010; Vol. 513, c. 950.]
My hon. Friend the Member for Wellingborough (Mr Bone) is making exactly the same point. I am trying to tease out from my hon. Friend the Exchequer Secretary whether it is the Government’s policy to try to encourage people to take responsibility for their own health care, if they can so do. This is not the subject of an amendment, but similarly, if people can afford to educate their children in the independent sector, should they not be encouraged so to do?
I am concerned that, in this country, we cannot afford to fund all our health care needs out of taxation. If we look at those countries that have better health care systems that are also better funded collectively than ours, we see that many of them—I am thinking particularly of Australia—are in countries where a high proportion of the money going into personal health care comes from individuals, rather than taxpayers. If we want more expenditure on health, why do we not incentivise people to take on more responsibility themselves?
It might be said, “Well, these are the services that are available, and people shouldn’t be encouraged to buy their way out of the queue,” but a situation is rapidly developing where what are described as low-priority health services are affected. For example, the local primary care trust in my area has refused to fund an operation—I think that it is called a grommets operation—for two young children who have difficulties with their learning as a result of their ear condition. The primary care trust has refused to fund those operations on the grounds that they constitute low-level care. Indeed, I met somebody during the general election who, according to the clinical advice that he had received, needed a cataract operation at the Royal Bournemouth hospital. However, that operation was not being funded, because the cataracts were not sufficiently severe.
What is happening now is that the public availability of health care that is funded by the taxpayer is being reduced. An increasing number of people may wish to insure themselves against the possibility that they might need access to such health care in the independent sector. Indeed, one might also mention physiotherapy. Any number of people who suffer sports injuries then seek to get physiotherapy on the NHS, but they find that if they can get it at all, the wait is likely to be so long that the benefit will be significantly less.
A large number of individuals in this country insure themselves with personal health insurance. If the Government think that that is a good and responsible thing to do—it is one way in which people choose to spend their money, perhaps instead of spending it on expensive holidays abroad or whatever else—we can perhaps hear about that today. However, if the Government’s purpose is to encourage people to supplement the health care that is available from the state, why are we proposing to increase the insurance tax on the premiums that they pay?
One might also talk about what happens in dentistry. It is almost impossible now to access free dentistry on the NHS. Indeed, I understand from the British Dental Association that, in terms of value, about half the dentistry in this country is practised in the private sector, and a lot of that is funded through insurance. If we want a nation that prides itself on having about the worst dental care of anywhere in the world, we are heading in the right direction. I am sorry that my hon. Friend the Member for Mole Valley (Sir Paul Beresford) is not here to supplement my points about that, but there is an increasing crisis in dentistry in this country, because of a lack of resources that are funded by the taxpayer. In moving the amendment, I am not asking that those taxpayer resources should be greater; rather, I am trying to ensure that proper incentives are in place to encourage people to take responsibility for such insurance themselves.
I am delighted by the case that my hon. Friend is making. As he is suggesting, people who insure for their health needs are paying twice, because they are also paying their contribution to the NHS, thereby helping doubly. Does he therefore think that keeping the tax rate at 5% is enough, or would he really rather it were lower?
My right hon. Friend asks a pertinent question. I would prefer the tax to be much lower—indeed, perhaps there should be no tax at all—for particular insurance premiums. However, in order to try to carry as many people with me as possible in this debate, I thought that I would limit my ambition, by saying, “Why don’t we not increase the tax from 5% to 6% for specific types of insurance premiums?”
I have picked out a couple of examples of that, and I will come to another in a minute, but obviously the principles could apply much more widely. For example, many people are now taking out insurance against their long-term care needs. Indeed, the Conservative party said in its manifesto that for an £8,000 premium, a family would be able to secure themselves against the cost of having to fund long-term care. I do not know whether such a premium, if it were paid, would be subject to insurance premium tax, but perhaps my hon. Friend the Minister will be able to tell us about that. At the same time, perhaps he can let us know when he expects that part of the Conservative manifesto to be brought before the House for implementation in legislative form.
The principle of insurance is one that most Conservatives—most of my constituents—applaud. People can either self-insure, which means that they take the risks themselves, or they can pool that risk by buying an insurance policy, which many people do, by buying life insurance, pension insurance and so on. In the case of pension insurance, we are talking about incentives for saving; in the case of life insurance, we are trying to encourage people to ensure that if they die prematurely, their dependants have some support and are not wholly dependent on the state. Those examples do not fall within the scope of my amendments, but they would be covered by amendment 15, which goes rather wider. However, it is important that we should have this little debate, to try to tease out a bit more from the Government on these important issues.
Turning to my amendment 19, let me say that we have a real problem with motor insurance in this country. For young people, the price of motor insurance is almost prohibitive. Indeed, it is so high that people cannot afford to buy it. Instead, what happens is that young people might get their parents to put them on their policies, if they are lucky enough to have parents who will do so—sometimes in quite dubious circumstances, as we have been reading in the newspapers recently—but quite often they will take a risk and drive uninsured. I regard driving without insurance as an extremely serious motoring offence. It is reckless, and those who do pay for their motor insurance end up having to pick up the bill for those who cause accidents and injuries as a result of not buying insurance.
I am following the hon. Gentlemen’s argument, but when he says that the cost of insurance for young people is prohibitive, does he honestly believe that 1% either way is going to be a significant factor in a young person’s decision on whether to buy motor insurance?
Well, 1% is 1%. I am sorry that the hon. Lady seems to be rather unsympathetic to the plight of people who are trying to get motor insurance. Lots of young people need a car to get to work. They find the cost of motoring increasing all the time and they find the cost of insurance also increasing, yet the proposal before us is to increase that cost further—not massively further, but to increase it nevertheless.
As I hope to be able to say in my contribution later, I agree with the hon. Gentleman on this point. I am astonished to hear the comments coming from the Liberal Democrats that they do not care about the costs of motor insurance, which, especially to young people, can be £1,000 or more. Will the hon. Gentleman also note the perverse consequences for those who go uninsured? Yes, they might get six points put on their licence if they are caught, but the fine is often just £300 or £400, so they would almost be better off to take the risk and be fined rather than pay the cost of the insurance. That has to change.
The hon. Gentleman is absolutely right. What he said is no great revelation for young people when they go out and party or communicate with each other via modern means of communication. They know that the risks of getting caught are not that great, and that if they are caught, the consequence will be penalty points on their licence and a fine. They will often be able to pay off the fine over an extended period.
Young people now face very substantial insurance premiums and those from the most deprived areas are often those with the highest premiums. One factor that is taken into account is the postcode. If the chance of someone’s car being stolen is high because of where they live or because they do not have garage, the premium will be higher than for someone who perhaps lives in a rural, perhaps law-abiding community. That is an additional problem that these young people face when it comes to motor insurance.
This tax will hit not only young people, but people of all ages. Does he agree that those arguing that the motor car is a luxury and that taxes on luxuries are quite acceptable are ignoring the real problems that people in rural areas face? For them the motor car is not a luxury but a necessity.
My right hon. Friend is absolutely right. What he and others are identifying in this debate is an element of confusion in public policy. Compulsory third-party insurance for people who drive cars is a matter of public policy. If such compulsory insurance is required by the law, we are effectively saying as law-makers that it is a good thing to have it. Are we seriously saying as law-makers, “Well, if you comply with the law, we are also going to charge you extra tax for your compliance”? It seems to me that we need more clarity of thought on the matter. If we do not think that insurance is important and necessary, we should remove the requirement for compulsory insurance. I think that motor insurance, and particularly third-party insurance, is not only desirable but essential. If we are to have it, however, why should we also have insurance premium tax on it? In particular, why do we need to increase the insurance premium tax at this time?
The yield from all the increases in insurance premium tax comes to some £400 million a year, but I suggest that the cost ramifications arising from uninsured driving, and the accident and injuries resulting from it, might be on a scale similar to the total yield of the entire increase in insurance premium tax. Because the current system imposes a flat rate on the level of the premium, the higher the premium, the worse the risk and the greater the penalty incurred.
When the Minister responds, I hope he will let us know whether he has considered alternative ways of raising revenue, if it has to be raised, from insurance premiums. It might be possible to do so by looking at each transaction, or we could have a fixed levy on every annual insurance premium. That would mean that people with the highest premiums would not have to pay the highest amount in tax. I do not know whether those options are being looked at. If the Minister is listening to what I am saying rather than coalescing with the coalition, I hope he will let me know whether any thinking has gone on in this radical Government along the lines that I have suggested—of having a fixed price tax on each insurance transaction rather than relating the tax to the cost of the premium, which, as I have said, militates particularly against the least well-off, living in areas where the premiums are higher because the risks are higher.
Without making a meal of it, I believe that we are debating an important matter of principle, and I am delighted that there are so many right hon. and hon. Members in the Chamber to hear it debated. We look forward to hearing more about amendment 15, which I believe is also a useful one. It is surprising that we do not have such a report as is suggested in the amendment before us now as we consider these issues.
I do not think my hon. Friend should gloss over this point too quickly. As he has said, this is a percentage tax, so we are effectively saying that a young driver seeking to insure an Escort RS motor vehicle should pay more in tax than a 55-year-old driver of a Bentley.
My right hon. Friend has particular expertise and knowledge about that particular end of the market. I am sure that the Committee is obliged to him for that information. The point he makes is absolutely correct. If we are thinking in terms of equity and fairness as the guiding words of the day, let us see if we can look again with radical eyes at this whole structure of taxing insurance premiums. Let us see whether the Government accept the amendment today; if they do not, let us see whether they have anything else to put on the table by way of responding positively to the points raised in the debate. We can then decide whether we wish to divide the Committee on this issue or just put down a marker.
Before my hon. Friend concludes his opening remarks, will he clarify this? I assume that the amendment is not really about whether to have the tax rise or not to have it, because it is very small. Is it more about sending out a signal that the Government want to encourage people to take responsibility and take out insurance?
Absolutely. I make no apology for declaring my own view, which is that if it could be afforded, it would be sensible to give tax relief on insurance premiums where we think those premiums are for the public good and will result in reducing the burden on the state and the taxpayer. I would like at least to bring in incentives in the form of tax relief, let alone eliminate the insurance premium tax. As I said earlier, I do not think that the latter is affordable in the present crisis. That is why I tabled this very modest proposal in the hope that it will get the Government thinking about alternative means of raising money from insurance policies.
I rise to speak to amendment 15 in my name and that of my friends. At face value, the increase in insurance premium tax in the Budget did not cause a huge stir, but as its consequences began to be felt, many representations were made by consumers and the industry. On balance, it is wise that we should have a report on the likely consequences of this tax rise on individuals, families, consumers and the sector. A number of concerns and predictions have been voiced. Eric Galbraith, the chief executive of the British Insurance Brokers Association, said that its research
“demonstrated that businesses and consumers were reducing insurance cover as a result of the recession”
“we are concerned that increases to insurance premiums as a result of IPT could lead to even further underinsurance or even a lack of insurance protection. The last thing people need in a financial crisis is a higher insurance bill”.
That makes sense, given that taxes elsewhere, not least VAT, are going up. The insurance industry is worried that increased premiums may tempt people completely to stop insuring their homes, holidays or travel. Already, according to research by moneysupermarket.com, only one in five travellers always cover every trip they take here or abroad.
One consequence of underinsurance or non-insurance is that the number of illegal uninsured drivers is on the rise. According to the Motor Insurers Bureau, they already push up the average car premium for everybody else by £30 a year. If more people are underinsured or have no insurance at all, the premiums of those who pay the minimum third-party insurance will be pushed up even further. That is another burden that people really cannot do with in the middle of this recession, when times are tough. As the right hon. Member for East Yorkshire (Mr Knight) has made clear, in certain parts of the country, where the car is a necessity and people are honest, such premiums will be paid again and again. There will be a lot of hits to the honest insurer as a result of non-insurance elsewhere.
The Association of British Insurers has responded to the Budget by saying:
“Raising IPT is a direct tax increase for the vast majority of people who sensibly protect themselves and their families with insurance. This is regrettable and could have serious unintended consequences if it puts off consumers from protecting their homes, cars, holidays and everyday living.”
On uninsured trips, apparently some 2.9 million trips are made each year without adequate cover. Peter Hayman, the director of P J Hayman, expects that number to rise as more people opt to economise and use “free” cover as the cost of IPT increases. Perry Wilson, the founder of Insure and Go, has said:
“Our research suggests that the UK travel insurance industry receives over half a million claims for medical problems a year and nearly 400 000 for lost or stolen baggage. This tax rise will only act as a deterrent to those who sensibly want to insure themselves against these risks”.
Of course, the cost of not having insurance in certain circumstances can be extraordinarily expensive.
The hon. Gentleman makes an important point about underinsurance, as have other Members. Does he agree that this should not be just about the potential increase in IPT, but should also be about what we can do in terms of product design? Surely the onus should be on insurers to come up with products that help people, particularly younger drivers, to avoid this challenge. For example, they should look at opportunities for pay-as-you-go insurance and other possibilities. The argument is not just about IPT, but is about other product-related challenges and what can be put forward to mitigate the problems of underinsurance.
I am a great supporter of innovative product design, marketing and pricing strategies, and I hope that all those things happen, but we are debating an amendment to the Finance Bill in which the Government are putting up IPT. I shall not strain the limits allowed by the Chair, but shall stick to the amendment and what is in the Bill, while supporting any innovation that the insurance sector, which is massively important in Scotland, might bring forward.
There is a deterrent effect on those who wish sensibly to insure themselves against many risks, and that effect will be enhanced as the cost of insurance rises. There are also specific consequences for individuals. Some 1.2 million people—about one in 20 motorists—regularly drive uninsured, and honest motorists pay the £30 premium I have mentioned, which is likely to go up. If someone is caught driving without insurance, the police are entitled to remove their vehicle from the road and charge them for the cost of transporting, storing or scrapping it. However, some cars may be worth less than the cost of insurance and there will be a burden on the public purse as a result of that removal, storage and scrapping of vehicles if people choose simply to abandon them.
People might also cut corners and opt for the “free” travel insurance offered by credit card companies, which might leave some travellers without the necessary levels of cover and might be costly in the long term. I do not intend to take up much of the Committee’s time on this issue, as this is a probing amendment, but this issue is more serious than I had initially imagined. I look forward to hearing the Minister’s comments on that last point in particular, because if people decide not to pay insurance premiums and instead settle for the “free” cover offered by their credit cards, they might be underinsured in certain circumstances. Also, business might be driven from the traditional, successful, good insurance companies, and I am conscious of what the net loss of jobs, revenue and profitability in that sector might be. So, putting up IPT will have consequences for the sector, for individuals and for jobs. All these points need to be answered properly and considerable comfort needs to be given that we are not going to turn into a nation that says, “We can’t afford insurance; we’ll do without it and let other people pick up the tab.” I shall listen very carefully to the Minister’s reply.
My hon. Friend the Member for Christchurch (Mr Chope) has highlighted the two very important and different issues of health insurance and motor insurance. Let me start with motor insurance, which is a legal obligation that is imposed on everyone who wishes to own and drive a car.
Like my hon. Friend, and, I suspect, everyone else in the House, I think it quite right that there should be that obligation. It reminds people that driving a car is a serious business and that they could do considerable damage to others or themselves if they do it badly. It also means that, were someone to drive badly or to be involved in an accident that was not their fault, there would be redress and injured third parties who might need substantial compensation would not be left without it. For all those reasons, we think that car insurance is a very good idea and we accept that it should be a legal obligation.
The coalition Government think that one way of raising more revenue is to increase the tax on that compulsory purchase, but quite a lot of people in the House think it would be better to raise more revenue from the existing level of insurance tax on motor insurance by getting more people to be insured. We are rightly very concerned that, because of the way in which the insurance market works, a significant number of people, particularly younger people, may not be taking out any insurance or may not be taking out proper insurance for their circumstances, and that that places other people at risk and could mean losses that those young people could not afford to pay if they had an accident. That clearly means a loss of revenue for the Exchequer, because those people are not making their contribution by paying their share of insurance tax. We would like the Minister to consider whether better enforcement of the insurance rules could help with his task of filling the coffers and narrowing the deficit. That might be a better route than increasing the tax.
I am sure that the Minister will remind us that we are talking about a 1% increase and that it is quite a modest sum of money. We have been reminded a few times that young people with certain kinds of vehicles, or some young people with any kind of vehicle, can be required to pay a four-figure sum each year for their motor insurance, so we could be talking about £10 or more. The additional increase would not be welcome, because most young people find such sums of money quite large in the first place, and a further 1% would not be helpful.
The increase might only be a straw, but the camel’s back is already well and truly loaded. The poor old motorist is always at the top of any Government’s list when they are rattling the collecting tin and trying to raise more money for a variety of state purposes. I just hope that the Government will reflect on this matter. They will have other opportunities to look at the total burden on the motorist, and they might not wish to consider this particular burden today and therefore immediately grant my hon. Friend the Member for Christchurch’s request. I see no sign of the Minister leaping to his feet to welcome the proposal, just and fair though it might be. We know, for example, that the coalition Government are going to look at a fair fuel levy—an escalator that comes down when the price goes up and goes up when the price comes down, to keep fuel prices at a more realistic level.
In trying to square the circle of how we can raise taxes when there is no money, it is interesting to note that we have not committed to Labour’s rise in fuel tax, which was going to add a further £425 million—[Interruption.] If you read the small print in Labour’s last Budget, you will see that there was a plan to raise an additional £425 million—
How wise you are, Mr Evans.
I was making the point that the Minister, in responding to this debate on the insurance premium tax, might assuage some of our grief if he were to say that the Government had looked at the total package of taxes on the motorist and that they were aware that this was yet another example of the piling high of taxes on the motorist. Although this individual tax increase will not be large for many motorists—it will be more penal for young drivers and high-risk drivers—it is none the less an additional burden. Even if the Minister cannot accept the amendment, I hope that he will look at other ways of dealing with the problem of fair motoring taxes.
Every time something like this happens to motorists—this time, it is the insurance tax levy—they say, “We are being sandbagged again. Where are those better roads? Where is that safer junction? Where is the wish to spend money on improving the flows on the roads so that we can travel in a more fuel-efficient, green manner of which the Environment Secretary would approve?” There never seems to be the money to do that. We know that this bit of taxation on the motorist, like most others, primarily goes not to making better roads but to a wide range of other purposes; it gets lost in the general coffers.
A number of speakers today have singled out specific kinds of insurance, but as I understand it, the Bill proposes to increase insurance premium tax on a whole range of insurance products, which we would encourage people to take in a responsible manner. I have every sympathy for young drivers and for other motorists, but why does the right hon. Gentleman feel that we should specifically single out motorists or people who take out private health insurance? Why should those people be specifically excluded?
That is what I am trying to explain, while remaining in order on this narrow amendment. The bottom line of my case is that motorists comprise a large category and, when polled, they say that they feel badly done by because they pay a disproportionate amount of tax and do not get much back. It is argued that motorists ought to pay more because they get the use of the roads, which are provided free at the point of use in most cases. It is not like that, however, because the bulk of the taxes levied on the motorist, including this insurance premium tax, are used for purposes other than roads and motoring. That is why motorists feel hard done by.
I hope that the Minister and his colleagues will consider carefully the general category of the motorist. I would love it if he could make a concession to my hon. Friend the Member for Christchurch, but if he cannot, it would help us and the people we represent if he could say that the Government were at least aware of the bad deal that the motorist has been getting in recent years, and that, where possible, they will do something about that. As we have heard, people in rural areas have no choice; they have to use their cars. People in urban and suburban areas also have no choice at certain times of the day or at weekends. People who work antisocial hours clearly need a car. Most MPs need a car, for example, because we still work antisocial hours.
I am following the right hon. Gentleman’s argument with some care. He said that motorists get only a limited amount back from the taxes that they put in. Does he therefore support arguments in favour of the greater hypothecation of taxes such as the insurance premium tax, to help to resolve that problem?
No, I do not. I am sufficiently in tune with Treasury thinking to know that all Treasuries under any Government hate hypothecation, and I understand the complication. Critics of motoring and cars often argue that motorists are walking off with all these free goods, but people have come up with lots of figures that show conclusively that, in a hypothecated way, motorists get a particularly poor deal. People now look at these issues in such a way partly because the green movement has made them do so. It has now been demonstrated that, calculated in a hypothecated way, motorists put in a lot more than they get back. I do not think that the Treasury should operate all its taxation on that basis, but it does need to take account of the mood and the politics surrounding this question, which we are here to represent.
The feeling of unfairness is now quite extreme among the motoring community, and motorists want to communicate through us the fact that they are often motorists because they have to be. There is no train to take them to the shops, for example. The train might be 2 miles away from their home so, unless they have plenty of time to walk to the station, they need to start their journey in the car and sometimes they might as well finish it in the car as well. There is often no alternative, which is why some 86% of our journey miles are carried out by car, and only some 6% by train. There is a basic necessity, which is why we need to be fair when making any tax proposals affecting motorists.
The case of private health insurance is somewhat different, as I am sure my hon. Friend the Member for Christchurch would agree. I make my declaration: I have no private health insurance, so I am not arguing my own case. I rely on the NHS, should ill health befall me, as I am sure do many other Members. However, I am not saying that some of my constituents are wrong to take out private health insurance. It is still a legal thing to do. Indeed, in a way, I feel that I am cheap-skating at their expense, because they are paying twice and I am paying only once. I pay my taxes, and if something happens to me, I hope to receive NHS care, whereas they contribute to everyone else’s NHS care through their taxes—they have no choice, of course, but some of them do it graciously—and then make the additional choice to pay for their own insurance. There is a double advantage: more money comes into the health sector, but when those people become ill they make no claim on the health service, even though they contribute to it.
My hon. Friend the Member for Christchurch is making a reasonable point. Given that it is not illegal to have private insurance, and that those who have it help to eke out NHS funds, should we be taxing it more? That is a very good question to raise. I shall make no stronger statement than that, but it will be interesting to see how the Treasury responds. After all, on this side of the House, we are all now big society fans and advocates—[Interruption.] Well, practically all of us, perhaps. There might be one or two of my right hon. and hon. Friends who are not so enthusiastic about it, but I am; I think it is a great idea. The essence of the big society idea is to harness private money, voluntary effort and charitable activity, and to understand that the state cannot solve all the problems. In a complex, difficult and expensive area such as health care and related social care, we need voluntary and private contributions as top-ups, or in addition to public sector care.
This issue poses a particularly interesting question for Ministers. If they are really serious about the big society idea, do they want to increase the taxes on people who make voluntary contributions and take some of the demand away from public services? Ought they not to be encouraging people to do such things? I look forward to hearing my hon. Friend the Minister’s reply to these nice philosophical questions in this wonderful caring, sharing age of coalition government, in which the big society will require some erosion of the old boundaries between public and private.
It is an enormous pleasure to follow the hon. Members for Christchurch (Mr Chope) and for Dundee East (Stewart Hosie) and the right hon. Member for Wokingham (Mr Redwood). The strength of their contributions was in illustrating that the proposals in clause 4 raise a wide range of policy concerns and debates. Hitherto, the House has not had much explanation of the logic or rationale of all the changes set out in the clause. The arguments for some of the proposals are fairly easy to deduce, but the core of the clause is the increase in the standard rate of insurance premium tax, which has not been explained.
The lack of explanation underlines the fact that the Bill is somewhat piecemeal. It is fragmented. It is not a whole Bill; it is not even a half Bill; it is a bit of a Bill. We were told with great fanfare a few weeks ago that the Government were introducing an emergency Budget. The Bill and the clause illustrate in our debate this afternoon that the only emergency was the need to get some pretty difficult changes on to the statute book by the summer, before Liberal Democrat members on the Treasury Bench got cold feet or had, dare I suggest, too many conversations with their constituents.
So the result of that emergency—something that some would uncharitably call a panic—is a Finance Bill with measures such as clause 4 that so far are bereft of logical explanation. The strategy has also produced clause 5, which we shall debate later this afternoon, which withdraws tax legislation without putting anything back in its place. Where there is certainty, the Government in their panic have decided to substitute mystery. So much for the simplification credentials.
The effect of clause 4 on one level, as I have said, is reasonably straightforward. It raises the higher rate of insurance premium tax from 17.5% to 20%. That would appear to be a fairly automatic consequence of the decision to raise VAT to 20%. The higher rate of IPT was introduced in 1999 to prevent a problem called value shifting, whereby some retailers and other producers tried to lower prices of goods and bundle them with insurance policies, for which they redeemed some of the value. I was not sure whether that was some of the financial innovation that the hon. Member for Dundee East was beginning to welcome in his remarks. Perhaps he will say more about that a little later.
The hon. Gentleman raises an important question. The answer is that I do not know. It is a mystery. The Budget scorecard has a certain number, but of course it has bundled together the revenue that is to be raised from the increase in the higher rate and the increase in the standard rate. I hope that the Minister will be able to enlighten us.
It is possible to deduce why the higher rate has gone up, but it is curious that the Government have chosen to increase the standard rate. We have to assess that decision alongside the decision to preserve exemptions and zero-rating from VAT on a range of goods and services. We were told on Tuesday night by the Economic Secretary that the existing zero ratings and exemptions would be kept in place for the course of this Parliament. That commitment was given to the House on Tuesday night, and we will all watch the Government’s adherence to it with a great deal of attention over the next few years. That decision to keep in place a series of zero ratings and exemptions just adds to the mystery of why this standard rate has been singled out for such an enormous rise.
The hon. Member for Christchurch raised an important point. The Budget scorecard shows that the overall increase in VAT brings about £54 billion into the Exchequer over the course of this Parliament. That is an extraordinary amount of money. Eight billion pounds of that will be paid for by our country’s pensioners. The scorecard also shows that a further £2 billion is brought in over the Parliament by the increase in IPT, but we are not told how much will come in from the respective increases in the standard and higher rates. True to form, the Government certainly have not told us what the impact of the IPT increase will be. I would therefore like to say a little about what the House of Commons Library and other sources are able to tell us about the impact of the increase.
I am afraid that one of the groups that will be hit hardest by the increase is, once again, our country’s pensioners. That was the group that Liberal Democrat and Conservative Members refused to protect when given the chance by Labour amendments on Tuesday night. We established in Tuesday’s debates that pensioners would pay £8 billion in extra VAT. The figure was not challenged by the Government. Today I can tell the Committee that it appears that pensioners will be hit by a further £355 million over the course of the Parliament. The House of Commons Library note—I am happy to release it more widely—allocates the revenue raised from the IPT increase between pensioner and non-pensioner households. I am grateful to the Library for this excellent work. It says that, according to Office for National Statistics figures, pensioners account for about 18% of spending on insurance in this country. The scorecard scores 115, 455, 445, 455 and 455 in increased revenue over this Parliament from the increase in IPT, so the Library estimates that £21 million will be raised from pensioners in 2010-11. Pensioners will pay that without any recompense in the form of extra pension credit or increased basic state pension; those increases do not kick in until a little later in the year.
In subsequent years our pensioners will pay about £84 million a year more in IPT—in total about £355 million over the course of this Parliament. Hon. Members will be concerned about that.
My right hon. Friend is making an incredibly important point. Many pensioners in my constituency will be oblivious to the impact that this stealthy tax rise from the Government will have on them, especially as they are diligent in keeping up with their contents insurance, buildings insurance and motor insurance. In many ways, the Government are grinding the burden of taxation on their shoulders. My amendment on advertising the increase in IPT was not selected. Does my right hon. Friend agree that the cost of the Treasury’s imposition should be more prominently displayed on policy documents so that at least pensioners are aware of what the Government are doing?
My hon. Friend raises an extremely significant point. I am sorry that his amendment was not selected. The insurance industry will almost certainly pass on the increased taxes directly to consumers. That has been the history of increases in this kind of tax. So there is a strong case for advertising the increase more widely. I am sure that all of us as politicians will do our level best to make the news known in our constituencies.
Is the shadow Minister saying now that he would support the private Member’s Transparent Taxation (Receipts) Bill—something in which the First Deputy Chairman of Ways and Means had a slight interest in a previous life—which required that receipts showed how much tax and duty had been paid so that they were better advertised?
I have not studied the Bill, so I am grateful to the hon. Gentleman for drawing it to my attention. We have had good debates over the past two or three weeks about the need for greater transparency both in economic policy making and in tax policy. The Bill certainly sounds as though it would contribute to that agenda.
The hon. Member for Christchurch raised a number of public policy points. He did not dwell much on the impact of the new charges on low income groups, and I should like to touch on that different policy question. It is important that we debate it this afternoon. The Association of British Insurers has argued for a long time that the tax is regressive. IPT has been raised in the past by Conservative and Labour Governments, and the ABI has been consistent:
“IPT is a regressive tax. It imposes a disproportionate burden on the less well off individuals and the smallest businesses. These are most likely to need the protection of insurance.”
Given those arguments, we deserve a full and thorough explanation of the public policy rationale for introducing such taxes.
We have heard about the impact that the tax will have on consumers. The hon. Member for Christchurch did not remind us of his distinguished career as a Transport Minister, but he understands well the impact of higher rates on, for example, car insurance. In the days shortly after the Budget, The Guardian told us that the average car insurance buyer would pay about £18 a year more in tax. The AA said that the bill would be slightly higher—at least another 35 quid on an average insurance policy. The right hon. Member for Wokingham spoke eloquently about the impact that the increase will have on young drivers. Some press reports estimated that the bill would rise by only £15, but the intimation in the right hon. Gentleman’s remarks, and those of the hon. Member for Christchurch, was that it might be a little higher. Of course the increase comes at a time when car insurance premiums have been rising consistently for the last 12 months.
There will be an impact on travel insurance, to which Members have alluded, but many Opposition Members are particularly worried about increases in the cost of general household insurance. Many of us serve constituencies with high rates of poverty and worklessness and many areas, including some in my constituency, are also troubled by relatively high rates of crime, with drug use fuelling burglary. Over the short number of years that I have served in the House, I have seen many constituents who did not have insurance and lost everything in burglaries and had to rebuild their lives, sometimes from scratch. The ABI has told us that for the average household a 1% increase in IPT will put at least another £8 a year on the general cost of household insurance, taking it up to £850. For many of my constituents, £850 is unaffordable, particularly if they live in areas that attract premiums.
For those reasons, the director general of the ABI has described the move announced by the Chancellor as “regrettable”. Kerrie Kelly, in remarks to which the hon. Member for Dundee East alluded, was clear, saying that the change
“is a direct tax increase for the vast majority of people who sensibly protect themselves.”
The hon. Member for Dundee East also mentioned Eric Galbraith, who said bluntly:
“This is a tax on protection.”
That is a public policy concern which we need to hear more about.
We do not have a theoretical objection to insurance premium tax and, subject to a decent explanation from Treasury Ministers, I do not plan to put our amendment to a vote. The history of IPT is one of consensus. It was introduced by the right hon. and learned Member for Rushcliffe—now the Lord Chancellor—and increased in 1999 by my right hon. Friend the Member for Kirkcaldy and Cowdenbeath (Mr Brown). None the less, there are some important questions that it is important for the Government to answer this afternoon.
What assessment has been made of the increase in insurance premium tax? I should be grateful if the Exchequer Secretary would set out his assessment of the impact of that hike on Britain’s pensioners? What will be the impact of the increase on the availability of general household insurance for people on low wages? Why is he raising the rate from 17.5% to 20%? Is it to preclude the value shifting that was the inspiration for the rate change in 1996? Most important, why is he raising the standard rate from 5% to 10%? Can he confirm that it is not the Government’s policy to harmonise the standard rate with levels across Europe?
In 1999, when Labour raised the IPT rate, my right hon. Friend the Member for Bristol South (Dawn Primarolo), then the Paymaster General, was clear on the matter. She said:
“Rates vary tremendously across Europe, but they are significantly higher than in the UK, which has one of the lowest rates.”
It was put to her that the rise was part of a wider, hidden plan to increase the rate successively to levels in Europe, but my right hon. Friend was clear:
“The increase does not signal a future change.”—[Official Report, Standing Committee B, 15 June 1999; c. 642.]
I should like the same assurance from Ministers on the Treasury Bench this afternoon. Can the Exchequer Secretary confirm that the change is not part of a plan successively to increase rates of insurance premium tax to levels across Europe, which amount to 11% at the low end of the range in countries such as Austria and 22% at the higher end in countries such as Italy.
It is important that we have some assurances this afternoon that there will be no further rises in IPT in this Parliament. Subject to satisfactory assurances and explanations of the points I have raised, I would see no need to put the amendment to a vote. I very much look forward to hearing what the Minister has to say in reply.
Thank you, Mr Evans. I am very grateful to have been called. It is a great pleasure to serve under your chairmanship for the first time since you have been elevated to your new role. I refer Members to my entry in the Register of Members’ Financial Interests.
The right hon. Member for Birmingham, Hodge Hill (Mr Byrne) made an interesting and measured speech, which I hope my hon. Friend the Exchequer Secretary will respond to in due course. I could not agree more with the right hon. Gentleman’s last point. We should not be increasing insurance premium tax to anything like European levels. That is one thing we do not need to learn from Europe.
I support the two amendments tabled by my hon. Friend the Member for Christchurch (Mr Chope) and I warmly support the comments made by my right hon. Friend the Member for Wokingham (Mr Redwood). My remarks about relief on motor insurance will be brief. The arguments have been made powerfully and I entirely support them. The amendment about health insurance concerns me the most.
The coalition Government have three areas of protected spending, where public spending is guaranteed to rise: the health service, overseas aid and the European Union. I want to deal with the relationship of the proposals to the health budget. Each year, £100 billion is spent on the NHS and the Government rightly recognise that spending will have to increase. There is no way round it. Demand on the health service will grow and grow, so there will have to be a real-terms increase. Even allowing for that, however, there will not be enough money to do everything in the health service.
One of my constituents is suffering from cancer and needs cancer drugs. She has to sell her house to pay for those drugs. If she had been insured, that would not have been the case. I am convinced that that lady uses the NHS most of the time, so she has not chosen to opt out by insuring herself against everything, but there will always be aspects of health provision that the NHS cannot cover because of their cost. That will mean that people have to pay extra, as this lady is doing for her cancer drugs. If we are to encourage people to insure themselves against such risk, we need to send the right signal.
Amendment 18 does not address cost because the difference between rates of 5% and 6% does not represent a huge amount. However, if the amendment was accepted, it would send the country the remarkable signal that the coalition Government and the Prime Minister want people to stand up for themselves and take responsibility, as part of the big society, by insuring themselves.
I am in the wonderful position of being a Conservative Back Bencher who does not have to worry about the Whip in Committee. The Prime Minister has already said that he wants the Government to be held to account—[Laughter.] I know that this will be a shock to Labour Members, given that they are always whipped and centrally controlled, but Conservative Back Benchers have the right to hold the Executive to account. When we are in Committee, as is the case today, we are not subject to a Whip. We can vote whichever way we like in this Committee as long as the overall Budget gets through. Amendment 18 is such a small amendment that if it is pressed to a Division, I will support it, which is the sort of thing that the Prime Minister would welcome.
I have set out my basic argument about the tax increase on medical insurance, but perhaps I should draw the Committee’s attention to a private Member’s Bill that will be debated on 4 February 2011. That Bill would give tax relief to private medical premiums, but that wider debate is for another day. There is a question of whether such an approach would lead to more people insuring themselves, which would generate a saving because they would be less of a concern for the NHS, but today we are discussing only whether to impose a 1% tax increase. I hope that the Exchequer Secretary will be able to tell us how much revenue the Treasury would lose if the amendment were accepted and we did not have that 1% rise. If the increase discourages individuals from taking out medical insurance, more people will have to be treated by the state, which is why I argue that the tax increase from 5% to 6% on medical insurance premiums will cost the state more money.
I agree entirely with my right hon. Friend’s point, but I want to draw a distinction between amendments 18 and 19. Amendment 18 addresses health insurance premiums, and the fact is that if someone does not take out health insurance, the state picks up the bill, because they will go to the NHS. When someone does not take out motor insurance, the responsible citizen picks up the bill through the Motor Insurers Bureau, but that is not quite the same as the position for health. It is clear that if someone might have paid for insurance so that they could go to an independent sector hospital but does not do so, they will be in the NHS and the state will have to pay. I argue that we could send a signal today to the citizens of this country, as part of the big society, that we want them to be responsible and to take out insurance, especially health insurance, which would save the Government money.
Labour Members do not have a philosophical objection to private health care, but does the hon. Gentleman accept that many people cannot afford such coverage? It is wrong to say that taking out private health care is a responsible option because that portrays those who cannot afford it as somehow irresponsible.
I am grateful for the hon. Gentleman’s intervention, but I know that I will get into trouble if I respond to it in detail. I suggest that he turns up in the Chamber when my private Member’s Bill is considered on 4 February 2011, so that we can have that debate.
My hon. Friend the Exchequer Secretary has an historic opportunity today to stand up and make a name for himself and this Government by encouraging people to take out insurance.
I am glad that we have had the opportunity to debate these important tax changes. I have the greatest respect for all my constituents and the British public generally, but when we talk about financial matters such as pensions, savings and insurance, there is a tendency in the British culture for the fog to descend and for people to say, “Well, these things are very complicated and I don’t quite understand them.” A lot of people therefore get trapped by their own inertia in certain policies, bank accounts or pensions, and they do not necessarily shop around to get the best deal. I am afraid that insurance products are in the group of services to which our constituents sometimes do not pay attention. I urge members of the public to examine their policy documents and payments closely because insurance can represent a significant cost, although it is a merit good and something that we should encourage people to take out.
Some areas of the country, including part of my constituency, face significant flood risk. Does my hon. Friend agree that such a tax increase on insurance will mean that people who are already paying significant amounts to protect their homes and lives will face an even greater cost? If those people do not continue to insure themselves, however, it will wreak havoc on lives throughout the country.
My hon. Friend is entirely correct. It is important that we ensure that all our liabilities are properly covered, so that the cost of our individual failings or mishaps does not fall on the general taxpayer. Responsible individuals have to insure themselves.
My hon. Friend says that people do not shop around. Does he agree that any process of shopping around is not helped by the way in which insurance companies sign people up to policies on standing orders with small print that allows that policy to be renewed without consulting the customer? Even if the customer wishes to change their policy because of a large increase in their premiums, they can discover that the small print means that they have to let the policy run because they are required to give notice.
That particularly pernicious practice merits much closer scrutiny. I do not know whether it is allowed to happen because of a legal loophole. People face dangers when they sign up to unending direct debits, especially if they have been attracted to an insurance policy because of a discounted initial arrangement but then discover that the payments have been ramped up. By the time they realise, from their bank statement or whatever, that the cost is so much more, it is too late to exit from the policy. I hope that any practices that tie customers in to such policies unnecessarily can be stopped.
Insurance premium tax was, of course, a Conservative initiative, introduced back in 1993, I think. We are all concerned about the deficit and revenues, so reluctantly we all have to accept the tax as part and parcel of our general revenue stream, but it is worth pausing to reflect on the impact of the charge on the behaviour of customers who want to take out insurance. Of course, there are different effects for different types of insurance. The amendments highlight both ends of the scale.
I am not sure that I share the sympathy for amendment 18 on private health insurance, because the general public already effectively pay for health cover through the tax that they pay towards the NHS; that is far and away the best health insurance that all of us could want. If we are all part of that, and pool our resources effectively, we ensure a better quality of health care for ourselves. I hear the points made by Government Members, who say that private health insurance removes the burden from the NHS, but if we are all part of the system together, and make sure that we all take part in it, we have a better collective service.
Thankfully, Labour has shifted the terms of reference for this debate, and not just in this country, where the Liberals and the Conservatives—the Conservatives in particular, to be fair to the Liberals—have now accepted that the NHS is one of the jewels in the crown of our welfare system. It is respected worldwide, and there is no longer any attempt, or at least no overt attempt, by the Conservative party to unwind the change that has been made, although having listened to Government Back Benchers, there may be some straws in the wind. I agree more with the hon. Member for Christchurch (Mr Chope) on amendment 19 on motor insurance.
I have absolutely no idea. As a humble Back Bencher, I simply make my comments and observations. Clearly, I will happily take a lead from our Front Benchers; they are immensely sensible individuals, and will make their arguments. But I have my own observations to make about the changes.
One of those observations is that there is a level of compulsion that distinguishes motor insurance. In a way, private health insurance is an entirely discretionary commodity, so I suppose one could argue that paying tax on it is a matter of choice, but that is not the case for drivers and for motor insurance. As the right hon. Member for East Yorkshire (Mr Knight) said, in the case of third-party car insurance we are talking about adding a tax on top of a charge that is effectively a requirement in law. That raises the hackles. It makes me feel aggrieved that there is a bit of opportunism on the part of the Treasury. It is a parasitical choice effectively to cream off more money from something that the general public have no choice but to get.
I suppose that those on the Treasury Bench might say that members of the public could give up driving and stop purchasing cars. Perhaps that would be good for the environment more widely, but in the real world, people have to get around, have to get to the shops and to school, and have to commute. It is part and parcel of ordinary life. I am very worried—genuinely worried—that ratcheting up insurance premium tax on motor insurance will create a disincentive for people to comply with the law, take out insurance, and ensure that the cost is covered if any accidents occur or harm is caused to other members of society and the wider public.
In my constituency in Nottingham, the road safety and casualty reduction budget has taken a hit as a result of the cuts announced by the Government parties. Something in the order of £350 million is being taken out of that budget in this financial year alone. Clearly, it would not be in order for me to refer to an amendment that I have tabled that would hypothecate the revenues from the motor insurance IPT increase and put that money towards road safety and casualty reduction. All that I would say is that there are concerns in my constituency and elsewhere that not only are we losing money for road safety, but if we discourage people from taking out motor insurance, and encourage them to go down the illegal route and to drive without car insurance, when there are problems and accidents, and individuals suffer trauma or are caused harm, they will struggle to recoup any compensation. That is especially regrettable.
As I said in an intervention on the hon. Member for Christchurch, some young people, who may pay £1,000 or even more for their insurance, may come to a rational yet entirely perverse judgment and say, “I’ll risk not getting that car insurance. I’ll drive uninsured.” They will risk getting six points on their licence, and a £300 or £400 fine—that is the typical amount that magistrates will impose—if they are caught driving without insurance.
Members on the Treasury Bench really ought to speak to the Justice Secretary, who introduced insurance premium tax in the first place, and make representations that fines for driving without car insurance should be at least commensurate with the cost of car insurance. That is an extremely serious point. I understand that in a magistrates court, if an individual is fined for driving without proper motor insurance and they are not earning and have a very low income, the fine can be as low as £80 or £90. That gives them an even greater incentive to chance their arm and to go without car insurance. There are some extremely serious points here.
Let me come on to the effects of insurance premium tax on buildings insurance and contents insurance. When times are tough, many of my constituents may well look at their outgoings and think: “What could I do without? What will go first?” Clearly, they know that there are legal obligations to pay council tax, utility bills and so forth. Those things that are on the margins, such as home insurance and contents insurance, tend to go first, and that is extremely regrettable. Of course, adding further tax to those items will speed up the decision for many of my constituents, who will say, “This is becoming unaffordable.”
I thank my hon. Friend for his assistance. On home insurance, the excess is typically £100 or £200. Those hon. Members who are IT-literate, and who use the interweb to purchase their insurance, will realise that on many sites there is a little bar that one can shift across the page to increase the excess to £400, £500 or more. It effectively means that people will rarely, if ever, claim against that insurance, and it thereby removes not only much of the cost of the initial premium, but the chances that they will ever use that product. Again, that will leave people under-insured, with poor cover, and with a poor product for what could be a great expense if they are broken into or have problems with internal flooding or other damage to their property.
In some parts of the country, particularly where there is a flood risk, far too many people are still uninsured, and the pressure that they put on the taxpayer more generally to pick up the tab will be great. In some ways, the measure is a false economy by the Treasury: it discourages people from taking out insurance, yet they will undoubtedly be under pressure to pick up the tab in flood-risk areas.
There is a rumour going around that the Treasury might also impose an extra tax on those who live in flood-risk areas in order to cover the extra costs to the taxpayer of flood-prevention work—yet another example of a crude and unfair measure. I am sure that the Minister will be happy to tell the House that that is not the case and to put our minds at rest, because it would be a shame if such a measure were to come forward.
Those who require insurance, on which the amendments would seek a report from the Treasury in order to reveal the impact not just on the Exchequer, but on individuals, will also be concerned about their contents insurance and buildings insurance, which are often where the cost of picking up reparations after flooding occur. It would be wrong of me not to pay tribute to my hon. Friend for his work before he entered Parliament.
On that specific point about the incidence of such insurance deals, the reality is that, as climate change progresses, the people who are caught by such costs will often be the poorest, who are closer to high flood-risk areas because of bad planning and the like. Does my hon. Friend agree that the impact of the measure will be increasingly regressive?
Absolutely. My right hon. Friend the shadow Chief Secretary to the Treasury made that point very forcefully earlier. The regressive impact of insurance premium tax is not widely understood, but, when our poorest constituents take out insurance, they are hit disproportionately hard, and unfortunately many of them will decide to go without that insurance altogether.
I appreciate the hon. Gentleman’s point about a 1% rise being regressive, but, on his earlier point about it putting people off buying insurance, the average household insurance policy is £400 and a 1% increase will add £4 to the total cost. If someone who seriously wishes to insure their home is prepared to pay £400, is he really suggesting that an extra £4 will produce the result to which he referred, namely that many people will no longer purchase insurance?
The hon. Gentleman makes a reasonable point, and he is right that at that level the disincentive might well be marginal. However, my point is that there is a slippery slope, and, with 1% here and 1% there, before we know it we have 2% or more—3%, or even 4%. My right hon. Friend the shadow Chief Secretary asked about the potential risk of aligning our insurance premium tax arrangements with those of the wider European Union, and, if they are at 22% in Italy or wherever, there is a risk of a serious disincentive.
So, I regard this debate as a stitch in time to put down a marker and say to the Government, “Don’t chance it too far. This may well feel like a small amount of money. but £10 on a motor insurance policy of £1,000 is quite an additional burden and not to be sniffed at.” If the Government continued to ratchet up the costs in that way, that would be regrettable. Some of the amendments before us are very sensible, and, in asking for a report from the Treasury, I also urge it to consider in that document the merits of a requirement on insurers to advertise more prominently the yield from insurance premium tax and the rate of tax that customers pay, because it is exceptionally important that our constituents understand why they are asked to pay so much.
When I consulted the Association of British Insurers about that, its representatives said that they would welcome more information on policy documentation and be more than happy to work with the Treasury on those matters. If the amendment is carried, and there are good arguments for doing so, I hope that the Minister will consider that point seriously.
The impact on travel insurance will be even greater, given the costs for many people who travel abroad on, perhaps, their holidays. If those people are my constituents, they will often do so for one week a year, if that. However, all travellers are encouraged to take out travel insurance for such trips, and the rate is currently 17.5%, but it will go up by 2.5 percentage points to 20%, which is a significant amount of money, so, if we discourage our constituents from taking out insurance on their holidays or travel, there will again be consequences.
Does my hon. Friend agree that the measure will also have an effect on the wider economy? For example, Newcastle airport in the north-east is a huge economic driver, and East Midlands airport, near my hon. Friend’s constituency, is a huge employer. The measure could have an impact on the business of those two airports—and many others.
There will be consequences if, because of the extra cost of a family holiday, our constituents are disincentivised from going abroad or travelling. The Chancellor of the Exchequer’s imposition of a holiday tax is something that I hope many travel pages in the Sunday newspapers and supplements will focus on, perhaps by modelling the costs for a typical family. About £400 million of travel insurance business is carried out in this country each year, and that accounts for a significant part of not only the insurance industry, but the economy more generally.
I am being won over by the hon. Gentleman’s speech. He argues very strongly against tax rises, and he has won me over on that. Indeed, I should be happy to vote against those increases, but, given the problem with the deficit, can he suggest some other public expenditure savings to make up for them?
That is a reasonable point, but I should not want to stray beyond the terms of the amendment, suffice it to say that the hon. Gentleman asks a reasonable question, because if we agree to the amendments we might be forgoing revenue to the Exchequer. My view, which he may have heard before but I am happy to share with him, is that the banks should not gain £400 million cash-back from the corporation tax reduction that they will enjoy.
Mr Evans, I felt an obligation to help the hon. Gentleman and hoped that, with that short interjection, you would indulge me.
To return to my general point, insurance is not only a public good, but a necessity for many of our constituents. Our constituents also often make the choice to take out insurance. Although I would not say that all insurance policies are good value for money and although we want to see more competition, I feel uncomfortable about the constant ratcheting up of the costs to our constituents of compulsory insurance, particularly motor insurance.
We could see some policy initiatives on this issue. Why does the Post Office not consider advertising its car insurance offer more widely, given that the state and the Government play a part in that offer in some ways? It would be healthier for there to be greater competition. The Government—indirectly, through Post Office services—could create cheaper car insurance. Treasury Ministers could talk to their colleagues at the Department for Business, Innovation and Skills about that, to ensure that the insurance industry does not unnecessarily inflate the cost of insurance.
My hon. Friend mentioned the issue of compulsion and rates. Does he agree that there is a case to be made for keeping the “holiday tax”, as he put it, lower, and paying for that by making it compulsory? One could argue that it is irresponsible for people to go on holiday without insurance and end up with all sorts of problems.
I hear what my hon. Friend says, but I am reluctant to extend compulsion in that regard. We should certainly encourage people to take out travel insurance and inform them of what might befall them should they not do so—they could be stranded abroad or find themselves without adequate medical or health cover, for example. I do not know whether hon. Members always remember to fill in their E111 forms when they travel to other countries in the European Union, but our constituents often do not. They can find themselves in significant jeopardy. In those circumstances, travel insurance is very useful.
Many people are employed in the insurance industry, and if there are disincentives against our constituents’ taking out decent, high-quality policies there will be an impact on the insurance sector and the financial services sector more widely. The financial services sector, including insurance, is one of the great industries of our country. It has been subject to a lot of criticism, and we can talk about that on another occasion, but it is important that we should not take steps that harm the products that we consume in this country and sell worldwide.
I conclude by reiterating to the Treasury the importance of assessing the impact of the insurance premium tax increase on our constituents and the Revenue. We do not know from the Red Book how the £455 million annual yield precisely breaks down between pensioners, young people and beyond. My right hon. Friend the shadow Chief Secretary says that the impact on pensioners will be significant and I take his word for that. That issue is a great worry. These are serious matters and I hope that the Treasury and other hon. Members will hear some of the points shared across both sides of the Chamber today.
We have had a wide-ranging debate on clause 4 and the amendments tabled to it; I am sure, Mr Evans, that you want to hear its conclusion. I was grateful to hear the contribution made by my hon. Friend the Member for Wellingborough (Mr Bone), who highlighted the freedom given to Government Back Benchers in Committee debates. I hope that my remarks will persuade my hon. Friends not to make full use of that latitude. We shall see.
The amendments are concerned with the general impact of the rise in the standard rate of insurance premium tax, particularly in respect of its impact on personal health insurance and the motor industry. I will come to those issues in detail in due course. Before I do so, I propose to set before the Committee the reasons behind the course that we have chosen.
Reducing the deficit and ensuring economic recovery are the most urgent issues facing the UK and they are the Government’s top priority. In the words of the shadow Business Secretary, it is no good wishing the deficit away; it is only by acting quickly to tackle the deficit and restore confidence in the public finances that we will achieve economic growth. That has meant that we have had to take many tough decisions to ensure that everybody makes a fair contribution. Part of that contribution will come from increases to the standard and higher rates of IPT.
Clause 4 legislates for that by increasing the standard rate of IPT from 5% to 6% and the higher rate of IPT from 17.5% to 20%, both with effect from 4 January 2011. IPT is, of course, a tax on insurers, not on their customers; 80% of all the insurance sold in the UK is exempt from IPT. All long-term insurance, such as life insurance and pensions, is exempt from IPT. My hon. Friend the Member for Christchurch (Mr Chope) mentioned Conservative party policy on long-term insurance. If he is a little patient, I am sure that my right hon. and hon. Friends at the Department of Health will say more on the subject. I just underline the point that IPT is not levied on long-term insurance.
What I can say is that given how IPT is currently structured and where it is levied, it does not apply to long-term insurance; the conclusion to be drawn about something that falls within the definition of long-term insurance is fairly logical.
However, in respect of the types of insurance that are affected, insurers have the right to respond to the tax as they see fit. They are not obliged to pass on IPT through higher premiums. [Interruption.] We recognise that many insurers will pass it on to their customers through higher premiums, but I will not be dragged into the detail of the amendment tabled by the hon. Member for Nottingham East (Chris Leslie).
The question was asked whether further regulation should be imposed on insurers, making them display prominently how much is being paid in IPT. Unlike VAT, IPT is a tax on insurance, so there is no obligation to pass it on or to recover it for businesses. We do not think that that would be appropriate. Insurers are, of course, perfectly free to display the IPT rate on documentation, and many do so. Requiring them to do so, however, would be burdensome and unnecessary.
I am not denying that we expect the increase to be passed on predominantly to consumers; we expect that the bulk of it will be. The analysis of VAT, another indirect tax, shows that two thirds tends to be passed on straight away and that much of the rest is passed on over the following 12 months. However, it is not always possible to predict and it partly depends on the level of competition.
That is not what I am saying. I am saying that the increase in insurance premium tax, which is payable by insurers, is likely to be passed on to consumers. We are not denying that; in simple terms, we need the money.
Even if the increases to the standard and higher rates of IPT are passed on in full, the impacts will be very modest, costing households less than 20p a week on average and businesses an average of less than 0.01% of annual turnover, even for smaller businesses.
I am not sure whether the hon. Gentleman has renewed his car insurance or household policy recently, but he will find that most insurance policies make it clear exactly how much tax is paid, so I do not think it is the case that they will withhold the increase and not pass it on to the consumer.
I am grateful to the hon. Gentleman for underlining an earlier point that I made—that it is not necessary to introduce regulation in this area. As I say, we anticipate that it will be passed on, but it is not mandatory. I am not denying that position.
Despite these modest impacts, the IPT rate increases will contribute more than £450 million a year to reducing the deficit. As I said, such decisions have been forced on us by the economic circumstances that the UK finds itself in, and they have not been taken lightly. We are confident, however, that this modest rise in IPT, which leaves the main rate of the tax significantly lower than that of many of our European competitors, is a means of raising much-needed revenue that will not have a significant impact on households, businesses or the insurance industry.
The Minister is making an argument about choices that are made in order to increase revenue, but I think the Committee is struggling to understand the reason for the increase in the standard rate of IPT. Other choices were available. Why have increases in cider duty been withdrawn, for example, while new taxes are being introduced on insurance?
The central point is that the country is in a very difficult position as regards the public finances. I hope that the shadow Chief Secretary is grateful for the fact that I have got this far through a speech without once referring to his letter. With another intervention, I may be tempted to do so. We have made a series of judgments. If he thinks that cider duty is the way to reduce the deficit, I suggest that he is somewhat mistaken.
Amendment 18 would exempt personal health insurance from the increase in the standard rate of IPT, and amendment 19 would do the same in relation to motor insurance. In effect, that would mean creating a new reduced rate of IPT that applied only to private medical insurance and motor insurance. Of course, the Government recognise the value of these types of insurance and, indeed, of insurance more generally.
I assure my hon. Friend the Member for Christchurch that we do not disapprove of people taking out private medical insurance—that is not something we wish to prohibit, either in law or by imposing enormous costs on it. In health policy, our focus is of course on improving the national health service, and we have this week set out important proposals on improving the quality of the health service and reducing expenditure on bureaucracy. We are also, as a Government, protecting the NHS from spending cuts, which is not, as I understand it, a policy endorsed by Labour. The purpose behind this tax increase is clearly to raise more revenue—it is not an attempt to try to dissuade people from taking out private health insurance.
The Minister claims that the Government are protecting the NHS. Is he aware that all the health boards in Scotland have written to their employees to inform them that following the cuts that his Government are making, the NHS in Scotland will have significant job losses?
Of course health care in Scotland is a devolved matter, and you will not want me to digress on that, Mr Hoyle, but the fact is that health care spending will go up in real terms under this Government. That is not, as I understand it, a policy that is supported by the official Opposition.
My hon. Friend framed his policy in rather negative terms by saying that the Government did not disapprove of health insurance and did not want to prohibit or deter it. Can he be a bit more positive and say that it is their policy to try to encourage people to take responsibility for their own insurance, on similar lines to the Secretary of State for Transport saying that he wishes people to take responsibility for paying their own bus fares, despite their having bus passes, if they can afford so to do?
As a Government—I am sure that this is a principle that my hon. Friend would support—we believe in giving people choice, and that is what we will do. We have set out our policies in that context, and I am merely underlining this Government’s commitment to the national health service.
The combined effect of the amendments tabled by my hon. Friend the Member for Christchurch would be to slow down fiscal consolidation. Through the Budget and this particular measure, the Government are trying to get our deficit under control, and slowing it down would not be an appropriate step.
If I may, I will provide a little more information breaking down the numbers in a moment or so, and we shall see whether that is specific enough for the hon. Gentleman.
Exempting motor insurance from the IPT rise would reduce revenue by £160 million a year, and exempting medical insurance would reduce it by a further £40 million. Taken together, those figures total £200 million—nearly £1 billion over the lifetime of the Parliament. That would leave us with quite a shortfall, and a couple of options. First, we could raise £1 billion from elsewhere. We have to be open about the fact that the purpose of the IPT rise is to raise revenue, and if we were to look to raise the outstanding £1 billion through IPT, that would mean increasing very considerably the rate of tax on the remaining classes of insurance. For reasons that I will set out, we do not think that that is the right way to go. The second option is to leave ourselves with £1 billion outstanding, which would leave us further away from plugging the deficit, with all the risks that that entails. We are certain that that is not the right way to go.
It has always been a principle of IPT that the tax applies to a relatively broad base of general insurance, with few exceptions. That broad base allows us to keep the standard rate of the tax low by international standards. Even at the new rate of 6%, the UK’s standard rate of IPT is far lower than in, say, Germany, where it is 18% for property and 19% for motor insurance, or France, where it is 9% for property and 18% for motor insurance. Narrowing the base of the tax through specific exemptions of the type that my hon. Friend the Member for Christchurch suggests would put that low rate at risk.
To respond to the perfectly fair question of the shadow Chief Secretary, the fact that we have announced the increase should not be taken as a signal that we intend to harmonise tax levels with those elsewhere. To quote what the shadow Chancellor used to say, we always keep taxes under review and it would be daft to rule things out, but this increase should not be taken as a signal of an ongoing programme of further increases.
We do not take any pleasure in introducing this tax rise, even though the reasons for it are clear. However, by keeping a broad base of tax within general insurance, we are able to raise revenue so as to cut the deficit, while keeping the increases at a level that will not have any significant impact on the number of people buying insurance.
We do not believe the rise will have a noticeable effect on the number of people taking out insurance, but I know that hon. Members are concerned about the impact of the IPT rises on households. I have already set out the average impact on households. Specifically in the case of the insurance covered by amendments 18 and 19, the IPT rate increase will add only about £6 a year to the average motor insurance premium, and for those who buy private medical insurance the rise will cost less than £10 a year on average. Consequently, it is difficult to make the case that the increase will prove much of a deterrent to people taking out motor insurance or private medical insurance. Consumers are well used to insurance premiums fluctuating, and the modest effects of the rise will not act as any significant deterrent.
The Exchequer Secretary says that the rise will not be a deterrent, but it will certainly provide an incentive to people who pass the tax on to the consumer to increase charges over and above the amount in question and then blame the Government for it, as we have seen with so many other taxes.
Let us see what happens. I am not sure that the evidence necessarily supports that concern, but I am sure that if it happens the hon. Gentleman will come back to the House to highlight it. Many within the insurance industry have themselves acknowledged that the rises are very modest and will not have a significant impact on households or on the take-up of insurance.
Amendment 15 would make the IPT rise announced in Budget contingent on the publication of an assessment of the effect of the rate rise on consumers and the insurance industry. We believe it is unnecessary. I have set out fairly comprehensively in this debate the expected impact on households and businesses—in broad terms, that impact will be minimal.
I should also point out to hon. Members the considerable amount of information on the impact of the Budget that we have already put in the public domain. In particular, for the first time the Government have set out their analysis of the distributional impact on households of the Budget measures, including the IPT rate changes, in annex A of the Red Book. Separately, other organisations such as the Association of British Insurers have given estimates of the impact of the rise on households, which are very much in line with our own estimates. Naturally, the industry and consumers do not like the rises, and we do not like having to introduce them, but the industry accepts that they are going to happen and is preparing accordingly.
Finally, I wish to address amendment 48 which, as the shadow Chief Secretary said, is a probing amendment aimed at exploring the reasons for the rise and its impacts. He asked a specific question about the balance between the standard and higher rates. For 2010-11—Members should remember that the rate increases will occur in January 2011—the revenue raised will be £110 million from the standard rate and £5 million from the higher rate. For the following years, the higher rate will raise £25 million each year, with the balance made up from the standard rate, which in most years raises £450 million.
The shadow Chief Secretary also asked about the reason for the increase in the higher rate from 17.5% to 20%. As he correctly surmised, it is to do with value shifting and the fact that travel insurance is often sold with other products on which VAT is payable. A discrepancy between the IPT on travel insurance and other rates may create dangers of value shifting, and that is the reason for the proposal.
As I said earlier, the cost of my hon. Friend’s amendment to exempt motor insurance from the IPT rise would reduce revenue by £160 million a year, and exempting medical insurance would decrease revenue by a further £40 million a year. I hope that that is helpful.
The increase is necessary. It is an attempt to bring our deficit under control. We need to make some tough decisions, and that is one.
It is my pleasure to respond to an excellent debate and I thank everybody who has participated in it. At the beginning, other hon. Members and I conceded that the sums of money involved were relatively small, but we were concerned about the messages that were being sent. I am rather disappointed by the Exchequer Secretary’s failure to engage with that part of the argument. It is one thing to say that the Government do not disapprove of health insurance, will not prohibit it and do not wish to deter people from taking it out, but all those who take out private health insurance help not only themselves but the country.
My hon. Friend kept saying that our commitment—meaning the coalition Government’s commitment—is to the NHS, but surely it should be to the health of the nation. That depends on money going into health care and health protection from a mixture of sources. Some will come from taxpayers, and an increasing proportion in my view should come from private individuals and companies—we are also talking about company health insurance schemes. My hon. Friend had the opportunity to say to companies that have health insurance schemes for their employees, “Thanks very much indeed for your contribution; that takes a burden off the NHS.” He had the opportunity to tell those who take out private health insurance or self-insure and pay for their health care, “Thanks very much; you are relieving the state of a burden.” He did not. I do not know whether that was a deliberate omission or unintentional.
I am concerned about the messages that are being conveyed about the direction of travel and I am slightly bewildered about whether the coalition Government are wholeheartedly enthusiastic about people taking responsibility for as much of their own lives as they can, depending on their financial ability. If we are trying to build a responsible society, we should encourage people to take responsibility for all aspects of their lives and should not force them to feel that they should depend on the state.
We should certainly not encourage a state of mind whereby people think that they are being antisocial by not depending on the state. We have almost reached a stage when, if somebody says that they have private health insurance or that they send their children to independent schools, while paying through their taxes for state education for everybody else, the Government frown on them. It is too late in this debate, but I hope that the coalition Government will send out a much more positive message about the virtues of self-help and responsibility and of people not being dependent on the state. There are many definitions of what may or may not amount to the big society, but if it means anything to me, it is encouraging people to do their own thing and having much smaller state involvement and, ultimately, lower taxes.
I am listening intently to the hon. Gentleman. Would he extend his argument to, for example, household insurance and the whole range of insurance premium tax? As was pointed out earlier in the debate, people insure their houses against flooding and fire, for example. There is therefore no burden on the state in the event of flooding, because the insurance companies carry it, and if a house catches fire, people do not have to look for a loan from social security, because they are covered by the insurance. Does he accept that the amount of money involved is hardly likely to act as a disincentive?
The answer is yes; I would wish to extend my argument. However, I tabled two specific amendments so that we could have a focused debate. It has become apparent in the course of the debate—I did not know this before—that about half the yield from the IPT increase will be from motor and health insurance premiums, and about half from other insurance, such as household insurance.
I am concerned that in my constituency, particularly as a result of the rather reckless behaviour of the Environment Agency, there is a blight on a number of houses, whose owners find either that they cannot access flood risk insurance or that that insurance is much more expensive than it used to be. Because of how IPT works, the state benefits from the latter outcome through extra income, and there is an extra burden on householders. Some very important points were made by Members who are concerned about household insurance. It was open to anybody to table similar amendments, but I tabled two to focus the debate. The hon. Member for Dundee East (Stewart Hosie) did the House a service by tabling an amendment that calls for a proper analysis so that the House can know the full implications of the proposals before we are asked whether we support them.
We have spent two hours discussing this matter, but we have still not really heard from the Government about the direction of travel. We certainly have not heard whether the principles so articulately described by my right hon. Friend the Transport Secretary—he spoke of people who can afford to pay their fare using free bus passes—apply throughout the coalition Government, and to those who take responsibility for their health care, education or other aspects of their lives.
People take out private health insurance, which might be through a scheme in their firm, because they want access to health care that is currently not available. I gave some examples in my opening remarks of people in my constituency choosing to take out health insurance. A very large number of my constituents pay for various procedures and operations. They insure themselves because they believe that they can access those procedures when they need them rather than when the state tells them they can have them.
The essence of the argument is that countries with the highest standards of health care are the ones that encourage higher non-taxpayer funded input into health care. That is what I am trying to get across. I might be unable to persuade the hon. Gentleman, but I hope that I might start to persuade members of the coalition Government on the virtues of people taking responsibility for their health care, thereby relieving the burden on the NHS.
Does the hon. Gentleman accept that the private health system is not independent? It is actually dependent on the national health service, and the vast majority of private health staff were trained and qualified in the NHS. The 6% we are talking about is quite small when it comes to disincentives for people to use the private health system.
The hon. Gentleman demonstrates his old socialist credentials and his prejudice. I shall not get into a full debate about the NHS, as I hope that we will have an opportunity to do so when the private Member’s Bill tabled by my hon. Friend the Member for Wellingborough (Mr Bone)—which I support—is debated on a Friday in February. Let us not forget that many of our top clinicians stay in this country because they can supply their services to the NHS—[Interruption.] Yes, they do so for money, but they can also top up their income by getting money for providing their services to private patients. That mixed market in health care provision, including the providers of health care, is healthy for our country and I am sorry that the hon. Gentleman does not support it. That is a philosophical divide, but I think that we need the best health practitioners in this country. The private health insurance companies make a significant contribution to the health of the nation.
I shall not go through all the contributions that were made in this debate, but I wish to touch on the motor insurance issue, which found most common cause across the Committee. Because the right hon. Member for Birmingham, Hodge Hill (Mr Byrne) did not seem to be committed to the idea of protecting motorists—especially young motorists and those from areas with high insurance premiums—and did not say that he would support my amendment, he has created a slight difficulty for me.
My ambition this afternoon was simply to tease out from the Government the principle behind the increase in IPT. The hon. Gentleman may be able to help me with this, but I think that I detected that the ambition was simply revenue raising. Was that his interpretation too?
The right hon. Gentleman has deployed an old trick. Instead of responding to my challenge, he has put a challenge back to me. He has listened to the same debate as I have, and the Government need to raise money because—as he so candidly recognised—there is no money left. That is one of the reasons behind the insurance premium tax.
The hon. Gentleman is being slightly unfair. We had a very different approach to introducing £19 billion of new taxes. The Government have chosen a different course, but they have had to raise so much in VAT and IPT because the Budget so slows down the recovery that £9 billion in extra taxes will have to be raised to make up for the lost growth.
I shall not get involved in that debate now, because I want to keep the focus on the narrow issues in my amendments. I am disappointed that the Minister did not respond to my concern—echoed by the hon. Member for Nottingham East (Chris Leslie) and others—about the regressive nature of the insurance premium tax, especially on the motoring public. One suggestion I made was that instead of having a standard tax on insurance premiums, we could have an individual transaction tax so that every motorist would pay the same tax for his annual insurance premium.
My hon. Friend is right to return to this point, and I apologise for not responding to it in my earlier remarks. If we took that approach on a revenue-neutral basis, we would end up essentially with the same transaction tax level on a big and small car—whether a Bentley or a Skoda, we would have the same transaction tax. Is that what he is advocating? That itself would be regressive.
I was not thinking about Bentleys versus Skodas; I was thinking about the student living in Liverpool trying to run a vehicle that is perhaps 10 or 15 years old and finding it hard to make ends meet, and about the person who might have several Bentleys in the garage covered under some collective insurance. I am concerned about those living in high-risk areas or who are in high-risk groups—because they are young drivers, for example—whose insurance premiums are significantly higher than those of, for example, the person whom my right hon. Friend the Member for East Yorkshire (Mr Knight) mentioned who is in their mid-50s and happens to own a Bentley. I do not think that, prima facie, that is fair. I was throwing out a challenge to my hon. Friend the Exchequer Secretary to see whether an individual transaction tax that is not related to the size of the premium might produce a fairer result. It seems as though it might not, but perhaps we can correspond on that so that we can take the matter forward.
We have covered a lot of ground in this debate, and I have already expressed my disappointment. The question now arises of whether we should seek to divide the Committee on the proposals. I live in hope—perhaps I am naive—that in due course we will get a better and more positive response from the coalition to questions of responsibility and encouraging people to do the right thing, and that it will send out those positive measures. To seek a Division would probably be counter-productive because, apart from anything else, I would have to pick one, rather than both, of my amendments, which would mean picking on one particular type of insurance premium tax as against another. I am not sure that that is necessarily in accordance with the will of the Committee, so I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
I beg to move amendment 60, page 3, line 9, at end add—
‘(4) An order under this section may only be made once the Treasury has published a report, including—
(a) the outline for the proposed replacement arrangement for the provisions contained in Schedule 2 to the Finance Act 2010;
(b) a distributional analysis showing the likely impact of the proposed replacement arrangement; and
(c) the revenue implications of the proposed replacement arrangement.’.
The amendment seeks to delay the making of any order under clause 5 until the Treasury has published a report that outlines the proposed replacement for the provisions in section 23 of, and schedule 2 to, the Finance Act 2010, a distributional analysis of the impact of the proposed arrangement and the revenue implications of the replacement provisions themselves. Clause 5 creates a power to remove the paving legislation that would have enabled the so-called high income excess relief charge to be levied in time to be collected in April 2011. That was legislated for in section 23 of, and schedule 2 to, what I suppose we must now call the first Finance Act of 2010, given that we look to be on course to pass three of them this year. I never thought that I would be comparing Finance Acts to buses—none come along for ages and then three come along at once—but it looks like 2010 is going to demonstrate the similarity. We are only in the middle of discussing Finance Bill issues in this Session, and obviously we will resume with part two later in the year.
However, back to the provisions before us. The original legislation, which was passed by the previous, Labour Government, was announced in the 2009 Budget and slightly extended in scope in the 2009 pre-Budget report. The idea was to have restricted tax relief on pension contributions for those earning £150,000 or over, who are the top 2% of earners in the country. The policy would have tapered that relief as earnings rose, so that by the time earnings were at £180,000, the relief on pension savings would be the same as that for a basic rate taxpayer, which is currently 20%. The measure was scored in the 2009 pre-Budget report as creating a total yield of £3.6 billion in 2012-13. It was calculated that it would affect 300,000 people at the very top of the income scale, leaving 98% of taxpayers unaffected.
In order to understand the effect of changes to pension tax relief, we need to understand how it has developed and how it is distributed. I propose to spend a little time outlining that, so that we can explore the precise effect of clause 5 as drafted, which completely takes away the previous policy. The tax relief available on pension saving in the UK is generous. As many hon. Members will know, it was originally introduced to support people seeking to produce an income for their retirement, in the recognition that these people are locking away resources in an inflexible way, which is obviously what pensions do. People cannot easily access those resources earlier than the retirement age, which is usually not for many years.
The tax treatment allows tax-free saving and tax-free investment growth, as well as the taking of a tax-free lump sum on retirement of up to 25% of the fund. There are also valuable tax incentives for employer contributions to pension saving, which is a recognition—long supported by Members in all parts of the House—that it is more efficient for pensions to be provided on a collective rather than an individual basis. The favourable tax treatment is also a recognition in wider society that pension saving involves a deferral of current income, which is always difficult to maintain in what is a consumer-oriented society, where all the temptations tend towards instant rather than delayed gratification.
My hon. Friend responds to my mention of instant gratification, but obviously it is in all our interests as a society to recognise that there is merit in assisting people to save for their retirement, so that they can avoid being reliant on benefits in their old age. As a result of the welcome increases in longevity, which have been a feature of our success as a society since the war, the average period of retirement is becoming longer and longer. Indeed, history recalls that when old-age pensions were first created 100 years ago, the life expectancy of those due to access them was a mere one year after they had been lucky enough to qualify. Clearly, by the time pension saving and old-age pensions became more widespread after the second world war, the time had gone up considerably to seven or eight years. It is now 20-odd years for men and—gratifyingly for females—even longer for women.
That shows that there are issues about longevity in society and about how to adapt our pensions arrangements to recognise that we live in what is often referred to as “an ageing society”. I believe that it is a great triumph of our organisation of society. Although it presents us with some difficult issues of policy and affordability, it should not be seen or ever portrayed as a problem; nor should the fact that these days many more pensioners reach retirement age and live longer be seen as representing some kind of burden on our society. After all, we all aspire—as I am sure you do, Mr Hoyle—to reaching retirement age and enjoying an extremely happy, long and hopefully prosperous retirement. That is what we are dealing with when we tackle the issue of pension tax relief.
I was pointing out that pension tax relief is more generous than the relief in many other areas of saving. That is because there are great benefits in encouraging people to save for their own pension, despite the fact that they are putting money away to which they often cannot gain access for many years; and also because it is more effectively and efficiently done if it can be done collectively. That is why Government incentives, in the form of tax reliefs, have always featured in the system.
This form of tax relief is often referred to as EET. This is not a stuttering, Steven Spielberg sci-fi film; it stands for exempt, exempt, taxed. That means that as savings are put away from income, they are exempt from tax. Any investment growth that comes from investment in those funds is also exempt from tax—that is the second E. The T, of course, is the thing that many people worry about—the fact that as these savings are taken as an income stream when retirement happens, taxation applies again at that stage.
I doubt whether any Member on either side of the House would quibble with the very generous tax incentives put in place over many years by Governments of all hues, colours and sorts—whether they be coalitions or otherwise—to privilege such tax savings. However, as that has developed, certain features have brought about unforeseen consequences and have not proved to be in the best interests of fairness or equity.
To establish the size of the issue and to put into perspective the amounts of money that we are dealing with under this clause, let me reveal—although I am sure that many Members will already know—that the gross annual cost of pension tax relief for the financial year 2008-09 was £28.4 billion, which at a full 2% of gross domestic product is a not insubstantial amount. Net of the tax on pension income—the T part of EET—and also of the national insurance contribution relief for employers, which are also granted by the Treasury, the figure was £18.9 billion. Therefore, the net cost of that tax relief for pension savings is close to £19 billion. Again, that is not an insubstantial amount of money or revenue forgone by the Treasury.
Another feature of the net figure is how it has been growing in the past few years, having doubled since 1998-99. From being reasonably stable, it has gone up very quickly in a relatively short space of time when we think about life spans and the development of pensions policy in this area. That change has been accompanied by a change in the distribution of the beneficiaries of the tax relief, so there was a very strong case for taking action to put it on a more sustainable and fairer footing, and that is what we were doing with the tax law that clause 5 seeks to repeal by order.
It is a feature of the system, which I am not sure could be avoided without putting huge restrictions on it, that tax relief for pension savings is granted at a marginal rate. By definition, that means that it is more valuable for higher rate taxpayers than for basic rate taxpayers. Analysis has shown that the relief was increasingly benefiting those on the very highest incomes rather than just those on higher rates. So, paradoxically, over time, the very reasonable and logical policy of granting tax exemptions on savings for pensions meant that the incentive to save for a pension was being provided, at a cost to all taxpayers, to those who needed it the least because they were the most well-off. That is the definition of “regressive” in terms of how tax relief might hit. The fact that the system was becoming even more distorted, benefiting those in the very top income brackets, was illustrated by a distributional analysis of the benefits, which revealed that higher rate taxpayers received 65% of the relief but constituted only 19% of pensions savers.
The real distortions were at the very, very top, as those on the very highest incomes were benefiting even more disproportionately. Analysis shows that about 2% of savers currently receive a quarter—25%—of all the tax relief available. I hope that the Minister will agree that that is unjustifiable. It means that if a person is privileged enough to be in the top 2% of earners by income, they are entitled to an average of £20,000 of tax relief per year per person on their pension savings, whereas the average relief available for those who are on the basic rate of tax is just £1,000.
The way in which the relief is granted, its connection to the income tax system—the fact that it is at the marginal rate—and the introduction of the 50p rate for income tax mean that if action were not taken, this massively and already grossly regressive relief would become even more distorted. That is why my right hon. Friend the shadow Chancellor, in the pre-Budget report 2009 and the Budget 2009, decided that action had to be taken to deal with the relief, which had become unsustainable and extremely unfair. It was therefore necessary to have a policy response at the medium and low-earning end of the income scale as well as a policy for the very high end. It is the policy for the very high end that is being repealed in clause 5, but I want to spend a tiny amount of time dealing with the policy at the low and medium end.
The decision to create the national employment savings trust was an essential part of the rebalancing of pension tax reliefs to ensure that they could effectively stretch further down the income distribution. Members will recall that the creation of what is now known as NEST was the outcome of a great deal of work across party lines from 2004 to design a system of pension savings that would deal with the obvious market failure in the private sector of the ability to allow low and medium earners to save in a worthwhile way in a low-cost savings vehicle.
NEST was first brought into the structure of pension savings as a result of the work of the Turner commission. The commission sat for two years and produced huge reports. Anyone who wishes to inform themselves about the policy issues surrounding the thorny problems of increased longevity and the ageing of our society, and their implications for our policy approach as an advanced, sophisticated and modern welfare state, should read the evidence and pronouncements of the Turner commission. It is the best available analysis and narrative of those complex issues. It led to two pieces of pension legislation: the Pensions Acts of 2007 and 2008. They put in place a structure that will create automatic enrolment for people, a compulsory employer contribution and—importantly for the subject of pensions tax relief and to this debate—a Government contribution alongside the money that individuals put into the NEST or any other pension structure through which a company chooses to make provision for its workers. This is an essential part of rebalancing the pensions tax reliefs and the extremely regressive skew that I have identified as a feature of the present system.
Automatic enrolment in the scheme is due to begin in 2012, but that is subject to a review that was announced by the new Government. Given the approach to low-cost pension saving, the fact of automatic enrolment, and the creation of a low-cost vehicle that makes saving worth while and does not eat into the savings of people on modest or low incomes through commission and costs, I hope that Members on both sides of the House will still agree that this should go forward. A great deal of work went into creating that consensus, and it is important, given that pension policy has to be developed over many years, that we maintain it across party divides, however much fun they might be at whatever time of the day or night. It is important that we keep the big picture in mind and begin to develop a coherent approach to pension savings.
My firm belief is that the creation of the low-cost vehicle, the NEST, will go ahead, and I hope that this landmark reform will ensure that, from 2012 onwards, up to 10 million people will get the chance to save into a pension with a guaranteed employer contribution and Government tax relief available for the first time ever. By definition, that will begin to reduce some of the skewed and regressive distribution of pension tax relief that is a feature of our system at the moment.
The measure will also begin to build a robust savings vehicle, which will finally guarantee the end of the current market failure that locks those on moderate earnings out of viable opportunities to save in a pension. It will also ensure that access to appropriate tax relief can be more evenly spread. There remains an issue, however, over the distorted distribution of pension tax relief towards those at the very top of the income scale. That is what section 23 and schedule 2 to the Finance Act 2010 were designed to deal with. Those provisions were specifically targeted at those on the highest incomes who had done so well in the good years. We felt it right that those people should contribute most to the fiscal consolidation that we all knew had to happen in the aftermath of the credit crunch. This was a progressive measure that began to address the distortions that had developed in the system. It also explicitly and deliberately targeted the very richest to bear most of the burden of the redistribution of pension saving tax relief. That gives the lie to the propaganda and constant refrain from Government Members that the Labour Government had no plans for a fiscal consolidation. The measure was an important part of our plan to halve the deficit over the lifetime of this Parliament.
Clause 5 creates the power to repeal by order all the paving legislation put in place by the policy approach that I have described. Page 36 of the Red Book hints at the new Government’s intention to deal with this matter. It says:
“The Government will continue with plans it inherited to raise revenues from restricting pensions tax relief.”
So that much we can certainly welcome, and even agree on. The Red Book continues:
“The Government is committed to protecting the public finances by introducing reforms that raise no less revenue than existing plans.”
That amount, as I have already explained, is £3.6 billion by 2012-13. The yield is likely to be maintained at that level or even go higher in the future. From the scoring that we did in government, it had a slow start in the first year—£0.2 billion—while the system was put into place, and went up to £3.5 billion and would remain at that kind of level, but get gradually higher in the future. The Red Book does not feature any scorecard implications, I assume because the Government have said that they will be replacing our yield like for like. They have not predicted what the yield for its replacement policy, whatever that might be, will amount to. One would have thought that it would be at least maintained at £3.6 billion and probably go higher over time.
The sum of £3.6 billion is a significant amount of money to get in by 2012-13. The Red Book goes on to hint at, but gives no firm details of, the approach that might be in the Government’s mind as a replacement for the scheme for which we legislated. That approach, according to paragraph 1.118 on page 36 of the Red Book, is to guarantee the same yield by substantial reductions in the annual allowance. The ballpark area that it mentions for those reductions is between £30,000 and £45,000. That is a significant reduction from the current allowance, which is £225,000. No mention is made of the lifetime allowance. The Minister will be aware that there is the annual allowance but also the lifetime allowance for pension savings. I would be extremely interested in any observations that she may have on the Government’s attitude to the lifetime allowance. Is it to be kept the same, increased, or perhaps indexed in a different way to the one that we established?
The lifetime allowance is certainly an important part of any debate about these matters, yet the Government have gone all coy about it. They have mentioned a potential range for huge reductions in the annual allowance, but they have not been forthcoming about their plans to replace the high-income excess relief charges, which we legislated for in paragraph 23 of schedule 2 to the Finance Act 2010. The Government are not at all forthcoming about the lifetime allowance, which is why the amendment is trying to get a bit more information out of them.
In terms of the public finances, £3.6 billion is a massive amount to be raised in a very tight period, so given that there is so much uncertainty and change around the Government’s proposals, does my hon. Friend accept that they present an enormous risk? From the viewpoint of the industry, it appears that the Government are playing fast and loose and are undermining the confidence of the financial markets and credit rating organisations in their capability to manage our economy or their finances.
My hon. Friend raises an extremely important point and I obviously look forward to the contribution that he will make to our debate in due course. If he looks at the amendment he will see that the point of it is to try to get more detail about what is in the Government’s mind. The time scale for putting the provisions in place is extremely short in relation to the beginning of the new financial year—a point to which I shall return.
The amendment would provide that an order that completely repealed all the paving legislation and all the work to put into effect the higher earnings charge would not be allowed until Parliament has more idea of at least the outline for the proposed replacement arrangements. There are some coy little hints in the Red Book but not much else to go on—certainly no detail—if we are to repeal an already organised charge that has been well consulted on. The amendment also provides for a distributional analysis to show
“the likely impact of the proposed replacement arrangement; and…the revenue implications of the proposed replacement arrangement.”
I accept that the Government have said that they want to replicate the yield, but as my hon. Friend correctly pointed out, the yield is not an insubstantial amount and it rises quickly. In the tax year 2012-13, a yield of fully £3.6 billion for the replacement measure is already on the Budget scorecard.
The planned yield is a considerable sum and the Government need to reassure us that they are not putting it at risk by ripping up all the work that has been done to implement the original policy since it was announced in 2009. There are clear dangers in destroying all that work, wiping it off the statute book and starting again from scratch so close to when the change is meant to come in, not least because of the tight time scales as we approach the start of the financial year 2011-12, when collection of the revenue is meant to begin. The Red Book states:
“The Government wishes to engage employers, pension schemes, experts and other interested parties to determine the best design of a regime.”
That does not fill me with confidence that the Government have the first clue about how their policy intent can be changed into an actual tax change. It is a complex area and they have only a small period to get the measure right.
I assume that the powers will have to be legislated for in the September Finance Bill; perhaps the Economic Secretary can tell me when she replies to the debate. There is not much time—probably only the summer—so I hope she will have a holiday, but I am not sure quite how that will turn out if she is put in charge of sorting out the proposals in an appropriate time. Her officials could get no break at all. To be honest, as they contemplate their second or third Finance Bill of the year, her officials will probably need a break as much as she does. While there is not a lot of time left, there is an awful lot of yield at stake if the Government get this wrong, and that is what we are exploring through amendment 60.
Parliament deserves a much firmer idea of what is in the Government’s mind before it jettisons a well-prepared and well-signalled change that has already involved a good deal of consultation, design, and stakeholder and legislative work. The tax regime to collect the suitably named high income excess relief charge is to be abolished although it has already been consulted on and legislated for. There have also been impact assessments, stakeholder engagement and consultation documents, so all people concerned have prepared for the regime.
I am the first to admit that the charge was not universally welcomed or accepted, especially by those who would have to pay it. Many self-interested and somewhat bloodcurdling arguments were advanced about how trying to distribute the relief more fairly would destroy all pension provision in the UK because it was suggested that those who previously received a completely disproportionate amount of relief would close their employee pension provision out of spite if some of that relief was taken away. It was not surprising that there were howls of outrage from certain quarters when the policy was announced, but it is impossible to justify a system of tax relief that delivers a quarter of its £18.9 billion to just the 300,000 richest people by income in the country.
Unfortunately, it seems that that lobbying effort has paid off under a new Government. The throwaway comment in the Red Book that the policy would
“damage UK business and competitiveness”
is quite worrying because that is usually code for “would hit the very well-off the most”. The Government have obviously listened to those with well-oiled lobbying machines who, after all the years of largesse during which the vast majority of the pension tax relief came to them, did not want the party to end.
My hon. Friend is probably aware of many people’s anger at the size of the pension pots of bankers such as Sir Fred Goodwin. Does she agree that when many people are struggling as a result of the bankers’ decisions, it is outrageous that the Government wish to reward those very bankers by giving them such big pension breaks?
I certainly understand that anger, and I suspect that there will be even more anger if the Government do not address the unfair way in which the distribution of the pension tax relief has developed, especially since the simplification from A-day in 2006. We tried to address the problem by targeting the people at the very top who had benefited the most from the relief in particular.
We received representations from stakeholders who called for a simpler system, and it would be wrong of me to try to claim that the system for which we legislated was simple—it was clearly complex. However, when dealing with people on very high earnings who use complex financial arrangements, we often find that that complexity must be matched to ensure that a fair amount of tax is taken from them. In tax and benefit law, as the Economic Secretary will know—she probably struggles with this every day—there is always a trade-off between simplification and fairness, as well as yield. We took the view that despite the complexities of the system that we were introducing, it was right to target very high earners in particular. I state the distributional analysis again: the top 300,000 people receive 25% of £18.9 billion. No right-thinking person in this country with any kind of understanding of what the term “fairness” means would want us to tolerate that kind of distribution.
Simplification is always a popular cry, but there are trade-offs, and it causes different problems if we create a simpler system. We did consider other options, but the trade-offs are inescapable. We want to explore in debate today how the Government are working their way through the trade-offs, so that we can try to assess whether the solution that the Government have hinted at, but have not put before us, is fair, or whether its outcome is less fair than the outcome of the system that we decided on.
I can see that the hon. Lady and other Opposition Members are following a particular train of inquiry, and that is perfectly right—it is the purpose of this debate. I just draw her attention to the fact that the clause gives the Government the power to repeal the previous measures if we can find a better alternative. If we cannot, I assure her that we will leave what is in place. However, does she agree with the Institute for Fiscal Studies, which described the measures that the previous Government proposed as unfair?
It is up to the entire electorate to decide what is fair or unfair. I have set out some of the reasons why we approached what is a difficult problem in the way that we did, but I certainly welcome the Minister’s comment that if the Government cannot find a different way of doing things, they will leave the current structure in place. I was wondering about the reference in the clause to December this year. I suspected that that might be what we would call a backstop position. It is important that the hon. Lady has put her point on the record. Taking what she says at face value, I assume that the Government will do some work in the next period. I do not know whether a measure will be in the Finance Bill, or how quickly that work will be done, but certainly there is not very much time for a completely new system to be brought in.
The hon. Lady is very kind. Given that she raises the issue, perhaps it would be helpful for the rest of the debate if I set matters out. On the timelines, she is right; we clearly need to make progress quickly. The aim is to publish draft clauses in the autumn, and to legislate in the Finance Bill 2011.
I certainly appreciate the information that the Minister has put before us, and it helps us to get on with the debate. I suppose it means that she and her officials will have time for at least a little bit of a holiday this August. Under our plans, the yield begins to come in during the next financial year. I was under the impression that she would have had to ensure that she legislated for an entirely new system in the September 2010 Finance Bill. She now tells us that potential measures for an alternative system will be forced into next year’s Finance Bill, which means that an extra £0.2 billion of revenue that was scored for the next financial year will have to be raised. I assume that she will take account of that.
The new regime comes in in April 2011. If, as the Minister said, the Government will not bring legislation forward until April 2011, does it mean that we will use the system that we introduced? That will be a second system. There is the current system; the one that we introduced, which will apply from April 2011; and a third one, which will be introduced subsequent to the Government’s Bill. Or will the Government abandon our system, and will there be a period of time in which we get less revenue as a result of the complex process that has just been announced?
There are issues of process on which I would appreciate the hon. Lady’s enlightenment in her response to the debate.
There is also an issue about the backstop position. The hon. Lady says that draft clauses might be brought forward, and, although I am sorry to go on about process, it is important when it comes to tax changes. We gave ourselves close to two years to do all the work to introduce the higher rate relief charge, because it was such a difficult and complex area. We wanted to ensure that those who were liable to pay had plenty of time to plan, understand their liabilities—even if they did not like them, which they rarely do in my experience—and get to know the system, so that there was certainty about it. It now seems clear that there is a degree of uncertainty, which those who would have been particularly badly hit by the high charges, the very richest in our society, might welcome. However, we felt that they should shoulder a fairer burden of the necessary fiscal consolidation, because they had done so well during the good times.
If the Government are serious about protecting the yield, there has to be a trade-off with fairness. The Government have hinted at using the annual allowances as a way of raising that money, rather than our way, and if they introduce that change those on incomes of less than £130,000 will be dragged into the tax net. We wished to avoid that with our solution, so, if the reduction in annual allowances that the Government are considering turns out to be their final decision, in response to the debate will the hon. Lady tell us how many people it will affect? The Government have hinted that that is their preferred way, but our amendment would ensure a distributional analysis of the measure’s effect. Given that we legislated for a particular approach to raising that yield, and given that the Treasury did a great deal of work on developing that system, it would be entirely appropriate for the Treasury to produce some comparisons between that and the preferred approach at which the hon. Lady and, certainly, the Red Book have hinted. How great will the sudden tax liability be of people who earned less than £130,000 a year and would not have been affected had our approach to raising the yield gone ahead? How low down the income scale will the restrictions on tax relief go?
For clarity, does my hon. Friend agree that the Government’s proposal consists of a multi-billion-pound giveaway for the richest 2% of people in this country at a time when the rest of the country faces massive financial penalties due to the actions of international bankers? Those very bankers will be given the extra bonus by this Government, and that is an absolute disgrace.
Again, my hon. Friend makes an important point in his characteristically acerbic way. I was going to ask the Minister, in a slightly more polite way, how much of the income that the very richest would have paid will now be paid, under the new plans, by those on lower incomes. I hope she can give us that figure.
The key issue with annual investment allowances is that they drag people into paying the extra tax regardless of income. For example, a modest earner might receive a bequest from a deceased relative and make a big payment into a pension, and under our system they would have been able to pay in up to £225,000 without incurring tax. Alternatively, a modest earner might receive a redundancy payment and wish to put it away, and we clearly want to encourage that if they do not have a pension. If the hon. Lady’s system is to be of the sort hinted at in the Red Book, that person would be much more affected, regardless of their ordinary income; they would be deterred from putting anything other than the annual investment allowance into a pension fund because of the nature of the tax. I hope she will at least admit that that is an implication. Has she any numbers that relate to this issue?
It is important that we should be able to compare the two systems. That is why the amendment calls for a distributional analysis to be laid before the House before the paving legislation is repealed by order. It calls for the Government to give the House more than a few vague hints about the shape of the new regime that they are planning to introduce.
Reading between the lines, it appears that the Government have chosen to pay a price for increased simplicity. That price appears to be that to reduce the tax burden on the very richest, those on lower—but still good—incomes will be hit. Once more, we see a Government choice that protects the very richest at the expense of those who are not as well off. The Liberal Democrat manifesto identified this regressive tax relief and pledged to restrict it completely to the basic rate. Somehow, through the mysterious and convenient process involved in the so-called coalition agreement, that manifesto pledge has been translated into saving the very richest—perhaps even bankers, as has been said—from large tax burdens and paying for that by clobbering those below them in the income distribution. That definition of “progressive” is even more peculiar than that applied to the VAT rise.
Will the Minister deal with a couple of other questions? There is only a short time before the new financial year. She has said that it is now anticipated that the measure will not be introduced until the Finance Act 2011. How will she protect the £3.6 billion yield, given that that will come in a year earlier? How will we avoid a situation in which the order has to be made before December this year? The new system will not be legislated for and might not even be designed. Surely there will be a space in which the £3.6 billion yield will be at risk, and there will be no approach to ensuring that we can maintain it.
Will the Minister also assure the House that the new regime will be put before us properly and in detail? Will there be consultations, especially with those lower down the income scale, who, it would appear, will now be affected by the changes? Will she also tell us what is happening to the anti-forestalling legislation, which is not repealed by the clause? Will the new regime put the burden of compliance on HMRC rather than on pension providers, which bore the brunt of the approach that we took on this issue? At a time when the Chancellor is boasting of very large cuts in departmental budgets, does the hon. Lady feel that HMRC can cope with the extra burdens that this very sudden, very late, policy change will impose on it?
Finally, what will happen if it all goes wrong? The Minister has hinted that if the Government feel that they cannot intellectually work something out between now and December this year to replace the yield, they will maintain the current system. My experience is that one can have an intellectually coherent approach to a tax change that looks fantastic on paper until one tries to turn it into actual approaches. That stage might well come after the stage that her new policy is able to reach by December this year.
What is the plan B if it all goes wrong? We spent nearly two years ensuring that we could turn our approach into a reality that worked, even though it was not popular among those who were going to have to pay it. The hon. Lady does not have that amount of time. Will she reassure us that the whole thing will not collapse in a heap? I look forward to her response on that point.
Over the past few weeks since the coalition came into being and the announcement of the Budget, the rhetoric that we have heard has been all about fairness. The Prime Minister and the Chancellor have said on many occasions, “We’re all in this together.” The other phrase is, “There’s no alternative.” We have heard the accusation that the previous Labour Government did not have a deficit reduction strategy. Well, this element was a key part of that—£3.6 billion of it.
I am quite sad that only one Government Back Bencher is in the Chamber, and I notice that the Liberal Democrats have not been here throughout this debate. During the election, we heard nothing about the VAT rises, but we also heard nothing about the fact that one of the things that the Government would do in their first Finance Bill would be to give a £3.6 billion tax give-away to the richest 2% of pensioners. I am sure that that would have gone down very badly with the electorate if the Government parties had been honest with us at that time. During the past week, the Liberal Democrats and the Conservatives, in their great coalition together, have been arguing that VAT is not regressive, although a key exception is the hon. Member for St Ives (Andrew George), who has found this policy very difficult. However, one cannot say that the measure we are debating is progressive at all.
Does the hon. Gentleman accept that if the amendment, which would require a distributional analysis of any changes, were accepted, we would be in a position to make a judgment on whether a system that is complicated, as the shadow spokesman said, was at least being replaced with a system that was fair and did not, as the hon. Gentleman says, give a huge amount of money to the very richest people?
I entirely agree with the hon. Gentleman. There seems to have been confusion from the Minister in the sense that she is saying, “Nudge nudge, wink wink, say no more”—in other words, that the Government might not actually introduce this measure. If this change is to be made, we need to know who it will affect lower down the income chain. If the top 2% are not going to carry their share of the burden, people lower down the tax scale will be affected, such as pensioners, who are already being hit by VAT and other implications of this Budget.
This proposal affects 300,000 people—2% of pension savers and 1% of working age taxpayers. We are being told that it is fair, just and progressive to abolish what was put forward by the previous Labour Government, which would have raised £3.6 billion to help to reduce the deficit that was created because of the lending we had to provide following the economic crisis. I am sorry, but I do not accept that that is fair, and I think that if this were explained to most members of the public, they would agree. Currently, no one who earned under £130,000 a year would be affected by this measure. If someone is in a Cabinet packed full of millionaires, that perhaps skews their perspective on what poverty is and what income buys. However, the average member of the public, certainly in North Durham, would be appalled by the fact that we are going to let off people who are earning what is not just a good wage but, for most of my constituents, a fantastic, unimaginable wage.
My hon. Friend is obviously very much in touch with the north-east of England. Would he care to speculate as to whether, among the 2% of the population who will benefit, there will be an equitable distribution across the UK, or whether the vast majority who will benefit will be located in certain parts of the country not too near his constituency or mine?
My hon. Friend raises a good point. Clearly the net beneficiaries will not be in the north-east of England, Northern Ireland or Scotland. They will be those in the south-east of England. The disposable income of those individuals will be a lot greater than that of a lot of our constituents, who will be hit by the VAT increase.
We have seen that give-away, but there is something else in the Budget that I find absolutely amazing. We heard the other night that under the corporation tax proposals, the banks will be given a cash-back of £400 million. The same individuals will no doubt benefit from the proposals that we are currently discussing. We have been hearing the mantras in the past few weeks that there is no alternative and that Labour left the economy in the mess.
Let us not forget that one. However, the proposal in clause 5 will leave a big black hole in the deficit reduction strategy. The Economic Secretary hinted, “Well, we might not do it, or we might do something different.” I am sorry, but if we are to have a thought-out plan to reduce the deficit, that is not the way to approach the matter. What we need is firm figures that do not make the poorest in society pay, which the proposal clearly will. She needs to explain to the House why neither she nor the Liberal Democrats went into the election saying that they would make this change. A lot of pensioners will find it very difficult to stomach.
I would not want to go against your judgment, Mr Amess, but may I say that my hon. Friend’s point is another example of how hard-working pensioners in my constituency will be affected by the Budget? However, I defer to your wise counsel and would not want to get on the wrong side of you.
Distributional analysis is needed before anything is done. We also need to know, if the relief charge is not going to go ahead, where the money is going to come from. It will affect pensioners lower down the income scale. Many on quite small incomes, who have saved all their lives for their pensions, will basically be paying for a give-away to the richest 2% in the country.
I hope that we can get the message out loud and clear from today’s debate that we have a Government who are clearly taking care of their friends, the top 2%. They have to start being honest with the British people—this Budget is not about deficit reduction. It is about an ideological approach to where the burden of taxation should fall and to the size of the state, and it will not help many of my constituents in North Durham.
It is a great pleasure to follow my hon. Friend the Member for North Durham (Mr Jones), who puts his finger on one of the key points. Obviously, the previous Government were attempting to raise £3.6 billion to tackle the budget deficit. They targeted the top 2% of people—those earning more than £150,000, including employer contributions. Those people anticipated that increase and budgeted for it and now, in the ashes of the economic downturn imported from the United States, the impact of raising the £3.6 billion is being spread across a much wider pool—10% of the people.
As has already been said, the suggestion that we are all in it together rings hollow. Public sector workers are on pay freezes and the incomes from their pensions, like those from private sector pensions, will be reduced by 16% over 20 years through the other change that has been mentioned—the link to the consumer prices index. On top of all that, the tide of the £3.6 billion will break over them. The impact will be great, and I very much regret it.
Does my hon. Friend also agree that the 2% of taxpayers who will get the £3.6 billion cash give-away are also in a position to take tax and accountancy advice, which could reduce their tax liabilities? That will not be open to pensioners who are paying the VAT increases or the public sector workers to whom he referred.
My hon. Friend is right. The status quo proposal of getting the £3.6 billion from the top 2% was based on standing back and considering whether there should be greater tax relief for those who are already the richest. The answer was no. At difficult times, those with the broadest shoulders should bear the greatest burden, but now, the burden is being taken from them and placed on much weaker consumers. That will undermine the attractiveness of pension schemes among larger numbers in middle income groups.
In essence, the proposal is to reduce the tax allowance from £255,000 a year to some £30,000 to £45,000. That creates an enormous difference in how many and which people are captured, and generates great anxiety in the industry—the providers that it represents and consumers whom it serves.
The Economic Secretary knows that the distributional impact of the proposals is, as I have said, to spread the £3.6 billion burden from the top 2% to 10%. It is as simple as that. She knows that that is the case, and there is no way that she can wriggle out of that political and economic fact. Before the election, there was a promise that million pound estates would avoid inheritance tax—the top 5,000 households. At the last moment, the Chancellor stepped back and said, “Oh no, at such difficult times, we won’t give billions of pounds to the top few thousand households. Don’t worry. Vote Tory.” However, their secret plan was to have a word behind the scenes with their rich mates, telling them, “Don’t worry, we’ll reverse the Labour party’s old plan to make sure that the top 2% pay most.”
My hon. Friend is making several important points. The clause appears to reinstate an enormous tax relief capability for the wealthiest, yet the Economic Secretary guffaws at questions from Labour Members about taking it away. Surely the Treasury should clarify the position.
My hon. Friend is right. Only yesterday, he lucidly pointed out that, when we went into the election campaign, the Conservatives were saying, “We won’t help the rich with inheritance tax, and we’ll get those bankers with the bankers levy”, but that the levy of £400 million will be nullified by the corporation tax give-away to the bankers. On top of that, we hear not only that the bankers will not pay a levy because they get corporation tax back, but because of this proposal they will have the £3.6 billion in pension contributions. That is an absolute disgrace.
The Government argue that the measure is both fair and effective. I have already argued that it is clearly not fair and will not labour the point any longer, but is it effective? That the previous scheme was complex has been acknowledged, but the new system is also complex. There is enormous uncertainty within the industry, which is asking how pensions can be accrued in defined benefit schemes, how they will be valued under the proposals, and what will be the impact of the proposal on the provision of such schemes and what will be the impact on basic rate taxpayers. There are also compliance and delivery questions, and all sorts of other questions, and the measure must be delivered within a very tight time frame. We are therefore playing fast and loose with our economy and public finances, and with the confidence of the international community, in order that the Tories can bail out their rich friends. That is quite outrageous.
The Government say that the matter will not be done and dusted immediately, but that the measures give them various regulatory powers to withdraw Labour’s well thought out proposals and to leave a void. Specifically, it is said that there will be a discussion document in the summer of 2010, meaning that there will be a big discussion among the stakeholders on how the Government are going to recover the £3.6 billion that they would have made from the top 2%. The Government say, “We’d better not take that £3.6 billion because we’d be taking it from our friends, but we don’t know how we’re going to recover it, so we’ll have a stakeholder discussion in the summer,” which will presumably take place in the Maldives or somewhere similar.
Again, the Labour party was trying to close the loopholes for the very richest and to reduce some of the tax give-away for the millionaires. The Minister is asking the House to trust her while she shuffles the rules—that is what clause 5 effectively means—but does my hon. Friend think that the Government, given their track record, can be trusted on this matter?
I certainly do not think that the Government can be trusted but, more importantly, do the industry, consumers and the wider financial community trust them to get their ducks in a row and recover the £3.6 billion? Much was made of the Chancellor saying, “We’ve got to get all this money and get the deficit down, otherwise we might be re-rated,” but suddenly we do not know where a key component of that—£3.6 billion—is coming from.
I mentioned that there will be a discussion group of stakeholders in the summer. The previous Labour Government considered reducing the annual allowance and all the other options. It is on the record in Hansard that the annual allowance proposal was rejected partly because it was less well targeted—as has been said, we wanted to focus on those who are able to pay most easily and without great pain rather than make the weakest pay more—and partly because of its complexity.
Another key point I wanted to make—I do not think it has been made clearly enough—is that primary legislation is necessary to reduce the annual allowance. The proposal in the Bill is half-baked. It gets rid of a system of gathering £3.6 billion and the Government are incapable of replacing it with an alternative. I object to the clause not just because of the discussion with stakeholders and the uncertainty, but specifically because section 282(2) of the Finance Act 2004 states that the annual allowance set by Treasury order must not be less than the preceding year. Given that the allowance is £255,000, it cannot suddenly become £30,000 to £45,000 without changing that legislation. Such a measure is not included in the Bill, which is another indication of how half-cocked the proposals are. We are discussing a Finance Bill now, but we would need another one before April 2011 to change that allowance. The proposal is incomplete and will mean uncertainty; it demonstrates ineptitude and incompetence; and it undermines confidence among industry providers and consumers. After all, we want more people to save with certainty, so that they have comfort rather than hardship in what we hope will be their long and happy retirements. This will undermine those prospects. People will be less likely to subscribe to sensible, robust pension schemes for the future.
The Government are giving themselves the power to repeal primary legislation by order without knowing exactly what will be put in its place. That is a half-baked approach. Amendment 60 calls for an analysis of “the likely impact”. I tabled an amendment that was not selected, but it simply suggested that this clause should be scrapped. We have looked at the issue, and we know what the distributional impact will be, albeit not in detail. We know that the rich will be let off the hook, and more widely it will cause massive uncertainty about the future. There may also be a question mark over whether we can fulfil our financial obligations as set out in the Budget.
Towers Watson, which is a leading consultant on pensions, says that lowering the annual allowance to £30,000 would lead to tax charges for long-serving final salary scheme members. That means that employers would pull the plug on such schemes. That is not my claim, but that of industry experts. We have already seen across British industry the loss of reliable and robust final salary schemes. Towers Watson says that the changes will undermine final salary schemes because they will not be as useful in retaining staff if they have a tax bill attached. The Minister has not thought this through. If big employers have these final salary schemes, their staff stay with the company because they know that each year they gain a little more benefit, instead of going to a predatory competitor company.
Towers Watson argues that the Government can either introduce a simple system or a fair system, but not both. A rough and ready approach was fine when a few were worried about the annual allowance, but the Government’s proposals would have an impact on hundreds of thousands of people. All the stakeholders will be running around wondering what the changes will mean for them and providers will wonder whether they should provide a different scheme. I mentioned KPMG before, and I will not go through all the consultants in terms of their support for my position, but KPMG says that the number of pension savers affected has widened from 2% to 10%. PricewaterhouseCoopers says that the level will need to be £30,000—as opposed to £30,000 to £45,000—to raise the £3.6 billion needed. The movement from £255,000 to £30,000 is a radical change and we are still consulting on it.
“Employers need certainty over the regulatory framework for pensions if they are to be remotivated to provide quality workplace pensions.”
The Government’s proposals are unfair, unclear, half-baked, fast and loose and a massive new multi-million pound bankers’ bonus to pay back many of the people who put us in this mess in the first place. They are disgraceful and should be withdrawn.
I have only a few points to make. The Conservative party’s fortunes or misfortunes do not really affect us in Northern Ireland so I am not seeking to score political points or to say that the Tories are bad people, even though they may be considered to be so by many people. However, the basic issue that hits everyone in the face in considering this measure is how it sits with the claim by the Government that the Budget is fair.
The core of my argument is this: is this a fair way of dealing with this particular issue? Perhaps the Minister can confirm whether the Government have decided that the current system is so complicated that it needs changing to such a degree that the £3.6 billion will be unrealisable. If simplicity will result in less money, we are obliged to know where that money will come from. On the other hand, if the change is intended to raise the £3.6 billion—but not in the way that it is currently raised—logic dictates that it can be raised only by distributing its collection among people who are not currently paying towards it, which means going down the income scale. That is where the issue of fairness comes in.
The first question I want answered, therefore, is whether it is the intention to raise that £3.6 billion. If so, how will it be distributed? The shadow Minister admitted that the system put in place by the previous Government was complicated—that is probably one of the things exercising Treasury Ministers at present—but if there were a simpler method, I assume that it would have been tried already, because nobody wants to put in place an unnecessarily complicated system. It might well be that something that previously escaped the people who designed the pension tax relief has suddenly appeared to them. If so, perhaps a way can be found to keep the same distribution but collect it differently. Were that the case, however, I suspect that it would have been found already.
A second issue, on which the amendment is quite clear, needs to be addressed. The Minister indicated in an intervention that the power being asked for might never be exercised, but I suspect that it is being requested because it will be exercised at some stage. If that is the case, and if the Government have nothing to fear from the amendment, in the interest of ensuring a collective and positive response to the Budget, and so that it can be seen to be fair, a clear distributional analysis, which the amendment asks for, should not be something that the Government walk away from—the amendment should be easily accepted. I would be interested to hear from the Minister whether that part of the amendment will be accepted, or whether there is some fear about the Government’s doing so. In our earlier debate about insurance, the Exchequer Secretary said that the amounts are so minimal that we do not need a full impact assessment, but the amount here is not minimal—it is £3.6 billion—so a distributional analysis should be called for.
The third comment I wish to make has already been made by other Members. We are going to have the current arrangements until the end of the year, then we will have the previous Government’s amendments for the next year, and then we will have new arrangements for the following year. In this industry, people, including all of us as pension contributors, want some certainty about where our pensions are going, what kind of contributions we will have to make and so on. It therefore strikes me as odd that a Government who say they want to make the running of the economy more simple—by reducing red tape and bureaucracy for industry—should be having three systems in three different years. That seems to go against the arguments that the Government have put forward about how they wish to deal with industry and the economy generally.
For all those reasons, Opposition Members have legitimate grounds for wanting to raise their genuine concerns about the clause and move amendments to it, and are not doing so just as an exercise in political point scoring. I would prefer the clause simply to be removed, rather than the amendment be accepted, but I shall be interested to hear the Minister’s response to the points that have been made.
I shall be relatively brief. It is perhaps worth noting that since my hon. Friend the Member for North Durham (Mr Jones) first commented on the lack of interest from those on the Government Benches, there has been a flurry of—I suspect—BlackBerry messages going out, so that we are now being treated to no fewer than five Conservative Back Benchers. They have joined us for the afternoon, yet not a single Liberal Democrat has arrived in the Chamber.
It would be wrong of me to suggest that the Liberal Democrats are simply uninterested in the Budget, so could it be that the Chancellor, having been thwarted in his plans for a millionaire’s inheritance tax break, came up with a new wheeze after the coalition deal? How could he help his friends in the City? Unsurprisingly, the Chancellor’s new wheeze is to reverse the previous Government’s policy of trying to find a more equitable approach to pensions. That, I suggest, is the reason why our Liberal Democrat colleagues have not been advised of the importance of this debate. For if they saw the skilful manoeuvre that the Economic Secretary is trying to perform on the Committee today, they would surely rush to the Chamber to show their outrage at this terrible scheme.
It is a slightly unusual situation when a Minister as artful and articulate as the Economic Secretary tells us this afternoon that the current system is terrible—that it does not work; that it is unfair and unclear—yet has not been able to articulate what would replace it. It strikes me, as a perhaps naive and innocent new Member, that the starting point for any Government—particularly a Government who are so terribly keen to reduce regulation and bureaucracy—should be as follows: rather than introducing legislation that has no purpose except to give them some wriggle room, the Government would have been better off spending their time coming up with an alternative proposal for the Committee to examine, instead of giving the Minister the opportunity to spend her summer and that of her civil servants coming up with a new scheme.
To conclude, although I look forward to the Minister’s reply, I suspect that we will hear no detail whatever about what the Government plan to replace the current system with, and that in six months’ time she will not have been able to find a suitable replacement.
May I start by saying what a pleasure it is to serve under your chairmanship, Mr Amess?
We have had a wide-ranging debate today and I will do my best to answer a number of the issues that Opposition Members have raised. However, it would perhaps be best for me first to set out the background to this debate, as the shadow Minister did. This issue was first looked at by the previous Government, and we have returned to it as a new Government. The coalition Government inherited from their predecessor the largest budget deficit of any economy in Europe, with the single exception of Ireland. One pound in every four that we spend is borrowed. The gap stands at £149 billion for this financial year alone.
The previous Government had planned to raise extra revenue through the restriction of pensions relief for higher-rate earners. As we have heard, that approach was due to raise £4 billion to £5 billion a year by 2014-15. Given the appalling state of the public finances that we have been left as a new Government, it is something that we cannot ignore.
On Second Reading, my right hon. Friend the Chief Secretary set out our commitment to fairness. This is a progressive Budget that ensures that every part of society makes a contribution to deficit reduction, while protecting the most vulnerable, especially children in poverty and pensioners. The Budget has a number of measures to support pensioners, not least the triple lock guaranteeing an annual increase in the state pension in line with earnings, prices or a 2.5% increase, whichever is the higher.
Let me make some progress.
That will benefit 11 million pensioners across the country. Through clause 6, which we will debate next, the Budget will enable individuals to make more flexible use of their pension savings.
Returning to clause 5, the Government have considered pension tax relief issues and believe that reform is a necessary part of their commitment to tackling the fiscal deficit. It is worth citing the views of Robert Chote, who heads up the Institute for Fiscal Studies, following the Budget. He spoke about this measure on 23 June:
“Perhaps the most welcome change was the decision to rethink the last Government’s complex, unfair and inefficient plans to limit pension contributions relief for high earners.”
That was what he thought about it.
Many people on the minimum wage will not view it as progressive for someone who can afford to pay upwards of £100,000 a year into a pension fund to be given a 20% marginal rate tax break. In fact, that was not the only problem. Having listened to the concerns of the pensions industry and employers, this Government have real reservations about the approach towards pensions tax relief that was adopted in the Finance Act 2010. We believe it could have unwelcome consequences for pension saving, bring significant complexity into the tax system and damage UK business and competitiveness. The director general of the CBI said of the previous Government’s measure, brought forward in the Finance Act 2010:
“This will have serious consequences—it will make it much harder for UK business to attract and retain global talent… In every way, it’s a bad move.”
In addition, a number of features of the approach adopted in the Finance Act 2010 were unfair. For example, it included a very complicated income test, which made it difficult for individuals and advisers to understand. It also made it difficult for individuals to plan, as they would not know their final income until the end of the tax year so they would not know until then whether or by how much they would be affected. The income test also created many perverse incentives, avoidance opportunities and anomalies. For example, different charges could arise, depending on whether an individual or their employer made the pension contributions.
Under the approach in the Finance Act 2010, individuals on the highest incomes, who are able to put in very large pension contributions—upwards of £100,000 to £200,000 in one year—would have continued to get pensions tax relief, as they would still have been able to get relief at the basic rate rather than the higher rate. That is worth up to £51,000 a year. Given our concern for fairness, we believe—
We are proposing a different approach, which would address that very measure. The decision for the hon. Gentleman to take tonight is on whether people who are able to pay £100,000 to £200,000 a year into their pension fund should be able to get tax relief at the basic rate. That is the question for him to answer.
There are hints in the Red Book about the annual allowance taking the strain, so will the Minister tell us whether that is the only approach that is going to be looked at, or is she considering a range of different approaches? She is comparing a system that was legislated for and consulted on with a replacement about which the House has no real information. As I say, there is a hint in the Red Book, but nothing else. Will she help us focus on the comparison by doing us the courtesy of telling us what her Government are going to develop as an alternative?
I was just about to come to that. One thing that we know right now about the existing plans is that if they came in from April 2011, they would curtail, but still give, basic rate tax relief to people who can afford to pay hundreds of thousands of pounds into a pension every year. Our alternative approach looks principally at significantly reducing the annual allowance to curtail that effect. We think that the annual tax relief available will potentially be restricted to less than half that available under the previous Government’s plan, significantly curtailing the ability of the super-rich to benefit from pensions tax relief. That alternative approach is supported by the pensions industry, including the National Association of Pension Funds, as well as employers and their representatives, including the CBI. The Government are keen to continue to engage with the pensions industry, employers and other interested parties to specify the level of the annual allowance, and other relevant design features.
Let me leave no uncertainty about our fiscal objectives. The Government are clear that a reduced annual allowance approach would have to raise no less revenue than the existing plans to restrict pensions tax relief in order to enable us to meet our commitment to deficit reduction. That is why we are not repealing the existing regime at this point, while we are finding a better way of achieving our objectives.
The hon. Member for Wallasey (Ms Eagle) asked for more detail. Our provisional analysis suggests that the appropriate level for the annual allowance could be in the region of £30,000 to £45,000 in order to deliver the necessary yield to the Treasury. However, the level required would be influenced by a number of policy design features in the revised regime. Once those have been decided, we can repeal the measures in the previous Government’s Finance Act 2010. Clause 5 therefore gives the Treasury a power to make an order repealing section 23 and schedule 2 in that Act.
Those measures, which are known as the high income excess relief charge, restrict pensions tax relief to the basic rate for high-income individuals, with effect from 6 April 2011. Let us be clear, however, that they still give basic rate tax relief to high-income individuals. The Government want to consult on a new approach. We want to discuss how best to design an alternative approach to make sure that it can operate fairly and effectively. The power to repeal is time-limited, because we recognise the need to resolve the design of the restriction of pensions tax relief as quickly as possible. We have already begun discussions with groups, which will continue through the summer.
Amendment 60 proposes that we should publish a report outlining the new arrangements and details of the yield implications and distributional impacts. I have some sympathy with the thrust of the amendment, but it will ultimately be unnecessary, because there will clearly be a chance for people to look over the draft legislation, and we will not repeal the high income excess relief charge until details of the alternative regime have been finalised and set out in public.
I thank the Minister for giving way on this important point. Will she undertake to provide a distributional analysis so that we can compare directly the effects of the system that she wants to repeal, with the system that the Government finally settle on if she can find an alternative? That is the essence of the amendment, so her answer to this question is quite important.
A whole range of analyses and impact statements will come out with the legislation. I suspect that, as my hon. Friend the Member for Chelsea and Fulham (Greg Hands) behind me is saying, any work that is done would give an answer that Opposition Members would not like, because it would show that we are no longer going to give basic rate tax relief to people who can afford to pay hundreds of thousands of pounds into a pension pot every year.
Let me address some of the issues that have been raised. I have set out the time frame within which we want to progress towards a better alternative to the current system. We all agree that, for pensions tax relief to remain affordable, we have to limit high levels of tax-privileged pensions saving, but we think that there is a better way of doing it than the one set out by the previous Government. We believe it is important to reduce the annual allowance to prevent people from saving £255,000 a year tax free.
The hon. Member for Wallasey mentioned instances of people suddenly being able to pay a large amount into a pension fund on a one-off basis. She was right to raise that matter, and we shall be looking at options for protecting basic rate taxpayers and supporting any hard cases caused by such one-off spikes in pension accruals. She also asked about the lifetime allowance being changed. We have not ruled that out, but it is obviously a key mechanism that sits alongside the annual allowance. We shall therefore have to look at it in the context of where we end up going with the annual allowance limit. I should say that all this is subject to being able to work with key stakeholders to get something that we believe we can rely on. That is why the provisions will give us the power to repeal that measure, if we can find a better way.
I particularly want to respond to the argument from Labour Members that our proposals would somehow give a tax break to the most well-off people in the country. Let us have a look at some of the figures involved. Of course, the minute I say that, I lose the relevant bit of paper. Ah, here it is. Under the terms of the Finance Act 2010, someone who is contributing £283,000 to their pension fund on an annual basis would have had a tax charge, net of pension relief, of £85,000. Someone making the same contribution to their pension pot under a potential annual allowance level of £35,000 would have a tax charge, net of relief, of £124,000. The reason for that is that they would get 20% tax relief on the income that they would otherwise have paid a much higher rate of tax on. That is why they would pay just under £40,000 a year more under our proposed scheme than they would have done under the previous Government’s arrangements.
I wonder whether those Labour MPs who are so concerned about the impact of tax policy on the better-off people in this country will go through the Lobby today and vote for a measure that means that people who can afford to pay £283,000 a year into their pension pot will pay £40,000 less tax than they would previously have done. I do not know what Labour Members think “good” looks like in relation to taxing better-off people, but I guess I will find out when we have a Division on this amendment shortly.
The hon. Lady is talking to us as though we were schoolchildren, but she will not publish her proposals. Will she now agree to place in the Library a copy of the table that she has in front of her straight away, or this evening, so that we can all share in this secret plan?
I would have thought that the hon. Gentleman was so intelligent that he could do the maths himself. The calculation is pretty straightforward. It is a bit like doing a tax calculation where someone has an allowance and then a rate, and they apply it to the excess of the allowance that they are paying in extra.
It seems that I’m damned if I give information and damned if I don’t. I was asked to provide some facts, and I made sure that I gave some facts and figures. Now that I have provided some to the Committee, apparently that is a bad thing to do too. I think the problem is that the figures I have just provided are not ones that Opposition Members want to confront. They are about to go through the Lobby and vote on people who can afford to put a couple of hundred thousand pounds into their pension pot paying more tax net of pension relief than less.
I was asked for some figures and what the impact would be on the very richest. We can probably find in Hansard tomorrow that I have just provided the Committee with that information. That is probably the way in which debates are meant to work. Ministers have questions put to them and if they can answer them in some detail, they do. That is what I have done. I have set out in some detail why we are pursuing the clause. I hope that everyone realises that it is sensible and a pragmatic way to address the industry’s concerns. The industry faced a £1 billion bill for implementing excessively complicated and unfair tax changes on pensions tax relief. We hope that we can reach a conclusion with the industry and all stakeholders, but the key issue is to address the fiscal deficit, so any solution will have to bring in no less money than the mechanism intended by the previous Government.
We have had a long discussion, so I will be brief. I appreciate the information, such as it was, that the Minister was able to put before us about the shape of the alternative scheme. It is a bit like shadow boxing when one tries to compare a scheme that has already been legislated for with one that has been only hinted at in the Red Book. That has been the problem with this debate.
I was candid about the issues and trade-offs that we had to go through to come up with the structure for which we legislated in the Finance Act 2010. I hope that the Minister and her colleagues will be as candid as they try to develop this other method. She said that she was sympathetic, but she is still resisting the amendment to put a report before the House that will contain distributional analyses and much more information about this alternative system. That is a great pity. We shall divide the Committee on that amendment as the Minister has not given us an undertaking to provide that information. I also want a separate vote on clause 5.
Question put, That the amendment be made.
Question put, That the clause stand part of the Bill.
Clause 5 ordered to stand part of the Bill.
Treatment of persons at age 75
With this it will be convenient to discuss amendment 17, in schedule 3, page 19, line 38, leave out ‘22 June 2010’ and insert ‘a date set by the Secretary of State by regulation.’.
Clause stand part.
Schedule 3 stand part.
I do not intend to delay the Committee. By and large, I am very supportive of clause 6. The two-year extension for people reaching the age of 75 in order to allow them to buy an annuity when it is most effective for them is a good thing to do. The clause seems to be pretty well drafted and the description of it is extremely good. I am pleased about the protection in paragraph 8(2) of schedule 3, which provides that if a member dies before a year has passed since their 75th birthday, and at the date of death there are still funds held for the purposes of the arrangement that have not been designated as available to pay an unsecured pension, not paid as a lump sum, and not applied towards the provision of a scheme pension or a dependent’s scheme pension, those funds are treated as though they had been designated as available for the payment of an unsecured pension and will then be taxed on death at a rate of only 35%. That makes sense.
However, I am aware, through a constituent of my hon. Friend the Member for Angus (Mr Weir), that there are a small number of individuals who have already reached 75, or will hit 75 before 22 June, and who did not buy an annuity because it was not worth it or not effective. I want to describe the position of that person and then see what help the Minister might be able to provide, or hear her explanation of how the clause might assist.
As the rates for annuities were very low, this gentleman did not take up one on reaching 75 in 2007. Instead, he chose a scheme pension that allowed him, subject to pension regulation supervision—a specialist firm did that for him—to continue to manage his pension fund for a period of 10 years and take the actuarially calculated levels of income from it. That was very sensible and prudent. However, the downside is that on his death, if any of that fund is left, it will be subject to inheritance tax at a rate of 80% before it passes to a family member of his choice.
Indeed it was a constituent of mine who brought the matter to our attention. Does my hon. Friend think that a way round might have been for the clause to allow anyone to take the extra two years if they were to reach age 75 or were already in that position? I cannot imagine that the numbers affected would be huge, but it would have got round this particular problem.
It may have got round the problem. That is one of the questions that I shall put to the Minister.
If the 80% IHT rate is correct, as I believe it is, the situation seems dreadfully unfair, although I recognise that it occurs because of the tax benefits of the pension saving over a person’s lifetime. Of course, people cannot benefit from the same tax twice; I appreciate that. However, I suspect that of the people over 75 who had the means to purchase an annuity but did not, very few would want to do so now. We may be talking about some very wealthy people who would always manage their own pension anyway. I welcome the protection for those who hit the age of 75 on 22 June or thereafter, but people aged between 75 and 77 will feel extremely hard done by if they just miss that cut-off date. There are also those who were already 75 a year or two before and chose not to buy an annuity but are managing their pension provision.
This is a matter of natural justice and fairness. I imagine that the numbers of people who are in this position and would want to buy an annuity are very small, so I am looking to see what protection there might be in the Bill. We may reach a situation whereby there is simply a cut-off, so that even if someone reached the age of 75 on 21 June 2010 and found it not worth buying an annuity, they would no longer be able to take advantage of the two-year gap, which would be a sensible thing to do.
I hope that the Minister can give us some comfort as regards the small number of people, all of whom are beyond the age of 75, who will pay 80% IHT on any remaining funds at the time of their death, compared with those who, within the provisions of the clause, will pay only 35% if they die at that time. I would like an assurance that the Bill and the clause will help that small number of people too.
I am grateful to the hon. Member for Dundee East (Stewart Hosie) for his questions, and it is probably wise if I take this opportunity to set out to the Committee the background of clause 6 and address the issues that he raised. I am sure that he will be interested in the consultation document that has been launched today on a number of them.
The Chancellor announced in the Budget that the Government would end the effective requirement to purchase an annuity by age 75 with effect from April 2011. The reason why we want to do that is that it will provide greater flexibility and choice for the individuals affected. In considering the hon. Gentleman’s amendments, it is important for the Committee to understand why we are making that change and how we are going about it.
A consultation on the detail of the changes was launched earlier today by my hon. Friend the Financial Secretary, and our intention is to introduce any changes from April 2011. As set out in the consultation document, the Government will be guided by the following principles in implementing the changes: first, that the purpose of tax-relieved pension savings is to provide an income in retirement; secondly, that any changes to the pension tax rules should not incur Exchequer cost or create any opportunities for tax avoidance; thirdly, that individuals should have the flexibility to decide when and how best to turn their pension savings into a retirement income, provided that they have sufficient income to avoid exhausting their savings prematurely and falling back on the state; fourthly, that pension benefits taken during an individual’s lifetime should be taxed at income tax rates, with the tax-free pension commencement lump sum continuing to be available; and fifthly, that on death, as the hon. Gentleman mentioned, the pension savings that have been accumulated with tax relief should be taxed at an appropriate rate to recover past relief provided, unless they are used to provide a pension for a dependant. Those principles will ensure that the new rules offer maximum flexibility to pension savers, while avoiding undue complexity or incurring a cost to the Exchequer.
The proposals set out in the consultation document will create additional flexibility for anyone saving into a defined contribution pension. That new flexibility means that individuals will be able to decide for themselves whether and when to purchase an annuity. It will also allow them to leave their pension fund invested in an income draw-down arrangement beyond the age of 75, and to take benefits from their pension fund later than that age if they wish. In addition, individuals who can demonstrate that they have secured a minimum income will be free to draw down unlimited lump sums. The changes will also allow the pensions and annuities industry to consider more innovative products, giving consumers greater choice.
While the new rules are being finalised, it is important that individuals who are about to turn 75, and who have not yet made a decision about what to do with their pension savings, are not disadvantaged in the meantime. The changes set out in schedule 3 are the minimum necessary to enable those reaching 75 on or after Budget day to defer the decision on what to do with their pension savings.
The Bill achieves that by providing for the pension tax rules that previously applied to draw-down arrangements only up to age 75 to continue to apply up to an individual’s 77th birthday. That means that the higher inheritance tax charges that apply specifically to pension scheme members aged 75 or over will not apply to individuals who are about to turn 75, and who have not yet made a decision on what to do with their pension. They will not now have to make a decision until they reach 77, and in the meantime we will have worked through the consultation process. Clause 6 and schedule 3 will therefore ensure that they need make no decision until after new rules are finalised next year. To do otherwise would be unfair and confusing, and changing the rules retrospectively would add unnecessary complexity.
I understand the Economic Secretary’s point and I am closely following her argument. Does she accept that many people did not get annuities in the past two or three years because the economic position meant that it was simply not a good time to buy them? Those people are effectively being penalised. Would it not be fair, as I suggested in an earlier intervention, to say that everyone had two years from now, while the consultation goes ahead and changes are being made, to consider their position? Perhaps some people will wish to continue as they are, but at least they would have the option, which is rightly being given to people who are approaching 75.
I thank the hon. Gentleman for that intervention. I will set out our overall approach to the issue that he raised. In every individual case, there are specifics. I was not aware of the case of the individual whom he mentioned, and I would be happy to give him a more specific answer if he gives me details. However, in principle, he raises a difficult issue. It is doubtless hard for people who reached their 75th birthday before we got to Budget day when we announced the proposed changes. We had pressed the previous Government to take action earlier, but it was left to us, on coming into government, to start to take the steps that we all agree are important. We do not agree with making retrospective legislation, except in the most egregious cases. As he said, the provision affects only a few hundred people.
The inheritance tax charge of 80% would apply to estates over the inheritance tax threshold of £360,000 a year. On the face of it, I cannot give much comfort to the constituent of the hon. Member for Angus (Mr Weir). We are trying to improve the position of those who reached 75 on or after Budget day, but I have set out the basic principles, and the details of the constituent’s case may or may not fit them. If the hon. Gentleman provides the exact details, I will give him a more exact answer. I hope that I have provided some background and that we can find a way forward to clarify and resolve the specific issue.
I thank the Economic Secretary for her response. Clearly, the way forward for people reaching 75 is sensible. The two-year deferral until the consultation is complete is right. It recognises the problem and ensures that no one else falls through the cracks between now and the end of the consultation. I am slightly disappointed that no hope was offered that the consultation could allow a slightly retrospective element to those very few people who have become 75 in the past few years, did not take an annuity and are managing their own funds. I will not press the amendment, but I will have another think about it before we reach Report next week, when I may revert to it. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
I beg to move amendment 61, page 3, line 12, at end add—
‘(2) Schedule 3 shall not have effect unless the Chancellor of the Exchequer has laid before the House of Commons a report on the implications of the abolition of compulsory annuitisation of pensions, including—
(a) the revenue implications of abolition; and
(b) a distributional analysis showing who would benefit from abolition.’.
The amendment would mean that the age at which compulsory annuitisation is required could not rise, as the Government announced in the Budget, from the current 75 to 77 until the Chancellor lays before the House a report setting out the implications of abolishing the compulsory annuitisation of pensions savings. That would include the revenue implications and a distributional analysis of who would benefit from the abolition, in the interests of transparency. It is important to explore in more detail the Government’s precise thinking and intentions.
Before I do that, I shall comment on the sudden appearance this morning of a written ministerial statement, to which the Economic Secretary referred, on the matter. It appeared without the courtesy of any warning before our debate on the subject.
I spent some time on the Treasury website trying to avoid the increasingly odious comments on the “spending challenge website”, which continues to publish offensive and outrageous suggestions for savings, such as sterilising the poor, reopening the workhouses and the forced repatriation of immigrants. It appears to be completely unmoderated by the Treasury, and I hope that the Economic Secretary will convey my strong view that something should be done about that thing on the Treasury website.
What I could not find on the Treasury website, right up to the point when I came into the Chamber for today’s debate, was a copy of the consultation document that the written ministerial statement said would be there. I have a copy of the complete list of Treasury consultation documents that was on the website at around 12.30 pm. It featured the bank levy consultation, but not the consultation alluded to in the written statement. I therefore had to go the Library and have it printed so that I had the chance to look at it before I dashed into the Chamber, but the Minister has been waving it about. Will it be the usual behaviour of those on the Treasury Bench to give Members of the House so little time to look at a 53-page document? There was no advance warning, and the document was unavailable on the Treasury website, even though the written ministerial statement said it would be there. The Minister should get her Department to do a lot better than it has done today. That the document was unavailable anywhere other than via a photocopying machine in the Library at the last minute is a discourtesy to the House.
When I had a look at the consultation as I sat on the Front Bench while other debates were going on, the first thing I noticed was that the consultation will be a mere eight weeks long. It starts today and will end on 10 September, which is four weeks shorter than is recommended as good practice in the code on consultation, the second criterion of which states:
“Consultations should normally last for at least 12 weeks with consideration given to longer timescales where feasible and sensible”.
The consultation is an eight-week, rushed consultation that includes the entirety of the August holiday, when many of the people who have expertise on this matter will be sunning themselves in very much nicer climes than most of us could probably afford to visit, before they come back to pronounce. That is a very peculiar way to consult on such an important matter.
I too wanted to ask the Minister this: what on earth is the rush about? One thing about annuitising and pension rules is that she has a little run-in time to consider—at some length—the implications of her proposals. I do not understand why there was such short notice and why the consultation is so rushed. I am forming an impression that the Government have already decided what they are going to do and that the consultation is a sham. If it is, they ought to have the decency to tell us what they have decided and not to consult at all. I would not have thought that the many experts who will be sunning themselves over the August holidays will thank the Government very much for giving them such a short time to respond.
The foreword of the consultation document states:
“The Government wants to foster a new culture of saving in the UK.”
We would all agree with that, and that a rebalancing towards saving is necessary. Therefore, it is important to prioritise large numbers of people saving appropriately. I had a look to see what the Government have done so far to encourage saving, particularly in pensions, which is what annuities are all about. Will the Minister explain quite how reducing public and private pensions by changing their definitions from RPI to CPI helps to increase pension saving? Yesterday, the Daily Mail and various other experts said that that is a raid on people’s pension expectations of more than £100 billion in the private sector, an amount that will accumulate year after year. Can the Minister explain how that encourages pension saving? Will she confirm that the impact assessment in this consultation lets the cat out of the bag when it comes to changing annuitisation rules? We have no particular problem, and certainly no philosophical problem with shifting the age of annuitisation from 75 to 77. Longevity has increased and the last rules—and the age of 75—were set in 1956. Indeed, annuitisation was first made compulsory in the Finance Bill of 1921, which was slightly before my time and I know that it was also before the Minister’s time.
I am reassured by what the Minister says about what might be called red lines in the Treasury’s view of the consultation. The first is that annuities should continue in order to provide an income in retirement rather than as a tax-privileged method of saving large amounts of money that can then be taken as a lump sum over and above the 25% that can already be taken tax-free. Others are that there should be no Exchequer costs and no tax-avoidance activities. The latter might be difficult to sustain if the Minister intends to make changes that introduce a minimum income requirement. Interesting attempts have been made to define a minimum income requirement to allow someone to take complete usage—with appropriate tax paid, I hope—of the rest of the money in their pension pot. I know that the Government are consulting on that point, but it is not going to be an easy thing to decide.
I notice also from the impact assessment that although the annuities market last year saw 445,000 people annuitise up to £11 billion of funds so that they could take an income until they required it no longer, the estimate of how many individuals will actually be affected by this change is a mere 8,000.
At a time when we need to encourage more people to make pension provision, does my hon. Friend think that these proposals will help? My concern is that having a minimum might reduce the numbers of people providing for their retirement rather than increase them.
My hon. Friend raises a reasonable point. Changes in this area have to be made very carefully to avoid the law of unintended consequences, especially when large amounts of tax-privileged income are at stake. The Minister knows that, which is why she said that there would be no increase in tax-avoidance opportunities.
We would have to have a long debate about a range of issues to answer that, but I am happy to defend our record. The closure of defined-benefit schemes took place for a range of reasons and the closures began in earnest when I was still at school, so I do not take personal responsibility for that.
When we look at the impact assessment, we see that the changes will affect a tiny minority at the very top—a mere 8,000 people on the Government’s estimates, out of 445,000 people who annuitise every year. They will affect only those who can afford to live without touching their pension pot until fully 10 years after retiring. We know that two thirds of people take their annuity upon retirement and that only a much smaller number of people last beyond 70, so the flexibilities that the Government are looking for will be required by only a tiny number of very rich people. The Minister therefore needs to justify why this is a priority and why we need a rushed consultation of only eight weeks over the summer to bring it about.
I will be brief, Mr Evans, because I believe that some Members have other things to do later on. I also remind the House that in the Register of Members’ Financial Interests I have explained that I offer business advice to a couple of companies.
I would like to briefly praise the Minister and her team for their proposal. For many years, the Conservatives while in opposition urged the then Labour Government to allow people a bit more flexibility and freedom with their money in retirement. Even now, after the election defeat, the party does not get it. This was not the main reason it lost the election, but it was one of many things where it misread the public mood. People want more freedom and flexibility over their own resources and more control over their own lives, but Labour was always trying to stop them. This is a small but important move, and I think we might find that it affects rather more people than the hon. Lady says—
The hon. Lady is protesting. I know it is in the Government document, but I am suggesting that the Government might be wrong and might have underestimated the number—it is extremely difficult to know how many people might take advantage of the provision. I also think it will not necessarily be only rich people who are affected. I know that Labour never wants any successful people to make money and be able to spend their money sensibly.