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Direct Tax and National Insurance Contributions

Volume 824: debated on Tuesday 25 October 2022


Asked by

To ask His Majesty’s Government what plans they have, if any, to ensure that an individual with an annual earned income of £30,000 will not pay more in direct tax and national insurance contributions than an individual with an annual unearned income of £30,000.

My Lords, different forms of income are subject to different tax treatments. For example, national insurance contributions are charged only on earned income, reflecting their historic basis as a social security contribution. The Government have acted to reduce the generous tax treatment of unearned income, including reducing the generosity of the dividends tax allowance in 2018. However, the Government keep all taxes under review.

My Lords, I thank the Minister for his reply. A worker on £30,000 a year currently pays £3,486 in income tax and £2,092 in national insurance—a total of £5,578. A speculator with £30,000 of capital gains pays no national insurance, even though he uses the NHS and social care, and pays only £1,770 in capital gains tax. This means that the worker pays £4,000 a year more in taxes than a speculator. Can the Minister explain why the tax system hits the workers the hardest?

The noble Lord gives one example. As he knows, individuals can be subject to different tax treatments depending on the type of income they receive and whether they are employed or self-employed or working through a company structure. I reassure him that the Government have taken action to reduce this disparity in tax treatment, for example by reforming the taxation of dividend income, reforming the main rates of dividend tax in 2016 and reducing the tax-free dividend allowance from £5,000 to £2,000 from 2018.

Will my noble friend join me in resisting any attempts to treat gains from capital at the same rate as income? People like me, called speculators by some, started up a new business with risk capital, which is easily lost, whereas others bank an income entirely risk-free; they should not be equated. It is worth reminding the House that a mobile 1% of taxpayers account for 30% of revenues.

My noble friend makes a good point. The Government are committed to a fair tax system in which those with the most contribute the most, but one which also has to encourage saving. The income tax system, we believe, is highly progressive: the top 5% are projected to pay half of all income tax in 2022-23. My noble friend also cited the other statistic: the top 1% are projected to pay over—he said 30%—actually 28% of all income tax. Crucially, the top 10% of the income distribution are estimated to receive 35% of all income but pay over 60% of all income tax liabilities.

My Lords, according to HMRC, most of the benefits of the lower rate of capital gains tax accrue to individuals resident in London and the south-east of England, and very little to less wealthy regions in the UK. Could the Minister please explain what assessment the Government have made of the impact of the capital gains tax regime upon regional incomes, and more importantly, wealth inequalities?

The noble Lord may be aware that at Spring Budget 2021 the Government froze the capital gains tax annual exempt amount—the so-called AEA—at £12,300 until 2026. However, the Government keep the UK tax system under constant review, as I alluded to earlier, to ensure that it is fair and simple for all taxpayers.

My Lords, next week’s fiscal event will, in the words of Jeremy Hunt, involve painful cuts to public spending. However, as part of his attempt to avoid calling a general election, the new Prime Minister has said that he is fully committed to delivering the 2019 Conservative Party manifesto. Does the Minister believe that these two positions can be reconciled, or are we about to see new tensions between 10 and 11 Downing Street?

We all wish the new Prime Minister well. I personally congratulate him on his victory and, as he said himself, he has a hard task—and more. But to answer the noble Lord’s question, certainly on the non-dom side, they play a very important role in funding our public services, and the rules were changed on non-doms, to bring an end to permanent non-dom status.

My Lords, do the Government believe that taxation should not only be fair but be seen to be fair? If so, are the Government still planning to scrap the cap on bankers’ bonuses? Does the Minister agree that this is not only unjust and unfair but an insult to so many people who are paying soaring mortgages, food and energy costs and struggling to feed their families?

I do not know of any plans to change the current position, which is that the cap was raised on bankers’ bonuses, and I may say, having had a long career in the city, that I think it is a very good thing. The reason for that is that we are in a position in London to recruit the very best bankers from around the world who generate income for the UK, and they pay more tax into the Treasury, so it is a very good thing.

The Minister did not dispute the figures from my noble friend Lord Sikka. Will he confirm that the figures were correct, and if they are correct, how does that fit in with the Government’s levelling-up agenda? Or has that been ditched?

The Prime Minister mentioned the levelling-up agenda today, and it is very much on course—as you probably heard, he cited the fact that we wish to revert back, which is quite right, to the 2019 manifesto. In terms of the noble Lord’s figures, I will need to look at Hansard to see what precisely he said, because it was a very specific issue that he raised.

My Lords, could my noble friend take these questions from the Labour Benches as a strong recommendation for the Government for simplifying the tax system and indeed, in time, for reducing the burden of tax by cutting the basic rate of income tax, as the Prime Minister has indicated he will do in the long term?

My noble friend is right: the Prime Minister has said, over a long period of time, that he is a tax-cutting individual—now a tax-cutting PM—but when the economic conditions allow. It is the right way forward, but there is a lot to do before we get to that point.

My Lords, the Minister referred to the percentage of tax coming from richer earners. I am sure he is aware of the figures showing that, in the last five years, median income has risen by 2.2% on average, but for the richest fifth of people it has risen by 4.7%, while the poorest fifth of people have seen a real fall of 1.6%. Does the Minister agree that this rising inequality of income is a problem?

First, on a serious note, we are very aware of the issues that many people are having to deal with at the moment, with the rising cost of energy and so on. The House is very aware of that. However, I do not agree with the noble Baroness, because the UK fares very well on an international basis. The UK’s taxes on wealth are on a par with those of other G7 countries, including inheritance, estate and gift taxes.

My Lords, could the Minister tell us what specifically is being done to stop people taking up residence or setting up companies in the overseas territories and Crown dependencies?

We are very aware of these sensitive matters. I alluded to what we are doing about these matters, including the non-dom status, earlier in response to a question from the noble Lord, Lord Tunnicliffe.

My Lords, could the Minister explain how we have become a high-tax but low-service-level—in terms of public services—economy? It is the worst of both worlds.

As I alluded to earlier, the aim is to lower taxes, but we have a lot to contend with as a result of Putin’s appalling war in Ukraine and ongoing energy costs. At the end of the day, we aspire to be a low-tax country.

My Lords, in October 2019, the well-respected Institute for Fiscal Studies said:

“We do not find any evidence that tax-motivated retention of profits translates into more investment in business capital.”

Does the Minister have alternative evidence? If not, how does the present system of taxing the poorest more than the wealthiest match the Government’s conscience?

I think there are two matters to raise here. It is very important to keep taxes as low as possible to help working people, so that the amount they earn goes further. Equally, it is very important to have policies in place to incentivise businesses—not just those within the UK but those which want to come and invest in the UK.