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Income Tax Threshold

Volume 831: debated on Tuesday 4 July 2023


Asked by

To ask His Majesty’s Government what plans they have, if any, to adjust the threshold for the higher rate income tax of 40 per cent to account for inflation.

The income tax higher rate threshold is still high enough to protect the vast majority of people from paying the higher rate of income tax. Around 80% of all income tax payers pay at the basic rate. The Government must ensure that the tax system supports strong public finances, and it is right that those who earn more contribute more.

I thank the Minister for her reply, but I remind her that paying tax at 40% used to be a sign of achievement in this world and the middle classes—the middle earners on whom the prosperity of this country depends—are getting gradually poorer, with 1 million more of them paying higher rate tax in the last two years. With the withdrawal of child benefit, the effective rate of tax between £50,000 and £60,000 is around 61%. I know the Labour Party is not standing for lower taxes either, but does the Minister really believe that the country is going to be incentivised to perform well if it is crippled by this level of taxation?

My Lords, of course, the Government want to bring taxes down. It is worth reminding noble Lords that since 2010 we have nearly doubled the personal allowance and, this year, around 30% of those with income are projected to pay no income tax at all. In our current circumstances, we need to be fiscally responsible, and the best tax cut we can give people is to cut inflation.

My Lords, the income tax threshold and personal allowances are frozen at the April 2021 level until 2027-28. At that time, the real value of the personal allowance—to which the Minister just referred—will be less than it was in 2013. As a result of government policies, an additional 4.2 million people are expected to pay the basic rate of income tax this year; that is, 20% plus national insurance of 12%. Can the Minister explain the rationale for extra taxes on the poorest, already hit hard with negative wage rises and rising bills? How does the Government’s hiking of the taxes of the poorest reconcile with their levelling-up, or is it squashing-down, agenda?

My Lords, I could not disagree more with the noble Lord. On the personal allowance, the increases we have seen under this Government since 2010, even with the freeze in thresholds, will be more than if it had been raised in line with inflation. We have put in place unprecedented support for people after the two major shocks of Covid and Russia’s invasion of Ukraine. We need to consolidate our public finances in the face of that and it is right that everyone contributes. We have looked to change corporation tax rates while protecting the smallest businesses, and we have frozen tax thresholds. We brought down the additional rate threshold at the Autumn Statement 2022, which is a sign of those with the broadest shoulders bearing the biggest burden.

My Lords, does the Minister agree that the impact of inflation on taxpayers is corrosive, and therefore the sooner the Bank of England gets inflation back to target, the better? Does she further agree that the amendment introduced by the noble Lord, Lord Rooker, along with Audrey Wise back in 1977 is perhaps the most important principle informing our tax system?

On the first point, I absolutely agree with the noble Lord. As I said in answer to my noble friend, bringing inflation under control is the most effective tax cut we can give to families across the country. On the second point, I will have to check the record; it was at least a decade before I was born.

My Lords, I do not suggest cuts in the tax take in our current financial condition, but I question the distribution of the tax burden. Can the Government explain why they have chosen to use the threshold rather than the tax rate? By using the tax rate, they could certainly target the higher level of tax against those with the broadest shoulders most able to carry it. By using and freezing the threshold, they have dragged into the higher tax rate many people on very middling incomes, who are now experiencing the highest increase in taxes, according to the IFS, since 1979. Those are the people who, as the noble Lord, Lord Balfe, said, drive our economy, but they are also the group suffering severely from the cost of living increases.

I reassure the noble Baroness that the income tax system is still highly progressive: the top 5% are projected to pay nearly half of all income tax in 2023-24 and the top 1% are projected to pay more than 28% of all income tax. The noble Baroness is right that those on middle incomes are feeling the squeeze; that is why we are absolutely focused on supporting the Bank of England in its mandate to get inflation down.

Does my noble friend agree that the one tax that goes up because of inflation is receipts from inheritance tax? The latest figures show that inheritance tax receipts grew by 14% last year. As the noble Baroness, Lady Kramer, has pointed out, people are dragged into the fiscal net who were never intended to pay inheritance tax on their estates—which are essentially quite modest family homes. Is there not an urgent need to address the threshold rates for inheritance tax?

Since 2010, we have introduced additional allowances for people in certain circumstances to pass on up to £1 million to their direct descendants. Inheritance tax makes an important contribution to our public finances, so any changes in that area would need to be properly funded.

My Lords, the former Chancellor and current Prime Minister says that he wants to cut people’s taxes, yet under his watch the tax burden has reached a 70-year high. As other noble Lords have observed, more people are paying more income tax, wiping out the benefits of previous changes to the personal allowance. Can the Minister understand the frustration of those who work hard and pay their taxes only to see non-doms and those with £2 million pension pots given preferential treatment by this Government?

My Lords, we have worked hard to put tax cuts in place for working people, which is why we have raised the personal allowance. The increase to the starting threshold for paying national insurance was raised last year by the largest single amount, helping people who are currently facing challenges with the cost of living. The noble Baroness mentioned the changes we have made to pensions tax. That is to try to keep experienced professionals in our public sector workforce, from doctors to head teachers and members of the military. Those changes were made for the right reasons and will have the right effect.

My noble friend is quite right about the need to tackle inflation above all else. In the same way as the Government are discouraging excessive wage demands because they are inflationary, is it not correct that any attempt to change the tax system to chase inflation would be equally dangerous for the economy?

My noble friend is absolutely right. That is why, when we have looked at what support we can put in place for people, our number one aim is not to make the problem of inflation worse. We were able to do that through announcing the mortgage charter, which will provide important relief to people struggling with higher interest rates while not making the problem worse.

My Lords, is the Minister aware that the noble Lord, Lord Balfe, and others are lucky that they do not live in Scotland, where middle-income taxpayers pay even more tax, which the Scottish Government then use in areas where they have no responsibility—such as a Minister for Independence, serviced by 20 UK civil servants and paid for by our taxes? It is about time the Treasury did something about that. When will the Government do it?

I absolutely agree with the noble Lord that the UK income tax system is more competitive than the Scottish system and that we deliver better value for money.

My Lords, yesterday the Competition and Markets Authority showed that consumers were charged 6p a litre more than wholesale prices justified. Obviously, those excess profits will be taxed. Do the Government think they should be taxed at more than the current rate?

My Lords, we have been clear that we will take the findings of the CMA very seriously and put in place a system to ensure that we do not see future excess profits in a similar way.