My Lords, in the face of unprecedented global headwinds, my right honourable friend the Chancellor delivered an Autumn Budget Statement acknowledging the difficult decisions that this Government must take to tackle the cost of living crisis and restore faith in the UK’s economic credibility. To address head-on the issues that we face, we will follow two key principles: first, asking those with more to contribute more; and, secondly, avoiding the tax rises that most damage growth. These two principles work together to achieve these aims in a fair and sustainable way without damaging growth.
Today we are debating a small number of tax measures that are being taken forward as a matter of priority. I am sure that noble Lords recognise the need to progress these measures at pace to provide certainty to markets and help stabilise the public finances. This Finance Bill therefore focuses on tax rises that act on the Government’s commitment to fiscal sustainability, helping to stabilise the public finances and providing certainty to markets. I now turn to its substance, beginning with the measure on the energy profits levy.
Since energy prices started to surge last year, the Government have considered how to ensure that businesses that have made extraordinary profits during the rise in oil and gas prices contribute, in the fairest way, towards supporting households that are struggling with unprecedented cost of living pressures. The Bill takes steps to do exactly that by ensuring that oil and gas companies experiencing extraordinary profits pay their fair share of tax. We are therefore taxing these higher profits, which are not due to changes in risk-taking, innovation or efficiency but are the result of surging global commodity prices, driven in part by Russia’s invasion of Ukraine.
This measure increases the rate of the energy profits levy, which was introduced in May, by 10 percentage points to 35%. This will take effect from January next year, bringing the headline rate of tax for the sector to 75%—triple the rate of tax other companies will pay when the corporation tax rate increases to 25% from April next year. The Bill also extends the levy until 31 March 2028.
However, as the Government have made clear, such a tax must not deter investment at a time when ensuring the country’s energy security is vital. Putin’s barbaric and illegal invasion of Ukraine, and the utilisation of energy as a weapon of war, have shown that we must
become more self-sufficient. That is why the Bill also ensures that the levy retains its investment allowance at the current value, allowing companies to continue claiming around £91 for every £100 of investment.
The Government will legislate separately to increase the tax relief available for investments which reduce carbon emissions when producing oil and gas, supporting the industry’s transition to lower-carbon oil and gas production. Together, these measures will raise close to £20 billion more from the levy over the next six years, bringing total levy revenues to over £40 billion over the same period. The Government are also taking forward measures to tax the extraordinary returns of electricity generators, but will do so in a future finance Bill to ensure that we engage with industry on the plans.
The autumn Finance Bill also introduces legislation to alter the rates of the R&D tax reliefs. Making these changes will help ensure that the taxpayer gets better value for money, while continuing to support valuable research and development—a crucial ingredient for long-term growth.
Over the last 50 years, innovation was responsible for around half of the UK’s productivity increases, but the rate of increase has slowed significantly since the financial crisis. This difference explains almost all our productivity gap with the United States. We have protected our entire research budget and we will increase public funding for R&D to £20 billion by 2024-25, as part of our mission to make the United Kingdom a science superpower.
The Government also remain committed to the increasing focus on innovation set out in the 2021 spending review and the £2.6 billion allocated to Innovate UK over the spending review period. This represents a 54% cash increase in IUK’s budgets from 2021-22 to 2024-25, and 70% of its grants to businesses go to SMEs. These measures are significant, but ultimately businesses will need to invest more in R&D, and the UK’s R&D tax reliefs have an important role to play in this.
For expenditure on or after 1 April 2023, the research and development expenditure credit rate will increase from 13% to 20%; the SME scheme additional deduction will decrease from 130% to 86%; and the SME scheme credit rate will decrease from 14.5% to 10%. This reform aims to ensure that taxpayers’ money is spent as effectively as possible and improve the competitiveness of the RDEC scheme. It is a step towards a simplified, single RDEC-like scheme for all.
The SME scheme costs almost twice as much as RDEC and is, as it stands, significantly more generous, yet HMRC estimates that the RDEC scheme incentivises £2.40 to £2.70 of additional R&D for every £1 of public money spent, whereas the SME scheme incentivises 60p to £1.28 of additional R&D. In addition, RDEC has lagged behind other countries in generosity. Following the corporation tax rise from April 2023, the SME scheme would have become even more generous in cash terms, and RDEC less.
The reform is estimated to save £1.3 billion per year by 2027-28 and leave the level of R&D-related business investment in the economy unchanged. It is also expected to reduce error and fraud in the SME scheme where the generosity has made it a target for fraud. Government
support for the reliefs will still continue to rise in cost to the Exchequer, from £6.6 billion in 2020-21 to over £9 billion in 2027-28, but in a way that ensures value for money. The R&D reliefs will support £60 billion of business R&D in 2027-28, a 60% increase from £40 billion in 2020-21. The Government will consult on the design of a single scheme and will work with industry ahead of the Spring Budget to understand whether further support is necessary for R&D-intensive SMEs without significant change to the overall cost.
I will turn now to the measures on personal tax. We know that difficult decisions are needed to ensure that the tax system supports strong public finances. To begin with, we are asking those with the broadest shoulders to carry the most weight. Therefore, the Government are reducing the threshold at which the 45p rate becomes payable from £150,000 to £125,140. Those earning £150,000 or more will pay just over £1,200 more in tax next year. This will affect only the top 2% of taxpayers.
We have also announced a reduction of the dividend allowance from £2,000 to £1,000 from April 2023, and to £500 from April 2024, as well as a reduction of the capital gains tax annual exempt amount from £12,300 to £6,000 from April 2023, and to £3,000 from April 2024. We have also announced that we are abolishing the annual uprating of the AEA with CPI and fixing the CGT reporting proceed limit at £50,000.
The current high level of these allowances means that those with investment income and capital gains are able to receive considerably more of their income tax-free than those with, for example, employment income only. These changes make the system fairer by bringing the treatment of investment income and capital gains closer into line with that of earned income, while still ensuring that individuals are not taxed on low levels of income or capital gains. Although the allowance will be reduced, individuals who receive a high proportion of their income via dividends will still benefit from rates that are below the main rates of income tax: these are 8.75%, 33.75%, 39.35% for basic, higher and additional rate taxpayers respectively. These two measures will raise £1.2 billion a year from April 2025.
We are also maintaining at current levels the income tax personal allowance and the higher rate threshold for longer than had previously been planned. These will remain at £12,570 and £50,270 respectively for a further two years until April 2028. This will impact on many of us, but no one’s current pay packet will reduce as a result of this policy, and by April 2028 the personal allowance, at £12,570, will still be more than £2,000 higher than it would have been had it been uprated by inflation each year since 2010-11.
I also remind the House that we are a Government who raised the personal allowance by over 40% in real terms since 2010 and this year implemented the largest-ever increase to a personal tax starting threshold for NICs, meaning that they are some of the most generous personal tax allowances in the OECD. Changing the system to reduce the value of personal tax thresholds and allowances supports strong public finances. Even after these changes, we will still have one of the most generous sets of core tax-free personal allowances of any G7 country.
We also announced in the Autumn Statement that the inheritance tax thresholds will continue at current levels in 2026-27 and 2027-28—a further two years than previously announced. As a result, the nil rate band will continue at £325,000, the residence nil rate band will continue at £175,000, and the residence nil rate band taper will continue to start at £2 million. This means that qualifying estates will still be able to pass on up to £500,000 tax-free, and the estates of surviving spouses and civil partners will still be able to pass on up to £1 million tax-free because any unused nil rate bands are transferrable. Current forecasts indicate that only 6% of estates are expected to have a liability in 2022-23, and this is forecast to rise to only 6.6% in 2027-28. By making changes to personal tax thresholds and allowances, the Government are asking everyone to contribute more towards sustainable public finances—but, importantly, we are doing this in a fair way.
Finally, in line with the Treasury’s commitment to international action on net zero, we welcome the fact that the transition to electric vehicles is continuing at pace. The OBR forecasts that, by 2025, half of all new cars will be electric. Therefore, to ensure that all motorists start to pay a fairer tax contribution, the Government have decided that, from April 2025, electric cars, vans and motorcycles will no longer be exempt from vehicle excise duty. The motoring tax system will continue to provide generous incentives to support EV uptake, so the Government will maintain favourable first-year VED rates for EVs and legislate for generous company-car tax rates for EVs and low-emission vehicles until 2027-28.
These are difficult times, and difficult decisions need to be made to repair the UK’s economy. However, these decisions will be made in an honest and fair way. This is a vital part of the Government’s broader commitments made at the Autumn Statement. The Bill demonstrates a responsible approach to fiscal policy, helping to stabilise the public finances and providing certainty to markets. The measures in this autumn Finance Bill are a key part of these plans. For these reasons, I commend the Bill to the House.
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