My Lords, I thank the Minister for his introduction. This is clearly a niche debate—even more niche than some. I will make a general point and then move on to a specific issue that, to no one’s surprise, will involve pensioners.
For the general point, I want to cast our minds back to the Rooker-Wise amendment, so called after my noble friend Lord Rooker, when he was a Member of Parliament in 1977, along with his colleague Audrey Wise. They were responsible for one of the few examples of Back-Benchers making a significant impact on a Finance Bill. The amendment linked the personal tax allowance to the rate of inflation to prevent the effective erosion of non-taxable income. When the personal allowance remains the same, in the normal course of events, because of inflation and increases in general earnings, people effectively end up having to pay more tax. I did a bit of research on this. The Institute of Economic Affairs, not normally an organisation that I would quote, refers to this as an increase in taxation by stealth, and that is indeed the reason why the Government are doing it.
The Minister said the proposals were honest and fair, but I do not think it is honest and fair to increase general personal taxation by freezing allowances. It is covert. The Institute for Fiscal Studies described it as covert tax increases. It comments, in terms of the Budget, that the freezes to income tax allowances and thresholds constitute a very big tax increase indeed. This is a big tax increase, with the Government hoping that people essentially will not notice that their income is being increasingly taxed because of increases in line with incomes. It would obviously be much more honest and fair to continue increasing the allowances and to adjust the standard rate to recoup the same amount of taxation. I am not making a point about the global sum of taxation; I am making the point that it would be fairer and more honest to increase the standard rate rather than fiddle with—well, freeze—personal allowances, which are covert increases.
Obviously, we know why the Government are doing this: they are committed not to increase the standard rate because it would look bad. But my specific question on this issue is, how many more people by 2028 will the decision to freeze the allowances drag into the tax net? I am talking about people on low incomes. How many people on low incomes will have to start paying income tax because of the decision to freeze allowances? That is the general point.
There is a specific problem—an administrative problem, in my view—with freezing the allowances for pensioners. I have been looking at the figures and, because of the triple lock, which apparently we all support, there will be, according to the figures from the OBR, a 10% real increase in the state pension, the new state pension and the basic state pension, over the period up to 2028, which I believe is very much to be welcomed. But, at the same time as the state pension is going up, the personal allowance is frozen. That means that currently the state pension, taking the new state pension as the relevant figure to illustrate the situation, is 77% of the personal allowance. By 2028, it will be 100% of the personal allowance.
Now, people who have higher incomes pay more tax—that is reasonable. The problem is that the state pension is not functionally part of the PAYE system. Nobody pays income tax on their state pension. The state apparently has no way of deducting income tax from the state pension, which means that as the state pension gets to the same level as the personal allowance—and many people have additional amounts of state pension because of the state earnings-related pension scheme of the past—there will be many people whose only income is from the state pension and it will be in excess of the personal allowance. We have got away with that situation in the past because of the gap between the state pension and the personal allowance, but I believe there will be a major administrative and political problem as soon as people start receiving state pension in excess of the personal allowance. I have not seen any commentary on this, but the Government need to be clear what they intend to do about this problem.
My specific question is: what are the Government going to do about the large numbers of people who are due to pay tax on their state pension because of
this scissors effect? How can we resolve the problem and make sure that people who are not part of the current PAYE system do not end up being sent a significant bill for outstanding tax at the end of the year?
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