Taxing the Poor

The Government has decided to turn its back on 300,000 older people who are too poor to pay tax on their income as a whole, but will nevertheless be taxed on their share dividends from April. Saga Magazine looked at this sorry tale in July last year. At the time it seemed likely that the Government would have a change of heart. But just before Christmas it announced it would not change the policy announced in the 1997 Budget.

That policy means that from April the way that share dividends are taxed will change. At the moment, dividends are paid to their shareholder with tax of 20pc already paid by the company. People who pay basic rate tax have nothing more to pay and people who do not pay tax because their income is low, can reclaim the tax which has been paid on their behalf. From April that tax will not be paid by the company. Because no tax has been paid, there will be nothing to reclaim. But the rules about tax on dividends have been rewritten so that people who pay tax - either at the basic rate or the higher rate - will not end up paying more tax on their dividends than they do now. The only ones to suffer are people whose incomes are too low to pay tax. Their income from dividends will be cut by a quarter.

Many readers have written to Saga Magazine since we first looked at this tax change in July. One who wrote to us is Bert Parker, a 79-year-old physiotherapist who had to retire at 64 due to heart problems. He and his wife Gwen live on a modest income.

"Last year I claimed about £245 rebate from the dividends on my small portfolio of shares. I have shares in Debenhams, Arcadia, BT, P&O and National Grid. I have two small pensions but I’ve always been self-employed and they don't bring in much so I bought the shares to help tide me over."

Altogether, Bert's total income is just below the tax threshold - which is around £8000 a year for a married man over 75. So the extra £245 - £4.70 a week - is very welcome. But from April he will lose it.

"The big worry we have is petrol. The Government just keeps putting up the price. We live half a mile from the supermarket, that may not sound far but we both have cardiac conditions so we have to drive there. They should slow down on these tax increases. And to help us the Government should reinstate the tax rebates for non-taxpayers who are elderly."

In a way Bert and Gwen are lucky. Their income is double that of many poorer pensioners and they are among a minority who reclaim more than £200 a year. The average amount of tax reclaimed by the 630,000 people of all ages who are affected is £75 a year. The cost to the Government is put at £50 million.

But the Government is determined not to reprieve poorer pensioners. On December 10 Dawn Primarolo, then a junior minister in the Treasury, answered a written question from Conservative MP Nick Gibb

"Having listened carefully to all interested parties, the Government confirm the arrangements set out in the July 1997 Budget for phasing out payable credits."

That was very different from the promise given by her boss, the millionaire businessman Geoffrey Robinson. As Paymaster General he told MPs on 14 May that he would look again at the policy. He did not. And it took further pressure and a parliamentary question to the Prime Minister to flush out the December answer from Dawn Primarolo. Just before Christmas Mr Robinson resigned after lending the former Trade and Industry secretary Peter Mandelson £373,000 to buy an expensive house in west London. Red Dawn, as she was known when she refused to pay her poll tax in 1989, has replaced him. And it fell to her, and her colleague, the Economic Secretary to the Treasury Patricia Hewitt, to debate the question of tax rebates to low income shareholders, in the House of Commons on 18 January. Sadly, the debate degenerated into a party knockabout with little light cast on the Government's thinking. Ms Hewitt, who was an information officer with Age Concern in the 1970s and the original author of its annual publication Your Rights, told MPs.

"The Government is not going to take any lessons from the Opposition on how to run the economy or how to create a tax system that is good for business."

"The Government's plans are good news for pensioners, good news for business, and good news for the elderly."

Ms Primarolo battled for nearly half an hour against a hostile House of Commons to explain that there were alternatives for people like Bert and Gwen Parker

"We announced the change in July 1997 giving people nearly two years to consider their investments and if necessary switch them before the rules take effect."

We asked for an interview with the new Paymaster General to put to her directly the questions that readers have raised. But after nearly two weeks wait we were told she was too busy to talk to Saga Magazine. Instead, just before we went to press, she replied in writing to nine questions we put.

In reply to the question 'why do this'? she said the changes "were all about fairness" and were made "as part of a wider reform to remove distortions in the company tax system".

And she is right that this change in tax, which takes £50mn a year off low income people, is an unintended consequence of major changes in company tax. At the moment companies pay the basic rate tax on the dividends they pay to their shareholders and then deduct that payment from the tax they owe on their company profits. In future they will not do that. Instead they will pay their company tax earlier but at a lower rate. In addition, around £1bn extra tax will be raised from foreign companies which used to pay dividends to their parent companies abroad and then reclaim some of the tax paid. Their tax refunds will be cut almost to nothing.

Fair enough. But why not spend some of that £1bn making sure the poorest pensioners do not suffer. What would be the cost of doing what Bert wants the Government to do - reprieve pensioners from the loss of their tax refunds?

She answered "It's not a question of annual costs. We took the action to get rid of an unfair distortion in the tax system."

She also told us in great detail about the money the Government had spent in other ways on pensioners (see last month's Saga Magazine for much of that information.) And she advised pensioners to reinvest their money if that would make their income higher.

"From 6 April 1999 Individual Savings Accounts (ISA) will be available. ...The cost of transfer will be those associated with selling existing shareholdings and any management charges. However, sometimes special arrangements are made for new investors where some of these costs are waived...Other alternatives would be interest-bearing accounts...where the interest is paid gross...Example would be National Savings products...An investor transferring to such products from shares would incur any costs of disposing of the shares."

John Whiting is a tax partner with the international accountancy firm PricewaterhouseCoopers. He says that is not as easy as it looks

"Basically what they have to do is get out of shares and consider interest bearing accounts. Problem one is the cost of selling. Secondly, interest rates are falling which is not good news if you want to depend on interest payments."

And Bert Parker was not impressed with the advice either.

"The new Individual Savings Accounts are uncharted water I couldn’t choose what to invest in. I have seen my shares appreciate and I want the freedom of choice to invest where I want. Of course eventually I suppose I will have to sell my shares. The problem is £20,000 may sound a lot but at my age it may not last as long as me!"

Although Dawn Primarolo was too busy to speak to us, the Shadow Chancellor, Francis Maude, the MP for Horsham, was glad to give Saga Magazine an interview.

"This issue is one of basic justice. When I was a Treasury Minister we implemented the change where non-taxpayers could get the income tax back from the interest on their bank and building society accounts. I dealt with the implementation of it and we did it because it was basically unjust that non-taxpayers should not be able to get their interest paid gross. Now that isn't under threat, but this issue is the same. Labour has done precisely the reverse, we have had tons of letters from people really angry about it. By definition it is poorer people who are affected."

So what is Conservative policy?

"We believe they should effectively be entitled to get their dividends gross, otherwise it is double taxation and a basic injustice. Non-taxpayers should be entitled to get their dividends gross, to reclaim whatever has been deducted."

But unless there is a major change of heart announced in the Budget on March 9, that simple, logical solution will not happen.
March 1999

e-mail Paul Lewis on paul@paullewis.co.uk