This piece first appeared in The Daily Telegraph on 3 March 2001
The text here may not be identical to the published text
The Tory plans for reforming personal taxation are spread across four documents published at different times over the last few weeks. One shadow cabinet member told Your Money it was a deliberate plan – with pensioners for example being drip-fed "one policy per day". Joined Up Opposition it is not. Adding up all the money they are giving away comes to just £5 billion out of a total of £8 billion earmarked for tax-cuts. Another billion will probably be spent on cutting fuel duties by 3p a litre leaving £2 billion as what a spokesman called ‘room for manoeuvre’ – rabbits to pull out of the Tory hat after Gordon Brown sits down on Wednesday.
Transferable personal allowance
The personal tax allowance is the first tranche of income before tax begins to be levied and at the moment cannot be transferred to anyone else. Gordon Brown announced in November the allowance would be £4535 in 2001/02. Where both members of a couple work, they will have £9070 tax-free annual income between them. But if only one works then he (or she) can only have £4535 annual income before tax is paid.
William Hague will change that and allow a husband and wife to transfer any unused personal tax allowance between them – but only where there is a child under 11 or a disabled relative living in the household and one partner stays at home to look after them. A wife – or husband – in this position, will be able to transfer the personal tax allowance to their spouse who will then pay less tax. About a million couples will benefit, with the biggest saving going to those with higher incomes.
Joined Up Opposition it is not.
A working spouse paying higher rate tax will see their tax bill fall by £1814 a year, nearly £35 a week. Someone paying tax at the basic rate will gain by only £998 a year, or just over £19 a week. Not a huge amount to pass on to the person looking after a dependant full time. At the minimum wage it represents about 5 hours work a week.
The transfer would be available only to married couples who lived together, thus putting a price on separation for the working partner. Nor would it be allowed to an unmarried couple, even where one partner was staying at home caring for a young child. However, calling it ‘married couple's allowance’ is bound to cause confusion with the very different and original married couple's allowance which is still around for couples where either spouse was born before April 6 1935. It is worth around £540 off the annual tax bill.
The Conservatives would make dividends paid on shares and the interest earned by savings, including gilts, free of basic rate tax. Already, there is a lower 20pc basic tax rate on interest, instead of the 22pc basic rate paid on earnings. The Tories would reduce that 20pc rate to zero. Higher rate tax on savings is not affected – so this change would give least help to those with the highest incomes.
Income from savings is taxed like cream that floats to the top – always charged at a taxpayer’s highest rate – the Revenue calls it ‘top-slicing’. So anyone earning more than about £33,000, who is already paying higher-rate tax, would still pay 40 pc tax on all their interest and dividends. For tax-free savings, they would have to rely on ISAs, which would in future only be of use to higher rate taxpayers and those who pay capital gains tax.
The plans would also give a boost to some annuities as the return on them would also be free of tax. At the moment the income for life paid out when an annuity is purchased is a mixture of interest and return of capital. The interest part is taxed, reducing the overall return. In future it would all be tax-free, giving a welcome boost to the falling returns on annuities. However, it would not benefit people who bought an annuity as part of their pension plan – all the income from that is taxable and would remain so.
The Tories would also reduce the tax paid by some pensioners by raising the personal tax allowance for some people over 65 by £2000. At the moment the personal tax allowance in 2001/02 is expected to be £5990 for people aged 65-74 and £6260 for those aged 75 or more. People of that age can enjoy an income of around £117 a week before paying any tax. The Conservative would raise both by £2000, increasing the tax-free income level to around £155 a week.
For basic rate taxpayers the tax saving would be up to £440 a year. But the advantages would not extend to better-off pensioners. The higher personal tax allowance given to people over 65 is subject to a means-test and the Conservatives would keep that. The higher personal tax allowance is progressively withdrawn as income exceeds £17,600 in 2001/02 and the Conservatives admit that the new personal tax allowances would not benefit anyone over 65 who had an annual income of more than around £24,000.
Tory tax cuts
·Abolish basic rate tax on interest and dividends - £3 billion
·Transferable personal allowance for some married couples - £1 billion
·£2000 increase in personal tax allowance for those over 65 - £1 billion
·3p off the duty on petrol - £1 billion
·Room for manoeuvre - £2 billion.
3 March 2001