House of Lords - Spring Budget debate

On the 18th March the Spring Budget was debated and below are a few of the subjects discussed.

Background

Lord Lamont of Lerwick , a former Chancellor of the Exchequer set out the background to the UK’s public finances summarized in the following extract from his speech -

“If you spend ￡500 billion—50% of one year’s tax revenues—on Covid measures supporting people’s living standards, it is almost inevitable that the tax burden will increase somewhat. Our tax burden after this involuntary forced increase is still below those of major European countries. Of course it is still too high, but it is not a decision the Government made easily, willingly or with great enthusiasm. It does not mean that living standards cannot in time begin to recover, as we are seeing. Wages have risen by 10% in the last two years, and the national insurance reductions have cut in half the effects of freezing tax thresholds up to this point. We have been through a tsunami but we have weathered the storm, and I hope that, geopolitics permitting, calmer waters might lie ahead. Sustained growth does not come from turbocharging demand: experience teaches us that turbocharging usually ends badly. Sustained growth has to come from the supply side, from being more competitive, including competitive taxes of course, alongside innovation and an adequate labour supply.”

Child Benefit

Baroness Lister of Burtersett commented on the rise in the child benefit high income charge (HICBC) threshold and the smoother taper. While she recognised the unfairness created by the present system, she did not believe that the answer is to jettison the important principle of independent taxation. This was pioneered by a Conservative Government back in 1990, and endorsed by the Minister the other week. Moreover, as tax experts have warned, and the Chancellor has conceded, it will require significant reform to the tax system. Such reforms are likely to pose considerable administrative problems. If introduced on a cost-neutral basis, they would create as many losers as gainers, according to the IFS. The Baroness ?asked that the consultation include the option of abolishing the charge altogether.

By way of background under new rules, parents earning up to ￡60,000 a year will receive child benefit, with the amount tapering off for those earning above this threshold. Analysis by Policy in Practice showed that some parents could face an effective marginal tax rate of 88.9% if they earn between ￡60,000 and ￡80,000 and receive universal credit. Some bodies have warned that changes to the HICBC will be hard to implement as income tax is assessed on an individual basis and these reforms will be based on joint household income. The Low Incomes Tax Reform Group (LITRG) says it is “concerned the tax system is not geared up to deal with assessment based on household income, and that the changes required may be costly, complicated and difficult to achieve”. Despite the complications it is very doubtful that the Government would consider abolishing the charge and giving up the revenue raised by the charge.

British ISA

Lord Lee commented that he had been a great supporter of this whole concept, starting to invest when Personal Equity Plans (PEPs) ?precursor of ISAs, were introduced in 1987. He commented that ?ISAs have developed into probably the best tax-free wrapper in the western world. It has been a very successful savings medium, and the newspapers over the weekend have been full of ISA content. He ?is very supportive of anything that gives a boost to the UK stock market, but he thought that the ￡5,000 British ISA suggested in the Budget is, something of a damp squib. “ It will be administratively very difficult and complex: we are probably talking about having to run two ISAs. It will obviously appeal only to the very wealthy, who will be able to put in something like ￡25,000 a year—￡20,000 plus the ￡5,000. Frankly, it hardly produced a flicker in stock market interest: there were no movements at all. I am pleased to say that my own ISA is 100% invested in UK stocks—which perhaps explains its rather poor performance in recent years.”

“More seriously, there is a fundamental choice here. If individual savers and investors want to invest in overseas stocks, by all means let them—that is their decision—but he does not believe that there should be tax incentives, via ISAs, to those who invest overseas. Therefore, while he did not think it feasible to argue that people should dispose of their overseas holdings, from now on those who take out new ISAs, whether they be for ￡20,000, ￡5,000 or whatever figure, should actually be restricted solely to UK stocks. If they want to invest in overseas stocks, that is their decision, but there should not be tax breaks supporting that.”

In fact when PEPS were? introduced the eligibility was confined to British companies. However, reverting to this criteria would seem a backward step now

Baroness Noakes thought that the new UK-only ISA announced in the Budget is not much more than a gimmick. The Baroness commented that apart from its being unlikely to have any significant impact on anything, the consultation shows that this is just another complicated scheme in an already complicated savings landscape. The Baroness added “There are already five different types of ISA; we do not need a sixth, especially one which could well prohibit savers from making rational investment decisions. Growth will not come from this tinkering.”

Resident non domiciled tax change

Lord ?Leigh of Hurley commented that the change in the non-dom regime may not be quite as harsh as one might have first thought from the Chancellor’s speech. “With the transitionary rules and overseas work relief being retained, and the rebasing of capital gains tax to 2019 values, it might not be too bad. Certainly, the ability to bring into the UK stockpiled gains outside of trusts at 12% is helpful, and the taxation of protective trusts has to be the right step forward if the scheme is going to work. Likewise, the inheritance tax scheme for non-doms seems fair, and a 10-year window is quite generous.”

Lord Leigh went on to comment “ I am pleased to see that the Government are open to extensive consultations on this issue, which I believe have already started. The OBR reckons this will yield some ￡5 billion a year, but with migration, as will inevitably happen, and other tax-planning measures, this will drop by some ￡2 billion to a net ￡3 billion, in its opinion. It is very hard to know how it could possibly have arrived at this.

Baroness VereI thought that the changes ?to non-doms were pragmatic and achieved the right balance between ensuring that those who are resident in the UK pay tax in the UK and encouraging those with high wealth to come to the UK and invest their funds. ?The Baroness commented “That was the balance that we were keen to achieve; we believe that introducing a new residence-based regime brings the UK into line with other countries with similar schemes, such as France, Spain and Italy, and makes us more competitive than places such as Germany and the US that do not have those schemes. The detail of the operation of the scheme will become clear in due course after consultation. I recognise that there is uncertainty around the costing: the OBR has certified the costing as reasonable and central, but as with any of these costings, some will include more uncertainty than others. My noble friend Lord Northbrook questioned its attractiveness, but as I said previously, I think we have got the level of attractiveness right versus other places.”

It is not feasible to outline the current rules in a very brief blog of this kind but in a very broad outline the proposed new rules effective from April 2025 ?mean that new arrivals to the UK ?will only be able to avoid tax on overseas income for the first four years of living in the UK. After that, they will be taxed in full on their worldwide income and gains.

It is alleged that many ?non-domiciled clients, were shocked at the speed with which the chancellor was “changing the rules of game and disrupting their lives when they had come to the UK to make a life here [under the non-dom rules]”. ?

Tax experts contacted by the Guardian said many non-domiciled clients were even more concerned about Labour’s plans? and were exploring moving to Italy, which introduced a scheme through which rich people could pay a? flat tax of 100,000 euros no matter how much money they earned abroad.

France, Greece, Cyprus, Malta, Portugal and Spain have similar schemes designed to attract the wealthy and internationally mobile elite.

Other UK-based non-domiciliaries are said to be considering moving to traditional tax havens such as Monaco, Switzerland, Dubai and Caribbean islands. However, recent academic research suggests super-rich people may not follow through with threats to move because they fear they would be “bored to death” in the often?culturally remote locations.

There were 68,800 non-domiciled people in the UK in 2021-22, according to the latest available HMRC data.

Lord Nortbrook commented that he could not ?see the sense in getting rid of the non-domiciled status. In his view, this was a political move to outsmart the proposed policy declared by Labour, without fully thinking through the economic consequences. He commented that the forecast of the extra tax gain is highly optimistic, as these non-doms can easily move to countries such as Italy and Portugal which offer them attractive regimes. The UK also?loses the benefits of these non-domiciled individuals running businesses and employing people, as well as VAT on their spending on goods and services.

Stealth taxes

Lord Sikka commented that “No one can grow an economy by depressing household incomes. The real average wage is stuck at the 2007 level. In February 2024, according to the ONS, the median annual pay was ￡27,972. The Joseph Rowntree Foundation estimates that a single person needs an income of ￡29,500 to have a minimal standard of living, and a couple with two children needs at least ￡50,000. A large part of our population is therefore below the level of a decent standard of living.

Rather than helping, the Government have piled on the agony. Since March 2021, 4.2 million more individuals have been dragged into paying income tax because tax thresholds have been frozen. By 2028-29, another 3.7 million workers will be forced to pay income tax at the basic rate of 20%, another 2.7 million at 40% and another 200,000 at 45%. The Government will collect ￡41.1 billion extra, which no doubt will be handed to more billionaires.

A rise in personal allowance at least in line with inflation would have helped lift millions out of poverty, but the Government chose not to do that. The 2% national insurance cut gives zero benefit to the 17.8 million adults with an income below ￡12,570.

The issue of the freezing of personal allowances until 2028 will not go away. It has been reported that the average worker in England will pay nearly ￡50,000 more income tax over their career compared to three years ago. This is because while the average salary has risen by 16% between 2020/21 and 2023/24, the income tax an average earner would have to pay over a 48 year career has increased by ￡47,102, or 27%. Chris Etherington, of RSM, said: "While the Chancellor is focused on trying to reduce the tax burden on workers, the biggest change that needs to happen is for the thresholds to be linked to inflation.”

In the same theme more than 10,000 people have signed an online petition calling for state pensions and benefits not to be taxed. As a result of recent substantial increases in the State pension in line with inflation many pensioners State pensions alone exceeds the personal allowance of ￡12,570 and makes them liable to Income Tax. This will affect people not otherwise in the tax system and who may not have access to a computer and be able to register online.

Summary

Obviously some of the comments in the debate ?reflect the political allegiance of the Lords and Baronesses but it is interesting to read their views particularly those of former Chancellors and former Treasury ministers. As can be seen by the comments on the resident non domiciled changes this is a topic that will continue to divide opinion and will not be resolved at least until after a General Election.

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