PRESS RELEASE - Margaret Thatcher’s former Chancellor, Nigel Lawson backs calls for the introduction of a new transferable tax allowance for married couples.

Writing in the foreword of a major new report from Care, he says the case for transferable allowances remains as “strong as ever” and describes them as “family friendly”.

“…the case for transferable allowances remains as strong as ever… it is not only family friendly but provides a far more cost-effective means of reducing the tax burden on low-income households than can be achieved by an across-the-board increase in personal allowances,” it says.

The report, Independent Taxation – 25 years on, Does it meet today’s needs?, assesses the impact of independent taxation a quarter of a century after Nigel Lawson first overhauled the UK’s outdated and discriminatory tax system. It found that the benefits of independent taxation had been greatly undermined by the failure to include transferable allowances, which were part of Lord Lawson’s original proposal.

“The reformers wanted to make the tax system fairer for married women to allow married women to keep their tax affairs private,” it says, “and to reduce the discrimination against one-earner married couple families.”

But failure to introduce transferable allowances has resulted in families bearing a greater share of the income burden than before the changes.

“Since 1990 income tax rates have come down. In 1990 the basic rate was 25 per cent; in 2013 it is 20 per cent. The tax threshold for single people has risen significantly, with the result that the burden on such individuals has fallen. In 1990 a single person on 50 per cent median income paid 12.9 per cent; a comparable person now pays 5.9 per cent. At median income the figures are 18.9 per cent and 12.9 per cent respectively."

“By contrast, the tax threshold for families is scarcely higher in real terms than it was in 1990, with the result that, even though the basic rate is lower, the income tax burden on some families is much the same as it was then.”

The clear and very unfortunate result of this has been an increasing individualism in our fiscal arrangements and insensitivity to family responsibility. This is in no way consistent with the objective of making Britain the most family friendly country in Europe.

The report goes on to argue that this problem has been greatly compounded by changes to Child Benefit. Ironically, this is pushing some one-earner couple families the government regards as rich enough to lose child benefit, into the lower half of the income distribution. At the same time singles on the same income, or two earner families on the same income, remain very much in the top half of the income distribution. This is unjust.

“Although the current higher rate threshold may be at an appropriate level for single adults and two-earner couples, it is now far too low for one-earner couples with children. For a one-earner couple with two children, the higher rate threshold is only 15 per cent above the Minimum Income Standard (MIS), the gross income estimated by the Joseph Rowntree Foundation (JRF) to be needed for a minimum acceptable standard of living. A one-earner couple with three children needs a gross income of £41,519, which is £69 above the higher rate threshold. With four children the family needs a gross income of £45,821 to achieve the MIS, £3,831 above the higher rate threshold."

“Universal Credit has the benefit of recognising a second parent, which reduces the couple penalty. However, it will not compensate much better than tax credits do today for the failure of the income tax system to take account of marriage or family responsibilities. The problems created by an income tax system which ignores the family are likely to remain.”

The report concludes by saying that, “Measured against the aims set in the 1980s for the reform of personal taxation, independent taxation has been a failure.

“Independent taxation was intended to give married women privacy over their tax affairs but the two million couples with children who have to claim tax credits (or in future, Universal Credit) or the equivalent have no privacy, and others have lost privacy as a result of the Higher Income Child Benefit Charge.”

“…one-earner families face more fiscal discrimination in 2013 than they did in 1990 and marginal tax rates that apply to families are much higher than they were in 1990.”

It recommends introducing a raft of measures including a transferable allowance for married couples before the end of the current Parliament. Whilst transferable allowances would not address all the problems associated with independent taxation that the report highlights, it is clearly the single most effective solution that the report considers and is of special interest because it is what Nigel Lawson always intended and because it is in the Coalition Agreement.

The report makes two key recommendations regarding transferable allowances.

First, it argues that they should be provided in the 2014 Finance Bill for the fiscal year 2014-15, which will mean that they can be claimed against, i.e. impact people’s pockets, from the start of the 2015-16 financial year, one month before the next election.

Second, it argues that the transferable allowance must be introduced on a very much more generous basis than the very limited £150 per year transferable allowance proposed by David Cameron in April 2010.

Nola Leach, Chief Executive of Care, commented:

“While the report considers a number of potential policy solutions, the one it particularly favours is the introduction of transferable allowances – the part of the original proposal that Nigel Lawson was forced to drop."

“The solution that it advances, transferable allowances for married couples, was part of the original plan. The decision to drop that provision has had far reaching implications not just for the tax burden on one-earner families but also on their marginal effective tax rate, with a marked impact on work incentives.”

Mrs Leach concluded by saying:

“After much campaigning it just so happens that happily the Government has already committed to introduce transferable allowances and the Chancellor has promised an announcement in the Autumn Statement."

“I hope that Lord Lawson’s intervention and the publication of this report will further strengthen David Cameron and George Osborne’s resolve to deliver on their manifesto promise to introduce the transferable allowances and to do so they are fully operational by April 2015 and on a much more generous basis than that proposed by David Cameron in April 2010.”

As David Cameron said at the time:

“Of course I want to go further and I’m sure over a Parliament we would be able to go further but this is a good first step that says commitment is important. I want us to be the most family friendly country in Europe and this is one step along that road.” 1

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1. http://news.sky.com/story/772393/tories-unveil-tax-breaks-for-married-couples

The report has been written by independent Fiscal Policy consultants Don Draper and Leonard Beighton, assisted by consultants Alistair Pearson and David Binder.

The full report can be found here

For media inquiries, please contact Alistair Thompson of Media Intelligence Partners Ltd on 07970 162225 or 0203 008 8145, or Dan Boucher of Care on 0207 227 4738, or 07768 165 543.