So we will act – but we will act in a proportionate and gradual way, because I know that many hardworking people who’ve saved and invested in property depend on the rental income they get.
So we will retain mortgage interest relief on residential property, but we will now restrict it to the basic rate of income tax.
And to help people adjust, we will phase in the withdrawal of the higher rate reliefs over a four year period, and only start withdrawal in April 2017.
Second, the rent-a-room relief is designed to help homeowners who rent out a room in their home. It’s a good scheme, particularly in a world where more and more people are renting out rooms online, but the relief has been frozen at £4,250 for 18 years.
Next year, we will raise it to £7,500.
The third change fulfils a long standing promise I made.
The wish to pass something on to your children is about the most basic, human and natural aspiration there is. Inheritance tax was designed to be paid by the very rich.
Yet today there are more families pulled into the inheritance tax net than ever before – and the number is set to double over the next five years.
It’s not fair and we will act.
From 2017, we will phase in a new £175,000 allowance for your home when you leave it to your children or grandchildren.
It sits on top of the existing £325,000 threshold which will be fixed until the end of 2020-21.
Both allowances can be transferred to your spouse or partner.
And from today we’ll make sure those who choose to downsize do not lose any of the allowance from the property they used to own.
But we will taper the relief away for estates worth more than £2 million.
The result for families is this.
You can pass up to £1 million on to your children free of inheritance tax.
No more inheritance tax on family homes.
The tax paid only by the rich.
The security of home ownership restored.
Promise made – promise delivered.
This cut in inheritance tax will be more than paid for by changes we’ve set out to the pensions tax relief we give to the highest earners. From next year their Annual Allowance will be tapered away to a minimum of £10,000.
Mr Deputy Speaker, our pension reforms have given huge freedom to people who’ve worked hard and saved hard all their lives – and many thousands are, with the free guidance service we offer, making use of those freedoms to access their savings instead of buying annuities.
Now it’s time we looked at the other end of the age scale – at those starting to save for a pension.
For the truth is Britain isn’t saving enough and that’s something we need to fix in our economy too.
While we’ve taken important steps with our new single tier pension and generous new ISA, I am open to further radical change.
Pensions could be taxed like ISAs.
You pay in from taxed income – and its tax free when you take it out. And in-between it receives a top-up from the government.
This idea, and others like it, need careful and public consideration before we take any steps. So I am today publishing a Green Paper that asks questions, invites views, and takes care not to pre-judge the answer.
Our goal is clear: we want to move from an economy built on debt to an economy built on the more secure and productive foundations of saving and long term investment.
Mr Deputy Speaker, if Britain wants to produce more, it needs to invest more.
Many small and medium sized businesses have benefitted from our enhanced Annual Investment Allowance. This Allowance was set at £100,000 when we came to office – it is higher now, but without action it will fall to just £25,000 at the end of the year.
That would especially hit middle-sized companies in areas like manufacturing and agriculture that we want to do more to build up in Britain.
So I can confirm that the Annual Investment Allowance will not fall to £25,000 but be set at £200,000; this year and every year.
A major, permanent boost to the incentives for long-term investment by small and medium sized firms in Britain.
The large reductions in tax on North Sea oil and gas I announced in March are going ahead, and today we broaden the types of investment that qualify for allowances.
Now we have a long term framework for investment in renewable energy in place, we will remove the out-dated Climate Change Levy exemption for renewable electricity that has seen taxpayer money benefitting electricity generation abroad.
Mr Deputy Speaker, we’ve cut Corporation Tax from 28% to 20% over the last Parliament, one of the biggest boosts British business has ever seen.
We can’t take it lower than that while such strong incentives are created for people to self-incorporate and pay the lower rates of tax due on dividends.
The dividend tax system was designed partly to offset double taxation on profits.
But the system has not changed despite sharp reductions in corporation tax. Lower rates are creating rapidly growing opportunities for tax planning.
We have inherited a very complex and archaic system.
So I am today undertaking a major and long overdue reform to simplify the taxation of dividends.
The dividend tax credit will be replaced with a new tax-free allowance of £5,000 of dividend income for all taxpayers.
The rates of dividend tax will be set at 7.5%, 32.5% and 38.1%. An increase of 7.5% where dividend income exceeds £5,000.
Dividends paid within pensions and ISAs will remain tax-free and unaffected by these changes.
Those who either pay themselves in dividends or have large shareholdings worth typically over £140,000 will pay more tax.
85% of those who receive dividends will see no change or be better off.
Over a million people will see their tax cut.
It’s an important reform.
It comes into operation next year, and with our Personal Allowance and our new Personal Savings Allowance it means that from April – on top of the New ISA – people will be able to receive up to £17,000 of income a year tax free.
The reforms I’ve announced to dividend taxation also allow us to do something more – and go further in creating a Britain that is one of the most competitive economies in the world.
Mr Deputy Speaker, there are those in this house who said we were wrong to cut corporation tax in the last parliament – but it created millions more jobs, brought businesses back to Britain and increased much needed investment – so I profoundly disagree.
Now at 20% for large and small businesses alike, we have the joint lowest rate of corporation tax in the G20.
And so there are those who say we do not need to do more. I profoundly disagree with them too.
This country cannot afford to stand still while others rush ahead. I am not prepared to see that happen. Today I announce that I am cutting it again.
Britain’s corporation tax rate will fall to 19% in 2017 and 18% by 2020.
We’re giving businesses the lower taxes they can count on, to grow with confidence, invest with confidence and create jobs with confidence
A new 18% rate of corporation tax – sending out loud and clear the message around the world: Britain is open for business.
Mr Deputy Speaker, if we are to build a more productive economy, and our country is to live within its means, then we have to make this fundamental change.
We have to move Britain from a low-wage, high-tax, high-welfare society to a higher-wage, lower-tax, lower-welfare economy.
For Britain is home to 1% of the world’s population; generates 4% of the world’s income; and yet pays out 7% of the world’s welfare spending.
It is not fair to the taxpayers paying for it.
It needs to change.
Welfare spending is not sustainable and it crowds out spending on things like education and infrastructure that are vital to securing the real welfare of the people.
We’ve already legislated for savings of over £21 billion in the last parliament; capped benefits for out of work families; and started to introduce Universal Credit.
Universal Credit will transform the lives of those trapped in welfare dependency and deliver real social justice – it’s the result of the herculean efforts of my RHF the Work and Pensions Secretary.
But to live within our means as a country and better protect spending on public services, we need to find at least a further £12 billion of welfare savings.
Let me set out the principles we follow – and how they will be applied.
First, the welfare system should always support the elderly, the vulnerable and disabled people.
We will honour the commitments we made to uprate the state pension by the triple lock and protect the other pensioner benefits.
The BBC has agreed to take on responsibility for funding free TV licences for the over 75s and in return we were able to give our valued public broadcaster a sustainable income for the long term.
In the last Parliament we increased payments to the most disabled people and we will not tax or means-test disability benefits.
We will increase funding for domestic abuse victims and women’s refuge centres.
And we are also going to use the remaining funds available in our Equitable Life Payment Scheme, as it closes, to double the support we give to those policy holders on Pension Credit who most need this extra help.
The second principle we will apply is this.
Those who can work will be expected to look for work and take it when it is offered.
The best route out of poverty is work.
Our economic plan has created a record number of jobs, and now a third of a million fewer children are being brought up in workless families.
It is not acceptable that in an economy moving towards full employment, some young people leave school and go straight on to a life on benefits.
So for those aged 18-21 we are introducing a new Youth Obligation that says they must either earn or learn. We are also abolishing the automatic entitlement to housing benefit for 18-21 year olds.
There will be exceptions made for vulnerable people and other hard cases, but young people in the benefit system should face the same choices as other young people who go out to work and cannot yet afford to leave home.
To make sure work pays for parents, I can confirm that, from September 2017 all working parents of 3 and 4 year olds will receive free childcare of up to 30 hours a week.
Once again, a promise made: a promise delivered.
As a result we now expect parents with a youngest child aged 3, including lone parents, to look for work if they want to claim Universal Credit.
All part of our progressive goal of securing full employment in Britain.
We also want to increase employment among those who have health challenges but are capable of taking steps back to work.
The Employment and Support Allowance was supposed supposed to end some of the perverse incentives in the old Incapacity Benefit. Instead it has introduced new ones.
One of these is that those who are placed in the work-related activity group receive more money a week than those on Job Seekers Allowance, but get nothing like the help to find suitable employment.
The number of JSA claimants has fallen by 700,000 since 2010, whilst the number of incapacity benefits claimants has fallen by just 90,000. This is despite 61% of claimants in the ESA WRAG benefit saying they want to work.
For future claimants only, we will align the ESA Work-Related Activity Group rate with the rate of Job Seekers Allowance.
No current claimants will be affected by this change and we will provide new funding for additional support to help claimants return to work.
The third principle that we apply to welfare is this: the whole working age benefit system has to be put on a more sustainable footing.
In 1980, working age welfare accounted for 8% of all public spending. Today it is 13%.
The original Tax Credit system cost £1.1 billion in its first year.
This year, that cost has reached £30 billion.
We spend more on family benefits in Britain than Germany, France or Sweden.
It is, in the words of the RHM for Birkenhead the new Chair of the Work and Pension Select Committee, simply “not sustainable”.
As Alistair Darling has said, the sheer scale of Tax Credits is “subsidising lower wages in a way that was never intended.”
So those who oppose any savings to Tax Credits will have to explain how on earth they propose to eliminate the deficit, let alone run a surplus and pay down debt.
We will take the following steps to put working age benefits on a more financially sustainable footing.
Since the crash, average earnings have risen by 11%, but most benefits have risen by 21%.
To correct that, we will legislate to freeze working age benefits for four years.
That will include Tax Credits and Local Housing Allowance. And it means earnings growth will catch up and overtake the growth in benefits.
Statutory payments like Maternity Pay and the disability benefits – PIP, DLA and ESA Support Group will be excluded from the freeze.
Mr Deputy Speaker, we are also going to end the ratchet of ever higher housing benefit chasing up ever higher rents in the social housing sector.
These rents have increased by a staggering 20% since 2010.
So rents paid in the social housing sector will not be frozen, but reduced by 1% a year for the next four years.
This will be a welcome cut in rent for those tenants who pay it and I’m confident that Housing Associations and other landlords in the social sector will be able to play their part and deliver the efficiency savings needed.
We also need to focus Tax Credits, and Universal Credit, on those on lower incomes, if we are going to keep the whole system affordable and able to support those most in need.
So from next year, we will reduce the level of earnings at which a household’s Tax Credits and Universal Credit start to be withdrawn.
The income threshold in tax credits will be reduced, from £6,420 to £3,850.
Universal Credit work allowances will be similarly reduced – and will no longer be awarded to non-disabled claimants without children.
The rate at which a household’s Tax Credit award is reduced as they earn more will be increased, by raising the taper rate to 48%.
The income rise disregard will be reduced from £5,000 to £2,500 – the same level at which it was originally set in 2003.
Taken all together, the freeze in working age benefits, the downrating of social rents, and the focus of tax credits and Universal Credit on the lowest income households will reduce the welfare bill by £9 billion a year by 2019-20.
The fourth principle we will apply to our welfare reform is this: the benefits system should not support lifestyles and rents that are not available to the taxpayers who pay for that system.
We have already introduced a cap on the total amount of benefits any out of work family can receive, at £26,000.
It encouraged tens of thousands into work.
We will now go further, and reduce the benefits cap from £26,000 to £23,000 in London, and £20,000 in the rest of the country.
We are also going to require those on higher incomes living in social housing to pay rents at the market rate.
It’s not fair that families earning over £40,000 in London, or £30,000 elsewhere, should have their rents subsidised by other working people.
And we’ll turn support for mortgage interest payments from a benefit to a loan.
Another decision that most families make is how many children they have, conscious that each extra child costs the family more.
In the current tax credit system, each extra child brings an additional payment of £2,780 a year.
It’s important to support families, but it’s also important to be fair to the many working families who don’t see their budgets rise by anything like that when they have more children
So this is the balance we will strike:
In future we will limit the support provided through tax credits and Universal Credit to two children.
Families who have a third or subsequent child after April 2017 will not receive additional Tax Credit or UC support for this child.
Support provided to families who make a new claim to Universal Credit after this date will also be limited to two children.
And we will make similar changes in Housing Benefit too.
There will be provisions for exceptional cases including multiple births.
In addition, those starting a family after April 2017 will no longer be eligible for the family element in Tax Credits.
Nor will new births and new claims be eligible for the first child premium in Universal Credit.
We will make similar changes in Housing Benefit, by removing the family premium for children born or claims made after April 2016.
This approach means no family sees a cash loss.
And as promised, child benefit will be maintained.
These changes to Tax Credits are not easy but they are fair, and they return tax credit spending to the level it was in 2007-08 in real terms.
When we came to office in 2010 this country had reached the point where a benefit that was intended to support lower income households, was instead available to 9 out of 10 families in this country.
Now, our properly focussed reformed Tax Credit system will provide support to 5 out of 10 families – a much more sustainable balance in our welfare system.
Taken together, all the welfare reforms I have announced will save £12bn by 2019-20 and will be legislated for in the year ahead, starting in the Welfare Reform and Work Bill that will be published tomorrow.
Mr Deputy Speaker, we are moving Britain from a high welfare, high tax economy, to a lower welfare, lower tax society.
The best way to support working people is to let them keep more of the money they earn.
We promised the British people at the election that we would introduce a tax lock to prohibit any increase in the main rates of income tax, national insurance and VAT for the next five years.
We will not only keep that promise, but legislate for it in the coming weeks.
Our priority is not to raise taxes on working people, it is to cut their taxes.
In the last Parliament, we raised the tax-free personal allowance from the £6,500 to £10,600, taking almost four million of the lowest paid out of tax altogether.
When we went to the British people this May, we said we would go much further.
Our two commitments were these:
That we would raise the tax free personal allowance to £12,500 – so no one working 30 hours a week on the national minimum wage pays tax.
And that we would raise the threshold at which people pay the higher 40p rate of tax to £50,000.
These were our priorities at the election – they are the priorities in this Budget.
For we on this side deliver what we promise. So the rates of income tax in this Budget remain unchanged – but the thresholds do not.
Today I am taking the first major step to delivering our promise.
I am raising the tax-free personal allowance to £11,000 next year.
That’s £11,000 you can earn before paying any income tax at all – boosting wages by over £900 in total – and a down payment on our goal of reaching £12,500.
We will now legislate so that after that the personal allowance always rises in line with the minimum wage, and we never ask the lowest paid in our society to pay income tax.
The higher rate threshold currently stands at £42,385.
I am today raising it to £43,000 from next year.
It marks a strong start to our commitment to raise the threshold to £50,000.
And it will lift 130,000 people out of the higher rate of income tax altogether.
A personal allowance of £11,000.
A higher rate threshold of £43,000.
29 million people paying less tax.
A downpayment for a country on the up.
Mr Deputy Speaker, I began this Budget statement saying that I put security first.
I have set out the steps we take to deliver economic security of a country that lives within its means and a welfare system we can afford.
But there is also the financial security of families and the national security of our country. I turn to that now.
The Prime Minister and I are not prepared to see the threats we face to both our country and our values go unchallenged.
Britain has always been resolute in defence of liberty and the promotion of stability around the world. And with this government it will always remain so.
So today I commit additional resources to the defence and security of the realm.
We recognise that in the modern world, the threats we face do not distinguish between different Whitehall budgets – and nor should we.
So I will guarantee a real increase in the defence budget every year, and on top of that, create a joint security fund of £1.5 billion a year by the end of the parliament.
The services will have to demonstrate they are delivering real efficiency and the Strategic Defence and Security Review will allocate the money in the most effective way.
I am also protecting our overall counter-terrorism effort.
And I reaffirm our international aid budget that saves lives and supports our values around the world. I said that this was a Budget that delivered security to the people of Britain.
And I said that we had to choose our priorities.
Well, today, this government makes this choice.
Committing to our armed forces who fight to keep us free.
Committing to the intelligence agencies who keep us safe.
Committing to the values we hold dear – and defend around the world.
And so committing today to meet the NATO pledge to spend 2% of our national income on defence. Not just this year, but every year of this decade.
We will ensure that this commitment is properly measured, because we know that while those commitments don’t come cheap, the alternatives are far more costly.
Mr Deputy Speaker, let me turn to the final measure of this Budget which speaks to the values of this Government.
We have been clear that we want Britain to move from a low wage, high tax, high welfare economy, to a higher wage, lower tax, lower welfare society.
I have set out my plans to move us to lower welfare and lower taxes.
That leaves us the challenge of higher wages.
It can’t be right that we go on asking taxpayers to subsidise, through the tax credit system, the businesses who pay the lowest wages
That subsidised low pay contributes to our productivity problem.
The government is against against unfair subsidies wherever we find them.
In the last five years we’ve taken the tough choices to drive down our borrowing, make our business taxes competitive and reform welfare.
It’s because we’ve taken these difficult decisions, and overcome the opposition to them, that Britain is able to afford a pay rise.
Because let me be clear: Britain deserves a pay rise and Britain is getting a pay rise.
I am today introducing a new National Living Wage.
We’ve set it to reach £9 an hour by 2020.
The new National Living Wage will be compulsory.
Working people aged 25 and over will receive it.
It will start next April, at the rate of £7.20
The Low Pay Commission will recommend future rises that achieve the Government’s objective of reaching 60% of median earnings by 2020.
That is the minimum level of pay recommended in the report to the Resolution Foundation by Sir George Bain – Chair of the Low Pay Commission Let me address the impact on business and employment.
The OBR today say that the new National Living Wage will have, in their words, only a “fractional” effect on jobs.
The OBR have assessed the economic conditions of the country, and all the policies in the Budget.
They say that by 2020 there will be 60,000 fewer jobs as a result of the National Living Wage but almost 1 million more in total.
They also estimate that the cost to business will amount to just 1% of corporate profits. To offset that I have cut corporation tax to 18%.
To help small firms I will go further now and cut their national insurance contributions.
From 2016 our new Employment Allowance, will now be increased by 50% to £3,000.
That means a firm will be able to employ 4 people full time on the new National Living Wage and pay no national insurance at all.
And let’s be clear what it means for the low paid in our country.
Two and a half million people will get a direct pay rise.
Those currently on the minimum wage will see their pay rise by over a third this Parliament, a cash increase for a full time worker of over £5,000.
In total it’s expected that 6 million people will see their pay increase as a consequence.
And taken together with all the welfare savings and the tax cuts in this Budget, it means that a typical family where someone is working full time on the minimum wage will be better off.
The Budget today puts security first.
The economic security of a country that lives within its means.
The financial security of lower taxes and a new National Living Wage
The national security of a Britain that defends itself and its values.
A plan for working people.
And I commend this Budget to the House.
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