7. Plaid Cymru Debate: Income tax devolution

Part of the debate – in the Senedd at 5:53 pm on 8 February 2023.

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Photo of Mike Hedges Mike Hedges Labour 5:53, 8 February 2023

I think it's always good to discuss taxation, especially when it's being discussed not as part of the budget-setting process. I think if we could perhaps repeat this sort of debate again, well away from the budget, because I think it's got far deeper meaning than this year's budget, and I think that to come back to it in six months' time would be incredibly helpful, either brought here by the Minister or brought here by one of the political parties, to give us a chance to talk about it again. 

My view on devolution is well documented; I support devo max. I also support devolution from the Senedd to the regions and councils of Wales. On devolution I have a pragmatic approach: what works best for the people of Wales is what I support. 

The motion today is a continuation of Plaid Cymru's policy of independence by instalments, or salami-slicing powers from Westminster until we eventually find ourselves independent. The Conservatives are consistent: they oppose any additional devolution at any time. What is more surprising, of course, is that in 2016 and 2007 they wanted a coalition with Plaid Cymru. I think perhaps they need to reconsider. 

Where I do agree with Plaid Cymru is you cannot continue with asymmetric devolution. Scotland, Wales and Northern Ireland and English cities such as London have different powers being devolved. This cannot continue. It makes no sense whatsoever, and everybody's saying, 'They've got it—can we have it?' without actually having it set out. Germany doesn't have that problem. The United States of America doesn't have that problem. And America's probably even better to look at because you've got, in America, tiny states with populations smaller than West Glamorgan, and you've got California and New York. So, it can be done. It's not about size; it's about actually saying, 'This is your state responsibility.' With this asymmetric devolution, it will always cause problems. It's got to be resolved. It's got to be resolved in Wales, Scotland and Northern Ireland, but the biggest question is the English question, which people don't seem to be looking at.

Peter Fox criticised the Government on raising tax too much. Plaid Cymru attacked them on not raising tax too much. There's got to be something somewhere in there. Wales has done well out of devolving income tax, but that is due to a freezing of tax thresholds that means more people come into taxation and move into the second band, rather than improving relative tax. There are problems with income tax. It is meant to be a progressive tax, but there are so many ways of reducing individual tax liabilities to zero. Let's look at taxation of somebody earning £30,000 a year. If they run to retirement age, they pay income tax and national insurance. When they reach retirement age, they cease to pay national insurance. A graduate on the same income will pay back a student loan, income tax and national insurance. Some level of fairness is needed in there.

Someone who receives income via dividend, which is a lot of what self-employed people do to avoid income tax, will pay substantially less. Dividends are taxed substantially lower than income tax, so it's a great way of avoiding paying tax. I'll use the word 'avoiding', because, if I use the word' evading' I'd get into trouble, but it's a way of avoiding paying tax because you have been paid by dividend, and that's very easy. You create a company, search the company's name, enter your business and personal details, receive your limited company certificate and your business bank account at the same time, arrange for all payments to go into the business and then receive your income as a dividend, thus paying substantially less tax. And more importantly for us, we don't get any of the dividend income. I think something that we do need to start arguing about is that dividend income should come to us as well, and we should also be arguing that any dividends that come from a company that people have set up and of which they are the sole recipient is effectively income, rather than dividend. That's the sort of thing that I think we need to start discussing. I do not believe that this is fair. We need a less complicated system that ensures that everybody their fair share, with dividend rates taxed the same as income tax.

Then, the tax benefits exist—this only works for relatively well-off people—the travel expenses you can claim, what you're entitled to if you work from home, clothes for work count as expenses, how donating to charity can be good for your tax bill, pensions' relief. And finally there is the elephant in the room—non-domiciled status, used by the wealthy to avoid paying any income tax in Britain whatsoever. UK residents who have their permanent home outside the UK may not have to pay UK tax on foreign income, so if you have a dividend payment paid into a foreign bank and it becomes foreign income, you don't have to pay any at all; the same rules for foreign capital gains tax. All the above benefits disproportionately benefit those paying tax at a higher tax rate. Very few of my constituents get the benefit of that. The best financial devolution you could have would be for dividends to be devolved and for powers over non-dom status and for tax-deductible items to be examined, for pensions tax relief to be only at the basic rate.