Pre Budget Report December 2009
17 December 09
“This a good budget for bingo and boilers” so said the Chancellor announcing a reduction in tax on bingo and the introduction of a scrappage scheme for old boilers. The third B is of course everyone’s favourite bogeyman – bankers – with banks being hit with a 50% tax charge on bonuses (and not merely those paid in cash) paid by any bank in the UK in excess of £25,000.
The Pre Budget Report did not live up to some of the more lurid speculation in the lead up to the Chancellor’s announcement such as an increase in the VAT rate beyond the 17.5% rate which will be restored on January 1st, or an increase in the Capital Gains Tax rate. The former would have hit everyone’s pocket, the latter might have been populist in hitting “the rich” although not in fact raising very much revenue.
The Pre Budget Report confirms what we already knew, that there is an election coming soon and some unpalatable decisions are being postponed. Government borrowing is going to continue at an historically high rate before being halved in the course of the next four years. What needs to be remembered is that it is not the government’s debt which is going to be halved, merely the rate at which it increases and that must have implications for finance and investment decisions of individuals.
So where are individuals going to feel the effect of the announcements? Most obviously those in employment will see a rise in their National Insurance contributions, from 2011. More immediately they will find there is no increase in tax allowances which remain unaltered. Those employed in the public sector, and of course this is particularly important in Scotland, will see their pay rates all but frozen. Also, perhaps ominously, no departmental budgets have been set. However the promise to protect health, schools and the police means that other budgets will have to be squeezed all the more if the sums are to add up. Of course many of these areas are devolved ones so that the Chancellor’s writ does not run directly here but the Holyrood government will have to balance its books too.
The planned increase in the Inheritance Tax (IHT) threshold has been cancelled, so that it remains until April 2011 at £325,000. The Conservative proposal to increase the threshold to £1m has to all intents and purposes been put on hold. This will not be enough to stop this tax being an election issue, if current political debate is any guide.
Although Government pronouncements are tending to equate tax avoidance (arranging one’s affairs to minimise the tax paid) with tax evasion (cheating) there is still scope for tax planning, which does not have to use artificial arrangements, to reduce tax bills. In relation to IHT for example there are a number of specific exemptions and allowances written into the legislation such as the Annual exemption, and an exemption for gifts which are part of a pattern of spending and made from a person’s income. This can be very useful for those whose income exceeds their needs and who want to assist their families – for example with the cost of education.
In relation to investments, the differential in the income Tax rate of up to 50% from April and the CGT rate of 18%, previously referred to, increases the attraction of receiving return by way of capital profit rather than income.
In the original Budget this year steps were taken to reduce tax relief for high earners on pension contributions. The Pre Budget Report has tightened the rules to give effect to this policy. Those who are affected by this may want to consider whether making pension contributions still represents the best way of providing for retirement especially given the complex rules on how a pension may be drawn.
And the tax on bankers bonuses? Vince Cable described this proposal as having more holes than a cheese grater. There is talk of legal challenge, contractual difficulties, changing bankers pay arrangements. We are going to hear more of this – and it is unlikely to balance the country’s books.
Should you have any questions on how the Pre Budget Report might affect you or your organisation, please do not hesitate to contact Jim McMahon, Tax Manager.
