2008 Pre-Budget Report

24 November 2008

 

Alistair Darling today delivered his second Pre Budget Report.

 

In the normal run of things, Pre Budget Reports are fairly unremarkable events, but of course this Pre Budget Report comes at a time of extraordinary financial upheaval and was intended as a means of addressing that.  In this respect we can perhaps be thankful that Gordon Brown saw fit to introduce the idea of an Autumn ‘mini’ budget when he first arrived in office in 1997: the alternative would have been to wait ‘til next Spring (not really a practical option), or to push through an ‘Emergency’ budget – the very mention of which would have doubtless been sufficient to spook the markets.

 

Also noticeable with today’s Pre Budget Report, and this has become a growing trend of late, was the extent to which the main headlines were leaked to the Press twenty-four hours in advance.  Perhaps this is a tactic to focus the attention on the ‘good’ news.  Nevertheless, in this summary we’ll examine all the changes likely to be of relevance to Route Members – not just the headline grabbers.

 

Income Tax and National Insurance

 

Firstly, the main headlines: Income Tax will rise to 45% (the equivalent of a 12.5% increase from its current level of 40%) for all earnings above a £150,000 threshold, and National Insurance rates will increase by 0.5% across the board…..but not until the 2011/2012 tax year, and therefore conditional on Labour securing a further term in office (May 2010 being the latest date by which an election must be held).

 

So given that the precondition means that the increases might or might not happen (and might get re-written between now and 2011 in any case), what do we know about what will happen?

 

The good news is that both the Personal Allowance and the Higher Rate Tax Threshold will rise at a rate faster than inflation in April 2009.  The Personal Allowance will increase to £6,475 (up 7.3%) whilst the Basic Rate tax band will increase to £37,400 (up 7.5%).  Both of these measures are to be welcomed, and taken together mean that in 2009/2010 the threshold above which higher rate tax is paid will rise to £43,875 for someone with a ‘standard’ tax code.  At the same time the Government will carry through its previously stated [Budget 2007] intention to synchronise the NI Upper Earnings Limit (UEL) with the Higher Rate Tax Threshold, by raising the UEL to £43,888.

 

Less welcome, and rather buried away in the small print, is an aggressive move which means that from April 2010 those earning £100,000 or more will have their entitlement to the Personal Allowance halved, whilst those earning in excess of £140,000 will lose their entitlement to the Personal Allowance completely.  The effect of this for someone earning over £140,000, even before the introduction of a 45% rate, will be an additional tax burden of £2,590 per annum – or £215.83 per month.

 

Capital Gains Tax/Inheritance Tax

 

No announcements were made on these two taxes in today’s Pre Budget Report.

 

Corporation Tax

 

Despite the pain being suffered by many small business, and despite the promise to put up money to back further bank lending to Small- and Medium-Sized Enterprises, there has been no change to the current programme of progressive tax rises on Small Businesses: although now deferred by a year, the Small Companies Rate, having already risen this year from 20% to 21% will rise again to 22% from tax year 2010/2011 onwards.  Businesses of all sizes also face the problem of swallowing the 0.5% rise in Employers’ National Insurance contributions from April 2011 of course.

 

Enterprise

 

Oddly, despite the glaring need to stimulate business growth, there were no new announcements relating to Enterprise tax incentives.

 

VAT and Duty

 

As was widely predicted, VAT is reduced from 17.5% to 15% for the period from December 1st 2008 to December 31st 2009.  However this is offset to a degree by rises in the main duty rates for alcohol, tobacco, and petrol.  Petrol will go up by 2p per litre from December 1st (this is the original planned increase that had been put in abeyance earlier in the year), whilst cigarettes will rise by 17p for a pack of 20, beer will rise by 3p a pint, wine will rise by 13p a bottle, and spirits will rise by 53p a bottle: not good news for anyone hoping to drink their way out of a recession…

 

On the other hand, increases in Vehicle Excise Duty, which were potentially going to be substantial for some, will now be phased-in and limited to a maximum increase of just £5 in 2009, and a maximum increase of £30 in 2010.  Again, doubtless welcome news to owners of vehicles that would have been otherwise affected, but hard to square against the previous rhetoric about the ‘green’ agenda and the need to modify consumer behaviour.

 

And that’s pretty much it.  On face value it’s hard to see how the measures announced amount to the sort of major stimulus that it was assumed the consumer needed in order to restore confidence, or, for that matter, how the measures live up to this year’s Pre Budget Report’s official sub-title: “Facing Global Challenges: Supporting People Through Difficult Times.”

 

SIMON PIMBLETT

Head of Research and Development