By KATHARINE LINDLEY 24/04/2009
Despite the fact that the Chancellor is forecasting a stronger economic recovery than other forecasters, the public borrowing projections are much worse than expected. The public sector deficit is projected to hit 12% of GDP not just this year but also next year, while public sector net debt is projected to rise to nearly 80% of GDP over the next four years, twice the level forecast in last year's Budget - a very fast pace of deterioration.
This year, the Chancellor forecasts that GDP will shrink by 3.5% and return to growth in GDP of 1.25% in 2010 and 3.5% in 2011. The public sector borrowing requirement will be £175bn this year. The fiscal holes are to be filled by a combination of spending cuts and tax rises, most of which will come in from next year onwards and are focussed on wealthier individuals; which will further reduce the UK’s competitiveness for the internationally mobile.
Income Tax - effective rate increases to 60%
A new higher rate of 50% for income over £150,000 will be introduced from 2010/11.
In addition, where income exceeds £100,000 there will be a reduction of the personal allowance by a factor of £1 for every £2 of income above £100,000, thus giving an unpleasant marginal 60% tax rate for those with income just in excess of £100,000.
There are also corresponding changes for trusts and certain pension scheme tax charges to reflect the new 50% tax rate. The rate of tax applying to dividends will also increase from 32.5% to 42.5%. Owner managed companies will need to review carefully whether to pay dividends or salary/bonus in order to minimise overall tax exposure.
Pensions
The Government announced another raid on pension schemes by saying it would restrict higher rate tax relief. There are two main aspects to the changes.
- From 6th April 2011, tax relief on pension contributions will be restricted for those with taxable income over £150,000. Relief will be tapered down to a minimum of 20% where income exceeds £180,000. The restriction in relief applies regardless of whether contributions are made by the individual, their employer or a third party.
- Complex and wide ranging rules apply immediately to try and thwart individuals who might want to top-up their pensions ahead of the new rules in 2011. This would seem to put a stop to transitional pension planning for those not currently making regular pension contributions and wishing to make contributions in excess of £20,000. It will be of particular concern to those relying on the Annual Allowance and Lifetime Allowance to defer contributions to later life, focussing on debt repayment and providing for children in the early years.
In order to encourage saving we need a long term stable pension and savings market, rather than a complex system which is prone to constant change and tinkering. Yet further changes make retirement planning ever more challenging, especially for those already suffering from the impact of market falls on their pension funds.
Individual Savings Accounts (ISAs)
The Individual Savings Account (ISA) limit increases to £10,200 from the current £7,200 (up to £5,100 can be in cash). The new limit will be available to people aged 50 and over from 6th October 2009 and available to all from 6th April 2010. We welcome the increase but it would have been helpful to introduce this immediately as staggering dates will create an administrative burden.
Capital Gains Tax
There is no change to the Capital Gains Tax rate of 18% with an annual exemption on the first £10,100 of gains in 2009/10. Such a difference in the level of taxation between capital and income will mean higher rate tax payers will be keen to generate capital gains in place of income.
Basic State Pension
The Basic State Pension is usually based on Retail Prices Index (RPI) in September. RPI is predicted to be -3% in September 2009 but the Government has already vowed that the Basic State Pension will rise by a minimum of 2.5%, irrespective of the RPI level.
Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EISs)
For VCT and EIS investments, there are some relaxations to the time limits for investment within the scheme. In addition, it will be possible to carry back EIS income tax relief in full to the previous tax year.
VAT
The standard rate of VAT was temporarily reduced to 15% from 1st December 2008 and will return to 17.5% from 1st January 2010.
Property Stamp Duty
The stamp duty ‘holiday’ for properties up to £175,000 is extended until 31st December 2009 which will provide relief for struggling first time buyers. To provide further stimulus, it would be helpful if the stamp duty taxation system could be changed to an incremental basis like income tax to avoid pricing anomalies. There will also be more support for those struggling with mortgages through job losses and more efforts to kick start mortgage lending.
Cars Scrapping Scheme
The cars scrapping scheme will go ahead from next month through to March 2010, allowing a £2,000 credit for trading in a car over ten years old.