Budget Brief

In the gloomiest Budget on record there was little or nothing to cheer cash strapped families while higher earners face swingeing increases in income tax for those earning £150,000 or more.

Labour has reneged on it manifesto pledge not to increase the top rate of tax and in a speech reminiscent of Labour Chancellor Dennis Healey’s threat to squeeze the rich ‘until the pips squeak’ Alistair Darling increased the top rate of income tax from the proposed 45% to 50% and brought it forward to 2010-11.

From April 2010, an additional rate of income tax of 50% will apply to income over £150,000, and the income tax personal allowance will be restricted and clawed back down to zero for those with incomes over £100,000. These changes replace the 45% income tax rate and the two-stage taper of the personal allowance announced in the 2008 Pre-Budget Report. Tax on dividends will also be increased to 42.5% rather than the 37.5% announced in the pre-Budget speech in November 2008 for those with incomes above £150,000.

And there is more pain for high earners. As widely predicted, tax relief on pension contributions will be restricted for those with incomes of £150,000 and over, and tapered down until it is the basic rate of 20% for those with incomes of £180,000 a year. The Chancellor justified this by pointing out that a quarter of all tax relief for pension contributions goes to just 1.5% of the top earners.

To prevent high earners from making massive pension contributions to take advantage of the existing 40% tax relief on contributions, the Government is also introducing legislation to prevent individuals cashing in on this window of opportunity. Those who have never earned in excess of £150,000 are unaffected, as are those who continue with their regular pattern of contributions. This could be hard to enforce however as many self employed and high earners make irregular pension contributions.

The Institute for Fiscal Studies has already warned that income tax at 45% which hits the richest 1% of top earners will raise little extra revenue because the rich will simply take avoiding action by turning capital gains taxed at only 18% into income, or leave the country – or worse, work less. At a top rate of tax of 50% the incentive to leave the country or avoid income tax will be even greater. But the Chancellor reckons to raise an extra £1 billion by closing any tax loopholes which the rich might choose to use.

Holders of offshore accounts are being offered a ‘new disclosure opportunity’ which will run until March 2010. This will give holders of these accounts the opportunity to disclose, of their own accord, if they have unpaid tax or duties and to settle debts. The tax man will also be issuing more notices requiring financial institutions to provide information about offshore account holders.

And in an attempt to round up more tax revenue Her Majesty’s Revenue & Customers will be publishing names of serious tax defaulters – both corporate and individuals who have incurred a penalty because they have deliberately understated over £25,000 of tax.

On a brighter note, there is marginal help for savers and some pensioners. The limit on ISA savings at £7,200 for the 2008-09 tax year will be raised to £10,200 – for the over 50s – in the current 2009-10 tax year and for the rest of the saving population in 2010-11. The first higher contributions won’t be available until October 6th for the over 50s. As now, half this allowance can be invested in cash or the whole amount in an equity based ISA.

There is also some relief for pensioners with small savings. The disregard for qualifying for Pension Credit, Housing Benefit and Council Tax Benefit will be raised from its current level of £6,000 to £10,000. The Treasury estimates that this will increase the income of around 540,000 Pension Credit claimants who have savings above the current disregard level of £6000 by around £4 per week.

In addition, Pension Credit recipients who may have overpaid tax on their savings income in the past six years will be contacted as part of a taxback campaign. This will encourage people to claim back overpaid tax on savings income and, where possible, register to avoid overpaying tax in future. Those who claim are expected to receive around £200 on average. This is in response to the fact that millions of elderly taxpayers are paying too much tax but have not been notified of this in recent years by the tax man.

The Chancellor confirmed that if inflation remains in negative territory by September as expected, State pensions will increase by a minimum of 2.5% - but this is simply confirming the existing situation. There will however be an additional payment of £100 to households with someone aged 80 or over and £50 to households with someone aged 60 or over, to be paid alongside the existing Winter Fuel Payment in 2009-10.

Families with children will see Child Tax Credit go up by an extra £20 a year above indexation from April 2010 and there is an extra £100 a year which will be added to the existing £250 Child Tax Credit vouchers – for disabled children - and an extra £200 a year for severely disabled children. The CTF increase will be implemented in April 2010.

For those facing redundancy the maximum income on which redundancy payments are based will be raised from £350 a week to £380 a week. This is still well below average full time earnings of around £24,000 a year.

The concession on Stamp Duty exempting properties purchased for £175,000 or less is to be extended until December 31st of this year which will benefit many first time buyers. The Treasury estimates that around 60% of purchases are currently exempt from paying Stamp Duty as a result of the tax holiday.

The most controversial aspects of the Budget are the tax changes raising the top rate to 50%. Higher taxes for the rich also threaten to raise a major political problem for David Cameron, who has pledged to retain the higher rate, in defiance of many Conservative members.

Cameron last month confirmed that a Tory Government will not repeal higher income tax rates, saying that the richest in society ‘must bear a fair share of the burden’ of paying off Labour's debts.

But the IFS calculates that the current 40% is the optimum rate to maximise Treasury revenues from income tax on the rich. The Treasury disputes the IFS calculations, arguing that rich people are less responsive to higher tax rates than the institute's economists believe.