What does the Budget have in store for you?
In the pre-Budget report last November, Darling announced a temporary VAT cut from 17.5% to 15%. The move was made to encourage people to spend over Christmas, bringing much needed sales to the high street.
Although the 2.5% cut has come under criticism – for being too small, for being overshadowed by heavy retail discounts and for encouraging people to spend rather than save – it does appear to have had the desired affect. Retail figures from the Office for National Statistics show an immediate boost to retail sales after the VAT cut came into force on 1 December 2008.
Douglas McWilliams, chief executive at the Centre for Economics and Business Research, says Darling should extend the duration of the VAT cut to July 2010, when he believes the economy will be stronger.
”We consider that the temporary VAT cut was the best stimulus option available to the government and has helped lessen the impact of the recession,” he adds. “There has been a clear and immediate impact on retail sales since its introduction. We estimate that retail sales over the December-February period were £2.1 billion higher than would otherwise have been the case."
Another suggestion, from Consumer Focus, is that Darling could extend the VAT cut for energy efficiency products to incentivise people to improve the energy efficiency of their homes.
However, the cost to the government from the VAT cut could deter Darling from extending it. In the pre-Budget report, he estimated reducing VAT from 1 December 2008 until 31 December 2010 would cost the Treasury £12.5 billion.
Another option is for Darling to actually increase the rate of VAT – potentially to 18%. Accountancy firm Smith & Williamson says that such a move would net the Treasury an additional £2.5 billion a year.
At the very least, the British Bankers’ Association says Darling must use the Budget to set out his VAT intentions. In its Budget submission, the organisation states: “We seek a confirmation of whether the VAT rate will increase to 17.5% on 31 December 2009. Businesses require sufficient notice to effect necessary systems changes and given that the proposed change would take place during a holiday period, as much advanced notice as possible would be helpful to industry.”
Smith & Williamson believes Darling could use the Budget to announce an income tax hike.
Richard Mannion, national tax director at Smith & Williamson, says: “Alistair Darling is treading a very fine tax tightrope. He is under pressure to announce tax measures that support British business and hard-pressed families, but cannot afford to further remortgage our children’s future. Ultimately, certain groups of taxpayers are going to have to dig very deep - and probably for a long time.”
Mannion’s money is on Darling focusing on higher-rate taxpayers – despite this group already seeing their national insurance contributions increase on 6 April.
“Darling may look to generate additional revenue by increasing the rate of income tax for higher-rate taxpayers, as early as this year,” Mannion adds. “We know that the higher rate of tax rises to 45% in April 2011, but this date could easily be brought forward.”
Smith & Williamson also forecasts the government freezing personal allowances and income tax rates, or bringing forward planned national insurance increases.
ISAs and savings
Gordon Brown has already all but promised that the ISA allowance will be increased in the Budget. Speaking on Radio Four in March, the Prime Minister said: “We are looking at how ISAs could be made more attractive for the future. And we’re trying to make sure that in era of low inflation that the incentive to save remain high [...] In the Budget you’ll see some announcements.”
Matthew Woodbridge, head of investment products at Chelsea Financial Services, says: “The government needs to imbue a culture of saving in the UK. To date, by far the most powerful vehicle for saving and investment has been the ISA, yet the government seems hell-bent on its destruction. It has failed to increase the allowance in line with inflation and removed the dividend tax credit.”
Tony Vine-Lott, director general at the Tax Incentivised Savings Association, believes there are other options available to the government other than increasing the ISA allowance to make these savings vehicles more attractive.
He suggests introducing workplace ISAs, which allow employer contributions, allowing people to transfer their ISA funds to their partner or spouse on their death, and automatically converting child trust funds into ISAs on maturity.
“Taking these steps would be far more beneficial than merely raising the ISA annual allowance,” says Vine-Lott. “They would make people think very carefully about the importance of committing to savings on a life long basis. Similarly I would like to see a commitment from the chancellor to make ISAs the savings mainstay of the future.”
Woodbridge, meanwhile, recommends that the government should look to re-instate the dividend tax credit on shares held within stocks and shares ISAs.
Alongside increasing ISA allowances, the government could announce new measures to encourage people to save in non-tax efficient accounts.
The Briitsh Bankers’ Association, in its Budget submission, calls for the development of “flexible savings options” that allow savers to choose products that are tailored for their needs.
And Vine-Lott calls on the government to introduce a national savings strategy.
“The reality of the credit crunch is hitting home and more and more people are recognising the importance of saving or paying off debt," he adds.
"The chancellor has the ideal opportunity to build on this momentum and encourage people to save for their long-term financial security. But in order to achieve this we need a holistic savings framework that encourages regular saving and can reflect the different financial needs of an individual throughout their life.”
Energy bill hikes seen in 2008 have yet to be offset by significant price cuts in 2009 – despite cheaper crude oil costs. As a result, increasing numbers of people are now being classified as “fuel poor” – that is, they spend more than 10% of their income on energy for their homes. Rising unemployment is also exasperating the issue.
Consumer Focus says the Budget must include measures to tackle fuel poverty, and help households improve energy efficiency.
The government aims to end fuel poverty by 2016 – but Consumer Focus says it will miss this target without “radical action”. And following MPs blocking a recent bill to lift 80% of households out of fuel poverty, Consumer Focus warns time is running out.
Philip Cullum, deputy chief executive at Consumer Focus, says: "Expensive energy bills remain a huge problem for the poorest households and unless the government invests in solutions now, millions of customers will suffer real hardship and fuel poverty levels will continue to spiral.”
Cullum calls for a more coherent approach to energy efficiency, VAT cuts for energy efficient products and an end to “unfair” energy prices on pre-payment meter tariffs.
Age Concern and Help the Aged, which jointed forced to create one charity on 1 April, has urged Darling to think of pensioners and workers aged over 50 in his Budget.
It claims that aged 50 and over have been disproportionately impacted by recent job cuts, while pensioners on low income are struggling to cope with the cost of food and fuel,
The charity wants the government to do more to tackle rising unemployment among older workers such as incentives for employers and help for those struggling to find new work.
It also calls for emergency funding of at least £1 billion to tackle the social care “crisis” and for the roll-out of automatic payment of key income-related benefits to pensioners.
The property market continues to suffer from the onslaught of the credit crunch and recession, with house prices seemingly having further to fall, mortgage criteria remaining tight, and repossessions rising.
With this in mind, commentators both hope and expect some sort of new measures to help homeowners as part of the Budget.
Robert Sinclair, director at Association of Mortgage Intermediaries, says: "We are waiting for the chancellor to grasp the tiller and provide direction for the UK mortgage market and help the thousands of ordinary people trapped by the continuing lack of liquidity in the mortgage market."
The government is also expected to include housebuilding targets. One of Gordon Brown's first pledges when he became Prime Minister was to build three million homes in England by 2020 with a target of 240,000 new homes per annum by 2016.
However, according to the Royal Institution of Chartered Surveyors, the level of housebuilding in England in 2008 was only 110,000 units, lower than in the recession of the early 1990s. This is set to worsen throughout 2009, with construction expected to begin on fewer than 80,000 homes.
Cluttons is forecasting Darling to launch a consultative initiative in his Budget, exploring how financial institutions can help support the building of new homes
Andrew Stanford, head of residential professional at Cluttons, says the government could unveil an investment scheme offering fixed returns in return for the deliverance of rentable homes. “The ability to create a sizeable and successful professional rented build-to-let sector may have come a step closer,” he says.
Another way to stimulate the housing sector could be reducing VAT on home maintenance and repairs, Stanford adds.
Another tweak to stamp duty could also be on the cards. Last September, the government confirmed a shake-up to stamp duty rules that will see properties of £175,000 or less exempt from the controversial levy until 3 September 2009.
Smith & Williamson says extending this would help first-time buyers.
There have also been calls for Darling to increase income tax relief on Venture Capital Trusts (VCTs), to help smaller companies gain investment during the current climate.
Matthew Woodbridge, head of investment products at Chelsea Financial Services, believes that helping sole traders and other small businesses – many of whom have been hit by banks tightening lending - is key to boosting the economy.
“The role of VCTs in providing the lifeblood to small firms is now more vital than ever,” says Woodbridge.
VCTs, introduced in 1995 as a way of encouraging individuals to invest in small, unquoted companies, also provide investors with significant tax benefits. However, since the amount of income tax relief was cut from 40% to 30% in 2007, the flow into these investment vehicles has dropped off.
According to Chelsea Financial Services, around £130 million was raised for VCTs during 2008/09, down from the £1,250 million seen between 2004 and 2006.
“We feel that an increase in income tax relief from the current level of 30% would substantially increase the amount of money invested in VCTs and hence increase the flow of money to small UK companies at a time when banks are not lending to small or medium-sized firms,” says Woodbridge. “Stimulating this part of the economy is likely to increase the rate of recovery.”
April saw the introduced of the 2p increase in fuel duty, a move largely unpopular with drivers and motoring groups. The concern is that petrol suppliers, rather than absorbing the extra cost, will pass it on to drivers by hiking petrol prices.
PetrolPrices.com has called for Darling not to introduce a further rise in fuel tax in the 2009 Budget. It also wants to government to declare exactly what fuel tax is spent on.
Louise Doherty, spokeswoman for PetrolPrices.com, says: "Drivers are fed up being the government's cash cow. If drivers are going to be taxed it's only fair that our tax is invested in transport, and that the government is open with us about exactly what they're spending it on."
Jo Tanner, spokesman for the Freight Transport Association, adds: "Far from being an answer to the recession, fuel duty hikes will put jobs in jeopardy and businesses in administration.”
There are high hopes that Darling will make some serious moves in this year’s Budget to help small businesses weather the economic storm.
The government has already introduced several initiatives to help business, including rate relief for small business owners in Northern Ireland and Wales. The Federation of Small Businesses wants to see this business rate relief extended to companies in England, and claims such a move would stem the tide of around 120 business closures each day.
John Wright, national chairman for the Federation of Small Business, says more than half of small businesses miss out on claiming back up to £1,200 off their business rates because they are unaware they are entitled to do so. Business rates are the third largest cost to small firms, after salaries and rent.
"Next month's Budget could be make or break for small businesses,” Wright adds. “With around 120 businesses going bust a day it is crucial that immediate action is taken to sustain their cash flow.”
A hugely unpopular tax paid on property and share purchases. Stamp duty on property is levied at 1% for purchases over £125,000 (£250,000 for first-time buyers) which then moves up at a tiered rate. For property between £125k and £250k you pay 1%, then 3% from £250k up to £500k and then 4% from £500k to £1m and then 5% for properties over £1m. But unlike income tax, which is “tiered” and different rates kick in at different levels, stamp duty is a “slab” tax where you pay the rate on the whole purchase price of the property. On shares, stamp duty is charged at a flat rate of 0.5% on all share purchases. Figures correct as of May 2011.
Invented by a Frenchman in 1954 and ironically introduced in the UK on 1 April 1973, VAT is an indirect tax levied on the value added in the production of goods and services, from primary production to final consumption and is paid by the buyer. Its levying is complex, with a number of exemptions and exclusions. For example, in the UK, VAT is payable on chocolate-covered biscuits, but not on chocolate-covered cakes and the non-VAT status of McVitie’s Jaffa Cakes was challenged in a UK court case to determine whether Jaffa Cake was a cake or a biscuit. The judge ruled that the Jaffa Cake is a cake, McVitie’s won the case and VAT is not paid on Jaffa Cakes in the UK.
A scheme originally established in 1944 to provide protection against sickness and unemployment as well as helping fund the National Health Service (NHS) and state benefits. NI contributions are compulsory and based on a person’s earnings above a certain threshold. There are several classes of NI, but which one an individual pays depends on whether they are employed, self-employed, unemployed or an employer. Payment of Class 1 contributions by employees gives them entitlement to the basic state pension, the additional state pension, jobseeker’s allowance, employment and support allowance, maternity allowance and bereavement benefits. From April 2016, to qualify for the full state pension, individuals will need 35 years’ of NI contributions.
There are limits to how much you can invest in any tax year. For 2011/12, the limit is £10,680. Of that, the maximum you can invest in cash is £5,340 and the balance of £5,340 can be invested in shares (individual company shares or investment funds). If you don’t take the cash ISA allowance, you can invest up to £10,680 into a stocks and shares ISA.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.