Will the Budget leave you richer or poorer?
Alistair Darling’s 2009 Budget, his second as chancellor, was eagerly anticipated, diligently followed, and heavily criticised.
Addressing Parliament, Darling said his Budget will "help people now" and help "build Britain’s future".
But what will it mean for you if you are...
The Budget contained largely good news for pensioners, especially for those on low or modest incomes.
The ISA allowance will increase to £10,200 from this October for people aged 50 and over (see below), allowing savers to earn more on their pennies tax-efficiently.
Darling also announced the basic state pension will rise by at least 2.5%, regardless of inflation, next April – this is on top of the 5% increase implemented this April. And, from November this year, a pensioner’s first £10,000 of savings will not be taken into account when assessing entitlements to pension credit, pensioner-related housing and council tax benefit.
This is an increase from the current £6,000 level and is estimated to boost the incomes of more than half a million pensioner households by £4 per week on average.
Meanwhile, from April 2011, grandparents and other adults of working age who care for their grandchildren, or other members of their family aged 12 or younger, for 20 hours or more a week will be able to gain national insurance credits toward the basic state pension.
And, to help tackle rising fuel poverty among older members of society, the government has pledged to retain the winter fuel allowance at its current level of £250 for the over 60s and £400 for the over 80s for a further year. This means households will receive an extra £50 or £100 respectively this year.
Darling said the government is "committed to tackling pensioner poverty, promoting greater independence and well-being in later life, encouraging and rewarding saving, and enabling people to meet their income aspirations in retirement".
A saver or investor?
During his speech, Darling confirmed his government’s aim to encourage “people to save now and in the future”.
As well as changes to pensions (see above), the chancellor confirmed speculation that the ISA allowance would be increased to encourage people to save tax-efficiently. From 6 October, people aged over 50 will be able to save up to £10,200 in an ISA, of which £5,100 can be held in cash. Everyone else will have to wait until April 2010 before they can benefit from the increased ISA allowance.
The move has largely been welcomed by commentators. Reza Attar-Zadeh, director of savings and investments for Abbey, says the £3,000 increase to the annual ISA allowance makes the benefit of these savings vehicles even more attractive.
"This is a step in the right direction and hopefully will encourage people to save. With interest rates at an all-time low it's vital that savers don't lose sight of the benefit of saving and, more importantly, the long-term benefits of holding their money within an ISA."
Attar-Zadeh estimates that the move will allow the UK’s 31 million taxpayers to potentially save an extra £95.1 billion tax-efficiently.
However, the fact that the new increased ISA allowance is being phased in means the majority of people will see no benefit until the next tax year.
At the same time, critics say the government is giving a mixed message to older savers; on one hand, they are being encouraged to save more through ISAs, but on the other, those on higher incomes have been hit by changes to pension tax relief.
From 2011/12, people earning more than £150,000 a year will see the tax relief on pension contributions gradually reduced. For those earning between £150,000 and £180,000, the relief will gradually be cut from the current 40% to 20%.
Those with a £180,000 plus salary will only receive 20% tax relief on any personal contribution to a pension scheme. The move should net the exchequer £200 million in savings.
Standard Life calculates the move will affect 291,000 people. If someone earning more than £150,000 paid £100,000 into their pension, this currently costs £60,000 (due to 40% tax relief).
But in 2011 it will cost £80,000 as only basic-rate relief is added.
Simon James, partner at Gore Browne Investment Management, says: "While it is a positive move to increase the ISA allowance to £10,200 we are disappointed with the reduction of higher-rate tax relief on pensions for people earning over £150,000. We do not believe the additional ISA allowance will increase savings amongst the low to mid earners, exactly the people the government is targeting, and instead will encourage wealthier people to reallocate existing investments into tax-free savings.”
James says the government would have done better to increase the tax relief for basic-rate pension contributions – thus encouraging those on lower earnings to save for retirement.
Fuel duty, many drivers’ biggest bugbear, made a guest appearance in this year’s Budget. Following the 2p increase in April 2009, Darling announced that he would increase this duty by a further 2p in September, and by 1p per litre above indexation each April for the next four years.
This means that, from September, total duty on a litre of fuel will be 56.19p per litre, according to Petrolprices.com.
However, people with cars more than 10 years old could benefit from a new scheme unveiled in the Budget. The so-called scrappage scheme will allow motorists to trade in cars that are more than 10 years old in return for a £2,000 discount on new vehicles.
The scheme, which will last until March 2010, could benefit 300,000 drivers, according to the AA. However, as credit information provider Equifax points out, many people who have had the same car for 10 or more years might not be in the financial position to buy a new vehicle – even after taking the discount into account.
In the last month or so, a glimmer of hope has emerged over the outlook for the housing market. The number of new mortgage approvals were up month-on-month in February and March, albeit from a low base, and buyer interest has increased and appears to be translating into a higher number of transactions.
However, at the same time, 900,000 borrowers are now in negative equity (where the value of a property is worth less than the debt secured on it), according to the Council of Mortgage Lenders, house prices continue to fall and repossessions are set to rise further. With unemployment still on the up, green shoots in the housing market are unlikely to take root anytime soon.
With that in mind, Darling pledged more help for would-be buyers as well as existing homeowners in his Budget.
First off, he announced that the stamp duty holiday would be extended by three months. This means that people buying a property for under £175,000 this year will not have to pay any stamp duty. The chancellor also confirmed that the government will offer banks insurance guarantees that should allow them to sell mortgage debt to investors, thus freeing up funds for new lending.
While the latter scheme should, technically, help borrowers, a question mark remains over how successful it will be. Ed Stansfield, property economist at Capital Economics, explains: “Given that a lack of mortgage credit has clearly exacerbated the scale and speed of the housing market correction to date, measures to improve the flow of funds available for new mortgage lending could bring significant benefits.
"Yet, as long as there is a widespread belief that house prices have further to fall, investor demand for [mortgage debt] is likely to be muted. And sharply rising unemployment is likely to keep a lid on mortgage demand itself.”
The stamp duty holiday has also left commentators unimpressed. Robert Sinclair, director of the Association of Mortgage Intermediaries, says: "The extension is a sensible step but a bolder decision would have been to abolish stamp duty altogether. We really need more long-term thinking to encourage buyers back into the housing market.”
There are also concerns that the housing market will not have recovered sufficiently by 2010 to be able to cope with the stamp duty holiday ending – potentially causing a rush on the market before 31 December and a complete lull afterwards.
For existing homeowners, Darling extended the Support for Mortgage Interest scheme, which allows people who have lost their jobs to defer mortgage interest payments, for a further six months. This means that the interest rate used to calculate benefits will remain at 6%.
And, he also pledged to pump an additional £80 million into the government's shared ownership HomeBuy scheme and said that, as part of the Mortgage Rescue Scheme, people in negative equity will now qualify to sell all or part of their home to a registered social landlord.
Adam Sampson, chief executive of Shelter, says: “Housing is at the heart of the recession with millions of people suffering through threat of repossession, lack of affordable housing and homelessness.”
Finally, the chancellor pledged £500 million to support house-building – helping consumers and industry.
Stansfield is unimpressed: “The £500 million of new funds looks modest to say the least. After all, the value of new housing orders has fallen from an average of almost £16 billion a month in the year to July 2007, to just over £8 billion a month in the year to February 2009.”
A victim of unemployment?
On the morning of the Budget, new figures revealed the number of people out of work rose by 177,000 to 2.1 million between December and February, while the claimant count increased by 73,300 to 1.464 million - its highest level since 1997.
With unemployment still a major concern for many households, Darling promised to ensure short-term job losses don't turn into a "lifetime on benefits". He announced an additional £1.7 billion of funding for JobCentre Plus, plus additional support for young people.
This includes the creation of 250,000 new jobs, £260 million of new money for training and £250 million to help 16 to 17-year-olds stay in education or training. A further £400 million will be invested in this latter scheme in 2010.
Sylvia Perrins, chief executive of the National Skills Academy for Financial Services, welcomes the move but questions the plausibility of how the various schemes will work in practice.
“To give everyone under 25 who has been out of work for 12 months a job or a place in training is incredibly ambitious - but it recognises the government's realisation that we can no longer sit on the fence,” she says.
Meanwhile, statutory redundancy pay has been increased from £350 to £380 a week.
A higher earner?
High earners were targetted in Darling’s Budget – a fact that may or may not evoke your sympathy.
The biggest change is that people earning more than £150,000 a year will see their tax increase to 50% from next April. The chancellor originally unveiled this new higher rate of tax in his pre-Budget report, but at the time said this would be 45% and would not come into force until April 2011.
Darling said the increase to the top rate of tax, which will affect the richest 1% of people in the UK, will “pay for additional support for people now".
But the Institute for Fiscal Studies warns that increasing the top rate of tax will not help the government raise enough cash to fund its massive borrowing – and could lead to a brain-drain with high earners leaving the UK in their droves. It also claims that rich people use accounting rules to avoid paying income tax on more of their wealth.
Meanwhile, from next April, the income tax personal allowance for people earning over £100,000 will be reduced at a rate of £1 for every £2 earned over £100,000 until it is completely withdrawn. This replaces the two-stage withdrawal announced at the 2008 pre-Budget Report.
Deloitte calculates the move will cost around 700,000 people around £220 each per month.
And Carolyn Steppler, associate partner in personal tax at KPMG in the UK, says: “While the 50% rate of tax for those earning £150,000 plus will take the lion’s share of the headlines, there is another group of people who will be paying even more.
"The effect of the gradual withdrawal of the personal allowance means that some of those earning between £100,000 and £112,950 will be paying an eye-watering 60% tax rate on their earnings over £100,000.”
Another blow to high earners is the decision to scrap 40% tax relief on pension contributions. People earning more than £150,000 will see the tax relief on pension contributions reduced from 40% to 20%.
Tom McPhail, head of pensions research at Hargreaves Lansdown, says the move will undermine pension provision: “By breaking the link between income tax and pension tax relief, the government is setting a dangerous precedent for the future. The government is undermining important incentives to defer consumption.”
Finally, in the small print of the Budget, the government also announced that dividend income for the highest earners will be taxed at 42.5%. The tax rate on all income in trusts will also rise to 50%.
Alex Henderson, tax partner at PricewaterhouseCooper, says: "This will further undermine the position of those who wish to use trusts to benefit their families."
The tax changes will raise an estimated £6 billion for the government from 2012.
A smoker or a drinker?
As per usual, Darling increased the tax on alcohol and cigarettes by 2%. The changes came into effect on the day of the Budget (22 April).
The British Beers and Pub Association said raising the duty on alcohol would “sign the death warrant” for thousands of pubs - and for tens of thousands of British jobs.
It will also stretch the budgets of households who drink or smoke a little more.
A homeowner’s worst nightmare; repossession is an action of last resort by mortgage lenders to recover money from borrowers that have failed to keep up with repayments on their mortgage or other loan secured on their home (see secured loan). Repossession is a legal procedure that has to go through several processes before the homeowner is evicted and the property reposed. These are: if a borrower keeps defaulting; the lender applies for a solicitor’s notice; the lender instigates possession proceedings through the court; at the court hearing a possession order is granted and sometimes a possession warrant; a bailiff is appointed and an eviction notice issued at which point the homeowner has two to three weeks to vacate the property.
A stockmarket security (a form of derivative) issued by companies on their own ordinary shares to raise capital. A warrant has a quoted price of its own that can be converted into a specific share at a predetermined price (called the conversion price) and future date. The value of the warrant is determined by the premium of the share price over the conversion price of the warrant. Warrants give the same economic exposure to an underlying security without actually owning it, and cost a fraction of the price of the underlying security.
The circumstances in which a property is worth less than the outstanding mortgage debt secured on it. Although it traps householders in their properties, the Council of Mortgage Lenders (CML) says there is no causal link between negative equity and mortgage repayment problems. At the depth of the last housing market recession in 1993, the CML estimated 1.5 million UK households had negative equity but most homeowners sat tight, continued to pay their mortgages and eventually recovered their equity position.
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.
The tax levied on the total value of your estate after you die. IHT has to be paid by the beneficiaries of your estate before they can receive any of the money from it. The money can’t be taken from the value of the estate _– it has to be paid before any money can be released. There is an IHT threshold – known as the “nil-rate band” – below which no tax is levied (£325,000 in 2011/12). Any amount above the nil-rate band is subject to tax at 40%. If your estate totals £600,000, there is no tax on the first £325,000; however your estate will pay 40% tax on the remaining £275,000, a total of £110,000. Prudent tax planning can reduce your IHT liability, so always consult a specialist solicitor.
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.
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.
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.
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.