What the pre-Budget report means for your finances
If you’d somehow missed the fact there will be a general election in 2010, the pre-Budget report published on 9 December should have made it clear.
Eagerly anticipated as the government’s last chance to pull something out of the bag before the country goes to the polls, Alistair Darling’s report was mainly dismissed as a ‘damp squib’ reliant on optimistic growth forecasts and vote-grabbing policy measures.
Apart from measures to get the unemployed back into work and support for struggling homeowners, there was little focus on helping others hard hit by the credit crunch – such as pensioners and savers.
• A new boiler-scrappage scheme
• An increase in national insurance contributions
• A new 50p monthly levy on landlines to help fund faster broadband
• Bankers' bonuses above £25,000 to be hit with a one-off 50% tax
• Inheritance tax threshold frozen at £325,000 for the next year
• Increase in inflation-linked benefits and tax credits
For working people earning more than £20,000 a year, perhaps one of the most significant changes in the pre-Budget was the decision to increase national insurance contributions by 0.5% from April 2011. This is a larger increase than previously expected, and is in addition to the 0.5% increase announced in 2008’s pre-Budget.
Meanwhile, income tax thresholds will be frozen at their current levels for the next financial year, and the point at which people start paying the higher rate of tax will be frozen for an additional 12 months from April 2012. Personal allowances will also stay at their current level.
Darling also confirmed a controversial new tax that will see households with fixed landlines forced to pay a monthly levy of 50p as part of their bills. The money will be used to help fund the roll-out of super-fast broadband to 90% of homes by 2017.
Shoppers were left disappointed by the decision not to extend the temporary 15% rate of VAT beyond 2009, although with some experts predicting a 20% VAT rate ahead of the pre-Budget, the fact that this tax will remain at 17.5% for the foreseeable future is actually a blessing.
Darling also ignored pleas to extend the stamp duty holiday into 2010, and announced that the inheritance tax threshold will remain at £325,000 in 2010/11.
Arguably the biggest headline-grabber from the pre-Budget was a new one-off bankers’ bonus tax of 50%, which banks will have to pay on discretionary bonuses above £25,000.
Benefits and tax credits
Families receiving benefits linked to inflation - such as child benefit and some disability benefits – will see the amount they receive increase by 1.5% in April. Primary school children whose parents are on low incomes in England will now get free school meals – a measure expected to benefit some 500,000 children.
Although the winter fuel allowance has been frozen at £250 for the under 80s (or £400 for people aged over 80), the government did confirm that the basic state pension will increase by 2.5% in April 2010. Pension credit’s minimum income guarantee will increase to £132.60 for single pensioners or £202.40 for couples.
From April 2011, people aged 65 and over who want to continue working will now qualify for working tax credit if they have a job for at least 16 hours a week.
Help heating homes
One of the most 'exciting' aspects of the pre-Budget report was the unveiling of a new boiler scrappage scheme, which will help 125,000 households replace outdated and inefficient heating systems.
Households with working G-rated boilers (normally models more than 15 years old) will be offered £400 towards the cost of a new boiler or renewable heat unit. You can find out more about your boiler's rating on energysavingstrust.org.uk.
The Warm Front scheme, which helps those on low incomes to improve the energy efficiency of their homes through better insulation and heating improvements, will also be extended to help a further 75,000 households.
People with either wind turbines or solar panels who plug excess power back into the National Grid will receive tax-free payments averaging £900 a year.
As well as confirming the 2.5% increase in the basic state pension, the pre-Budget report contained several measures that will impact workers saving for retirement – especially teachers, local government, NHS and civil service workers.
The public sector came in for special focus, with Darling revealing that state contributions to public sector pensions will be capped by 2012, saving around £1 billion a year. Public sector employees, especially those earning more than £100,000, would in turn be expected to contribute more.
Meanwhile, following April’s Budget limiting the value of tax relief on pension contributions for people earning over £150,000, Darling has now extended this to include some people earning £130,000. Those with pre-tax incomes below £130,000 before the inclusion of employer pension contributions will not be affected.
Measures to help young people, as well as older unemployed people, into work formed a key part of the pre-Budget report. Darling said he intends to provide a place in education or training for every 16 and 17-year-old leaving school this September.
Youngsters not in education at the moment will be offered an entry into employment, supported by an education maintenance allowance. And starting in January, all 18-24 year olds will be guaranteed a job, work placement or work-related skills training six months after their first JobSeeker’s Allowance claim.
The over-50s were also flagged up for support “to equip them with the confidence and skills needed to get a job”.
The successful tackling of unemployment was also link with the aversion of repossessions. The mortgage support scheme, which has helped 220,000 out-of-work people maintain interest payments on their mortgages, has been extended for a further six months.
• No change to alcohol and cigarette duty
• Crack-down on tax evasion including offshore accounts
• Electric cars to be exempt from company car tax for five years
• Bingo duty to be cut from 22% to 20%
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.
The practice of locating your financial affairs (banking, savings, investments) in a country other than the one you’re a citizen of, usually a low-tax jurisdiction. The appeal of offshore is it offers the potential for tax efficiency, the convenience of easy international access and a safe haven for your money. However, offshore is governed by complex, ever-changing rules (such as 2005’s European Union Savings Directive) and, as such, is the exclusive province of the wealthy and high-net-worth individuals.
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).
This is more usually a feature of car insurance but it can also crop up in contents, mobile phone and pet insurance policies. An excess is the amount of money you have to pay before the insurance company starts paying out. The excess makes up the first part of a claim, so if your excess is £100 and your claim is for £500, you would pay the first £100 and the insurer the remaining £400. Many online insures let you set your own excess, but the lower the excess, the more expensive the premium will be.
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.