On Monday November 24, Alistair Darling, chancellor, unveiled his pre-Budget report noting that “exceptional times and require exceptional measures.”
Among those exceptional measures were plans to stimulate the economy by cutting value-added tax from 17.5 per cent to 15 per cent until the end of 2009 as part of a £20bn fiscal stimulus package.
To pay for those proposals Mr Darling confirmed that from April 2011 he would introduce a 45 per cent rate of income tax on those earning £150,000 a year.
Who will benefit from the short term tax cuts? How will families be affected? What is the long term outlook for the tax burden on companies as the chancellor seeks to balance his books?
To explain the details of the report and what it might mean for you, John Whiting, tax partner at PricewaterhouseCoopers, answered your questions.
Mr Whiting has been a tax partner with PricewaterhouseCoopers since 1984, working on most areas of taxation including many years of involvement with Employment taxation.
Mr Whiting is a former President of the Chartered Institute of Taxation and chairs their Management of Taxes Committee.
Did the chancellor say that self employed small businesses would be able to get a refund on last years tax payments due to this years’ losses? K Wall, Norfolk
JW:There is indeed an additional loss relief. For one year only a maximum of £50,000 can go back further than the normal one year carryback. So if, say, a business makes a loss of £100,000 and can only relieve £60,000 against last years profits then it can carry the extra £40,000 back a further year and generate a tax repayment from that year. This does only seem to be available for one year however.
I thought I heard a statement about a savers 50p giveaway for every pound saved, but can find no confirmation anywhere. Did I misunderstand? How will this be achieved? Thanks, MLBarnett, Beaconsfield
JW: You heard correctly but it needs a little explanation. This is the ”saving gateway” which will be introduced nationally in 2010. The Government will indeed contribute 50p for every £1 saved. There will be a limit of up to £300 by way of Government contribution. Saving gateway accounts will be provided by financial institutions and will be available through the Post Office.
How will the reduction in VAT change the flat rate scheme? We currently pay 10% VAT? Has this been reduced? Jacques, London
JW:This issue is something I raised with HRMC as soon as I heard about the reduction in the main VAT rate. The answer is that the various VAT flat rates are going to be adjusted to take account of the main rate change - not necessarily by the full 2.5% of course. So the 10% rate you use will change but you’ll need to look on the HMRC website for the promised further details as to what the new rate will be. It may well be that you’ll need to think again as to whether the flat rate remains worthwhile.
I am 64 years old and disabled. My wife is 67. How will this budget affect our income and can you explain the saving proposal of 50p for every one pound we save? Denyer, West Sussex
JW:There is some limited help in the PBR for you with an increase in the State pension that I assume your wife will be getting. There is also an additional lump sum payment of £50 in January. As for the saving proposal, that is the Saving Gateway which will operate from April 2010. Under that, the Government will add 50p to each £1 saved in Saving Gateway accounts.
There will also no doubt be increases on other benefits, in line with inflation but these were not announced yesterday.
I am a 47 year old single woman who works part time on £17,076 pro rata. My annual salary is £12,186 per year, how will the tax cuts affect my salary? Will I take home more every month and if so how much? Trish, Reading, Berkshire
JW:The main way that you are helped is by the increase in the personal tax allowance, i.e. the amount you can earn before you start to pay tax. That goes up from £6,035 to £6,475 from next April. The increase will save you £88 in income tax. Meanwhile the National Insurance figures change a little with the starting point for paying National Insurance going up from £105 per week to £110 a week. With the rate being 11% that potentially saves you 55p a week but exactly how much you save depends on how many weeks you work.
If a contract calls for payment by instalments is the VAT fixed at start or is it at the rate on the day payments are made? ie could people find themselves involved in 3 different VAT rates? J Stewart, Edinburgh
JW:VAT would normally be set at the time of invoicing - so that might mean some payments have been made at the old rate of 17.5% and some will be due at the new 15% rate....and of course if it’s a very long contract, the 17.5% rate may come back into play!
What are the implications of the national insurance rise for basic rate and higher rate tax payers? S B Hall, Basingstoke
JW:From next April , the NIC rates stay the same but the amounts of income on which people pay NICs alter. You start to pay at £110 a week (up from £105); the main (11%) rate stops at £844 a week (up, significantly, from £770 a week). In annual terms, the amounts are £5,720 and £43,875. The aim is to harmonise the stop points for the NIC ’upper earnings limit (UEL)’ at the same point as the 40% income tax rate starts. It means that there is quite a tranche of extra income drawn into the full 11% NIC rate; people will still gain thanks to the income tax changes - mainly the personal allowance - but it is marginal.
Then from 2011 all the NIC rates go up by 0.5% - including the 1% rate that applies above the UEL. That will of course hit the higher earner more.
As a man in a same sex relationship with a salary of £17,300 per annum with a partner who earns £20,000 per annum and an £80,000 mortgage, how will Alistair Darling’s budget affect us? We do not have children, work full time, pay full council tax, and have no drain on local council services. Will we end up better off? Marc Beckett, Cannock
JW:You will gain from the increase in personal allowances - the start point at which you both start to pay tax. That goes up by £440 a year, worth £88 each to you. There is some NIC reduction as well - another £31 each. Of course, the significant increases in tax credits and child benefits are of no assistance to you
I’m currently a low income earner, earning about 12k a year how will I be affected? Will private investors in UK stocks receive any benefits? Freddie Gleeson, Bath
JW:You will benefit from the extra personal allowance - going up from £6,035 to £6,475 from next April That is worth some £88 a year to you and there is a bit more through the NIC starting point uplift as well.
There is nothing in particular by way of help for private investors. One thing that such people are always interested in is the annual CGT exempt amount, but that wasn’t announced yesterday. As a matter of interest, when the new 45% tax rate comes in (if it does) those with high amounts of dividend income will find themselves with a top rate on dividends of 37.5% !
I take advantage of the Flat Rate VAT rate (I pay 8%), under the new rate it looks as if I shall be 2.5% worse off. Is that the case? Sid Cashmore, Oldbury
JW:The flat rates for the VAT flat rate schemes will all be adjusted - HMRC are setting out details on their website. It may mean that you want to look again at how valuable the flat rate is to you.
I think I saw in the speech something about a £70 payment per child being made to families before Christmas. Am I imagining things? Thank you. Steve Frier, Plymouth,
JW: What he talked about was bringing forward to April planned increases from the following year, so the child element of the Child Tax Credit will be increasing by £150 a year from next April.
I am a 72 year old pensioner with a small private pension which causes me to pay tax. Will the pre-Budget report now mean that I will qualify for the 10p tax compensation adjustment in my taxation? G Westwood, Sheffield
JW:The theory is that you have already had compensation for the loss of the 10p tax band through the increase in your personal allowance from £7,550 last year to £9,030 this year (that will rise to £9,490 next year). So although it may not feel like it, you have been compensated. Your income tax bill is actually lower now than it was when the 10p rate band was in place.
Has the chancellor made any changes to gambling taxes? W Bright, Derby
JW:The only comment I have found so far is that there will be no change to the basis of taxation on lotteries. There was discussion of switching lottery duty to a gross profits tax (following many of the other gaming duties) but the government announced that there will be no change to the existing system of stakes based taxation because of uncertainty over the likely impact of a change at this time.