When Alistair Darling delivered his pre-Budget report last November, I suggested: “Chancellors should pay less lip service to golden rules, and more attention to the law of unintended consequences,” (FT Money, November 29/30). In this week’s Budget, it became apparent that he had grasped 50 per cent – in more ways than one.
The “golden rule” – borrowing only for capital investment, rather than to fund current expenditure – has been not so much broken as obliterated by £175bn of public sector net borrowing this year, or 12.4 per cent of UK gross domestic product (GDP). Take the more telling figure for UK net debt, which includes the cost of bailing out the banks, and debt as a share of GDP rises from 59 per cent this year to 79 per cent in 2013-14.
But the unintended consequences of hastily written tax policy remain all too intact. Introducing a 50 per cent rate of tax on annual income above £150,000 was clearly very much intended – as much as a political statement as a revenue-generating exercise, as the £2bn it will raise (assuming high earners don’t flee the country) is less than the minimum repayment a credit company would demand on such maxed-out borrowing. Applying this 50 per cent rate from next month, for partners in businesses that have their financial year-end on April 30, is arguably no accident, either (listen to our podcast at www.ft.com/ moneyshow to learn why). Creating a new marginal tax rate of 61 per cent for those earning £112,950, which then falls back to 41 per cent for those earning £120,000-£150,000, surely cannot have been intended, though – nonetheless, it is the absurd consequence of clawing back the personal allowance at a rate of £1 for every £2 earned over £100,000.
However, two further headline-grabbing measures caught my attention for the (presumably) unintended consequences they have – one comical, the other very serious.
First, the vehicle discount or “scrappage” scheme, as it’s known. This wheeze, due to start in three weeks’ time, will see the government offer you a £1,000 incentive, with another £1,000 from participating carmakers, if you scrap a 10-year-old motor and buy a new one. On the FT.com Budget blog (http://blogs.ft.com/budget-blog-09/), I jokingly suggested that everyone should immediately go and buy an old Mini for £200, then scrap it to get the £2,000 benefit – not for one moment thinking this would be possible.
But it could be, if you can show that the old banger has been registered to you for 12 months before the order date of the new vehicle. Consultants at Deloitte suggested: “This could jump-start new car sales.”
But one of our blog readers spotted the more likely consequence: “Suddenly, every old car is worth £2,000.” Or at least worth £1,000 if you can fix up the paperwork with an ‘Honest John’ car dealer.
Second, the restriction to pension tax relief, and “anti-forestalling” measures, as they’re known. This mess of technicalities tapers the tax relief on pension contributions down to 20 per cent if you earn more than £150,000 from April 2011, and prevents you making large lump sum investments between now and then by not permitting contributions over and above your “normal pattern” of monthly or quarterly payments.
In the FT offices, three visiting tax experts questioned whether a new special annual allowance of £20,000, and associated tax charge, would effectively restrict tax relief to 20 per cent on any lump sum contributions above this amount, immediately.
But it really does, if you currently earn more than £150,000 and make only an annual or biannual pension contribution, or wish to make a salary sacrifice into your pension arrangement. Ernst & Young summed up the immediate consequence: suddenly, you “will be caught by this [£20,000] restriction straight away”.
For the self-employed and those working for partnerships, who – because of the way they are paid – can only make annual lump sum contributions of varying amounts, the consequences of these “anti-
forestalling” measure appear particularly ill thought-out. Worse than that, the measures breach every principle of “fair” taxation. They are retrospective: the measures took effect from Budget day, but if a one-off payment was made after April 6 but before the Budget, it still reduces the £20,000 annual allowance and therefore limits the ability to obtain full tax relief on further pension contributions. They break the link between income tax and pension tax relief: high earners will be taxed at 50 per cent, but receive tax relief at only 20 per cent, and potentially pay 20 per cent tax on their employers’ contributions, too. They also add yet more complexity to a system that this government claimed to have “simplified” as recently as pension “A-day” in April 2006. Three years is clearly a very long time in politics.
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