Chancellor unveils tax cuts in pre-budget report
How the Pre-Budget Report will affect you
On Monday 24 November, chancellor Alistair Darling unveiled his Pre-Budget Report, noting that ‘exceptional times require exceptional measures’.
Dubbed as the most important Pre-Budget Report for more than a decade, Darling unveiled a £20 billion fiscal injection which he says will help households and businesses weather the financial storm.
Recent figures show that UK GDP fell by 0.5 per cent in the three months to September and that economic growth this year is forecast to be 0.75 per cent, much lower than the 2.5 per cent predicted by the chancellor in March.
So, in an attempt to stimulate the economy, from 1 December 2008, value added tax (VAT) will be cut by 2.5 per cent to 15 per cent, a move that will last until the end of 2009.
But, as Cliff Husband, head of research at AWD Chase de Vere, points out, there is no guarantee that this will be effective: ‘Any reduction in tax is a welcome relief but there is a big question mark over how effective a 2.5 per cent reduction in VAT will be for the chancellor and his efforts to kick start the economy.’
Simon Pimblett of City financial advisory firm The Route, agrees, ‘It is hard to see how the VAT cut will make a real difference to the flailing economy. It does, after all, only equate to a 2.13 per cent reduction in shop prices, and many of the essentials of life are zero rated or five per cent rated anyway.’
He adds, ‘It is unlikely that a buyer will be tempted into a £100 purchase by a discount of £2.13, especially when many stores have been trying to stimulate buyers with sale reductions of up to 20 per cent in recent weeks.’
In his report, the chancellor also outlined plans to introduce a new 45 per cent higher income tax rate for earnings above £150,000 from April 2011, a move predicted to impact on one per cent of people.
Cliff Husband says, ‘The new proposal for income tax increases may set alarm bells ringing at the thought of what is still to come in the future. The proposals will only come into effect after the next general election as there is a pledge not to increase income tax this term, but this gives people plenty of time to plan for any changes.’
However, those planning for retirement are being urged to think carefully and consider the impact of any tax increases.
Leonie Kerswill, tax partner at PricewaterhouseCoopers LLP, says, ‘The increase in tax rates for high earners to 45 per cent, and at some levels, because of the withdrawal of personal allowances, at marginal rates of tax of 60 per cent, is likely to encourage people to think about putting more money into their pensions, which is tax deductible. However, people with high incomes will now need to think carefully about how much they can contribute.’
Maximum contributions of £235,000 a year are allowed, with an overall lifetime pension pot of £1.65 million. These limits are set to increase steadily until 2010 when they will be £255,000 and £1.8 million.
The annual and lifetime limits are then to be frozen for five years which, with inflation, will cut the real value of the pot and will mean less scope for high earners to save income for their future retirement in the face of higher tax rates.
The government estimates this freeze to be worth £400 million a year, which demonstrates the amount that would have otherwise been added to pension funds.
Kerswill adds, ‘This is a double hit for high earners, who will also be affected by the increase in national insurance contributions. Many will now be left with the dilemma of contributing now or delaying contributions to get tax relief at 45 per cent but losing out on two years' growth and possibly, depending on their views on the market, miss out on investing at a low point.’

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