Tuesday 25th November 2008
By Rachel Jones
Know Your Money Editor
The chancellor of the Exchequer's pre-Budget report was announced yesterday (November 24th) amid speculation about whether taxes would be cut or go up and if VAT would decrease from its well-known figure of 17.5 per cent. Indeed, from December 1st, VAT is expected be cut to 15 per cent until December 31st 2009. While this may seem like a consumer success, putting Britons firmly back in the financial driving seat, critics have pointed out that the duty increase on alcohol and cigarettes cancels out many benefits. But what does all this mean for the average UK taxpayer, who may assume that a VAT cut can only be a positive thing? Income tax and national insurance contributions have shot up, although the government claims that basic-rate taxpayers will not be affected by such an increase. But with all the monetary changes, who exactly will feel the effects?
The pre-Budget report explained
One of the key announcements made by Alistair Darling is that national insurance contributions for people earning over £20,000 a year will increase by 0.5 per cent by April 2011, which has seen questions about whether it is another stealth tax imposed by Labour. In what the Conservative's call a 'middle-class tax bomb', the increased contributions are set to go hand-in-hand with a new 45 per cent higher-income tax rate for earnings above £150,000. And although only a small percentage of Britons will be affected by such a move, the benchmark has sparked concerns from industry commentators that lower earners will be hit later down the line.
Speaking to the Telegraph, Francesca Lagerberg, head of national tax at accountants Grant Thornton, says: "Whilst significant tax giveaways are hoped to have a quick impact on the economy, voters are likely to pay back these tax cuts soon after the next general election, not just hitting out at high-worth individuals but on lower income earners too."
The 13-month VAT reduction will revert to 17.5 per cent after this period. Mr Darling hopes that by 2010, the economy will have started to recover and Britons will be able to afford the higher rate again. Indeed, he hopes that the cut will encourage people to start spending on the high-street.
A credit crunch Christmas present?
The Liberal Democrats have been one of the first to speak out about the pre-Budget report. According to the party's Treasury spokesperson Vince Cable, the government has missed a "golden opportunity" to make the tax system fairer for all. Commenting on the increased national insurance contributions, Mr Cable says: "The government acknowledges that the UK tax system is inherently unfair, but then announces that it will hit those struggling to make ends meet with yet higher tax bills by increasing national insurance. Everyone earning over £19,000 will be hit.
"The new 45p income tax rate is nothing more than a fig leaf to cover a £5 billion tax hike which will hit millions of low earners and businesses."
Meanwhile, the basic rate tax benefit will increase from £120 to £145 a year, a move which the Times claims will help 22 million taxpayers. Indeed, the Independent is more positive about the consequences for families, stating that while everyone earning over £40,000 will face a tax hike, this will benefit millions of people who take home a lower salary. However, the Conservatives still insist that anyone earning over £19,000 will indeed be negatively hit by Mr Darling's proposals.
Moving on to festive finances
The pre-Budget report appears to have turned into a mass political debate, with some opponents claiming that the majority of the public will benefit and some insisting they will in fact suffer. The shadow chancellor George Osborne tells BBC Radio 4's Today programme: "We have got to get lending going in this economy again, you have got to get credit to small businesses, that is where the action is needed, not, frankly, taking a huge risk with the public finances." He adds that the VAT is just a temporary measure that will hit consumers further down the line.
But rather than waiting for any potential financial benefits or preparing to be out of pocket, consumers may wish to look at the ways that their festive coffers can be boosted. Whether it be putting an extra bit of cash to one side, or researching suitable credit cards or loans, people may want to arm themselves with the financial knowledge that could equip them to cope with whatever the economy may bring.
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