Rich, poor, or in between? How you will be affected

Depending on your class, the pre-Budget report was a bonus or a blow. Julian Knight sorts the winners from the losers

Thursday 10 December 2009 01:00 GMT
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High earners

A lot of the headlines in the run-up to the pre-Budget report were prompted by talk of a "super tax" on bankers' bonuses and no one was surprised when a 50 per cent windfall tax was announced. Some bankers may feel they have got away lightly as the "bonus tax" announced today will be borne by the employer, but this may reduce the available profit pool from which bonuses are drawn. The Chancellor announced any effort to avoid this tax would be clamped down on but one accountancy firm has described the tax as a "lawyer's paradise" as the term "bonus" is not clearly defined.

Many other high earners will feel that the pre-Budget went badly for them, but it could have been worse.

The freezing of personal income tax allowances and the rise in National Insurance contributions will mean more money disappearing from take-home pay. Those earning over £150,000 are bracing themselves for a rise in the tax rate from 40 per cent to 50 per cent in April.

As for those on just above average incomes, earning around £40,000, they may soon find they get dragged into the 40 per cent income tax bracket. The decision by the Chancellor to freeze income tax personal allowances in 2010-2011 and then again for the 40 per cent tax rate from April 2012 will mean an estimated 70,000 people will move into the higher tax bracket.

Verdict Losers

High earners were always in for a pasting but it may not have been as bad as it first seemed.

Single people

Single people are often the Cinderella group in Budgets and pre-Budgets. They are less likely to benefit from tax credit increases and were indirectly one of the worst hit by the previous scrapping of the 10p tax rate. This time they will again have little to cheer. Those without a job and under the age of 24 may be heartened by the Government's commitment to find them work or get them into training within six rather than 12 months as previously promised. Those in work will see their tax-free income frozen next year, but those earning less than £20,000 will not suffer from the 0.5 per cent increase in National Insurance as the amount they can earn before NI is due will go up. Again, more money was promised for the Homebuy Direct scheme which helps wannabe first-time buyers get onto the property ladder.

Verdict Some winners, some Losers

Singletons may sigh with relief that they haven't been hit with another 10p tax bombshell but they remain forgotten when any handouts are due.

Low-income families

In what the Chancellor dubbed a pre-Budget about "fairness", it seems that one of the few groups to benefit were those living on low incomes, particularly families. Child benefit, a key boost to poorer family budgets, will rise by 1.5 per cent. Likewise, disability benefits will also rise by 1.5 per cent. The starting point at which National Insurance (NI) is levied will go up, which means that those earning less than £20,000 will not lose out, due to the extra 0.5 per cent increase in NI contributions for all employees due to come in April 2011. However, they will not be protected from freezing all income tax allowances in the 2009-10 tax year.

An extra £200m will be made available through the Government's Warm Front scheme, which helps lower-income households in particular with making their homes more energy-efficient. Of course, those families with old boilers that need replacing can benefit from the Government's "boiler scrappage" scheme. An extra 500,000 low-income families will be able to claim free school meals. If a family is struggling with its mortgage repayments, the positive news is that the Homeowners Mortgage Support scheme – which helps people pay their home loan if they meet certain criteria – is to be extended by another six months. But those households which still keep their land lines face a 50p tax to pay for the extension of super-fast broadband.

Verdict Winners

The Chancellor followed through with his "fairness" promise as far as low-income groups were concerned.

Pensioners

On the face of it, pensioners may seem one of the big winners from the pre-Budget report, as they have seen the state pension go up by 2.5 per cent – well above the rate of inflation. However, the 2.5 per cent is the bare minimum that the Government is allowed to raise the state pension by, according to its own rules. In money terms, though, 2.5 per cent may not seem that much. A full basic state pension will increase by £2.40 per week to £97.65. The full rate for a couple will increase by £3.85 per week to £156.15. And although the increase is above the current rate of inflation, it may not be for long. "With the Chancellor forecasting inflation to rise to 3 per cent next year, it is difficult to see how pensioners will benefit from the new pension rates," said Frank Nash, tax partner at London chartered accountants Blick Rothenberg.

What's more, those looking to leave an inheritance to their loved ones will find that the generous increase in the inheritance tax threshold (IHT) for next year – from £325,000 to £350,000 – has become a victim of the financial squeeze. As a result, at a time when property prices are rising again, the amount that people can leave free of IHT will be frozen. Accountancy firm KPMG has calculated that since 1997, the amount of property that can be left free of IHT has gone up by 51 per cent, but house prices have risen by 130 per cent on average.

Verdict Losers

Particularly if inflation does pick up next year and they have plans to leave property to their loved ones.

Family business

The small-business sector is having a rough ride in the recession. The Chancellor said his Pre-Budget Report was about supporting business. So a planned 1p rise in corporation tax for small businesses has been deferred until 2011. In addition, the Chancellor said the HM Revenue & Customs Business payment support service – which allows businesses in trouble to delay tax payments – will continue "for as long as necessary. The scheme has already been used by 160,000 businesses across the UK. But some suggest the scheme is not working as it should. "In some cases, we are already encountering resistance to these arrangements," said Tony Bernstein, a senior tax partner at the accountancy firm HW Fisher. "In practice, and whatever we may hear to the contrary, it is not universally available."

The Enterprise Finance Guarantee, which helps secure loans for small business, will also continue into 2010. But small business owners, as well as the self-employed, will have to pay higher national insurance contributions from April 2011. But, as Mr Bernstein points out, this could have been worse. "Smaller businesses have come out of this PBR relatively unscathed other than the 0.5 per cent increase in the NI, which doesn't come in until 2011."

But there were no moves to close loopholes used by business owners to avoid tax. "A lot of people were expecting some anti-avoidance on income-splitting and retaining earnings in companies, but this didn't materialise," Mr Berstein added. "So, take for example, husband and wife owning equal shares in a company: they can have income up to £100,000 each and still pay a maximum income tax rate of 40 per cent, compared with 50 per cent plus for a single individual earning £200,000 by themselves."

Verdict Winners

Help for small business stays in place as the economy struggles to climb out of recession.

Couple without children

Without the 1.5 per cent rise in child benefit to fall back on, childless couples not in receipt of tax credits will probably file this PBR report under "Bad, but could have been worse". Like everyone else, they will be hit by the rise in VAT to 17.5 per cent, national insurance contributions as well as the freezing of income tax personal allowances. If they want to move home, they will find that the stamp-duty holiday on property sold for under £175,000 ends in January and if they want to inherit the amount that can left free of inheritance tax will be frozen at £325,000. But, if they fancy a new boiler our couple can take advantage of the government's new scrappage scheme.

Verdict: Losers

Little cheer for couples, but the pain could have been worse.

Public sector

People working in the public sector have benefited from years of rising government spending and investment but now it seems it is payback time. For starters, public-sector pay increases are to be capped at 1 per cent for the next two years. Lucrative public sector pensions – which are guaranteed by the taxpayer – have also come under fire. Contributions from the state into public-sector pensions are to be capped from 2012. In addition, public servants who earn more than £100,000 will have to pay more into their pensions, the Chancellor announced. The Chancellor's plan to halve the amount the country has to borrow over the next five years is also bound to affect recruitment and pay rates within the public sector. Some savings were outlined by the Chancellor but the full scale of these cutbacks is not yet known and some will depend on the result of the next general election. From what the Chancellor laid out yesterday afternoon in the Common, it seems the party is well and truly over.

Verdict Losers

Workers in the public sector got a glimpse of the future, and it was not a bright one.

A working family of four

Working families have been at the centre of this Labour government's plans to reduce inequality and make work pay. Despite the horrific public sector deficit there is no sign that Labour is giving up on its much-cherished tax-credit system. The Chancellor announced an increase of £65 per annum in the child element of the Child Tax Credit – £20 above the rise in average earnings, and an increase of 1.5 per cent on all other benefits. Frank Nash, a tax partner at the accountancy firm Blick Rothenberg calculated: "A family with total household income of £25,000 will receive an increase in tax credits of approximately £205 a year."

What is more, families with children will win, due to the 1.5 per cent uprating in child benefit, which is above the present level of the retail price index.

But much of this extra cash paid in the form of tax credits and child benefit will be eaten by the freezing of personal income tax allowances. And the Chancellor's decision to ignore the calls of retailers to extend the lower rate of VAT into the New Year will hit family finances. From January VAT goes up to its old rate of 17.5 per cent from its present 15 per cent. But it could have been worse: the Chancellor has left alone zero VAT rating on certain items such as child's clothes and books, at least for the time being. Like all taxpayers, working families will have to pay an extra 1 per cent in national insurance from April 2011, which may, some suggest, mean that employers are less like to recruit and retain staff.

Verdict Winners

Families benefiting from tax credits will no doubt feel a bit better off, but those on a higher income will rue the decision to freeze income tax personal allowances.

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