Julian Knight: Now we're all waiting for the tax man's call

Personal Finance
Click to follow
The Independent Online

For many, it will be hard to shed a tear for those earning more than £150,000 a year, and that is just what the Chancellor is banking on. The overriding message from the 2009 Budget is that the biggest public finance mess since the war will be sorted by clobbering the very well-off. The first aspect of this raid on the rich is the new 50p-in-the-pound income tax rate on earnings over £150,000 to come next April. This equates to the highest tax rate imposed on any UK taxpayer since Chancellor Nigel Lawson cut the top rate from 60p to 40p in the 1980s.

More bad news for those earning over £150,000 is that the amount of tax relief they currently receive on pensions contributions will be gradually whittled away from 40 to 20 per cent. Many of the details over how this will work are yet to be ironed out, but the bottom line is that the bumper retirement pots enjoyed by the likes of Sir Fred Goodwin are not going to receive as much state aid in the form of tax relief in future. But accountants Ernst & Young reckon what will happen as a result of the change is that high earners will pay less into their pensions, preferring instead to invest in other assets, most notably property. Long term, this could lead to another boom in buy-to-let property investment, as the wealthy back bricks and mortar over less-attractive pension saving.

Meanwhile, those on slightly less – £100,000 – had it confirmed that they will see their personal allowance, the amount of money they are allowed to earn before tax is due, just disappear. However, it won't just vanish once they earn over £100,000, gradually tapering away.

Lower down the income scale, the fallout from the mess of the public finances is yet to have an impact, partly because the Government wants us to keep spending in the shops and to drag the economy out of recession. Overall, there were plenty of winners as well the usual losers. Those who smoke or drink will see duty rise by 2 per cent, while car drivers will not welcome a 2p-per-litre rise in fuel duty from September.

Even more unwelcome for motorists was the Chancellor's pledge to raise petrol duty by 1p more than inflation over the next four years. This was a move that revives the infamous fuel-price escalator, abandoned after nationwide protests and blockades of oil refineries back in 2000.

The increases to the income tax personal allowances announced in the pre-Budget report go ahead as planned, as does the future rise in national insurance contributions. Working families, the wooing of whom has been a cornerstone of Labour economic policy, will see tax credit payments rise by £20 a year above inflation from April.

Parents with disabled children will receive a child trust fund top-up of £100 a year, or £200 in the case of severe disability. Those on pensions will have been pleased that the one-off enhanced winter fuel allowance payment worth £250 for over-60s and £400 for over-80s will carry on this year, despite all the big six energy firms cutting their bills of late.

Those relying on interest drawn from savings in retirement will also have been cheered by the decision to raise the amount of money which can be sheltered from tax in an individual savings account from £7,200 to £10,200. The new higher ISA limit will only be available to those over 50 this tax year and for everyone else from April 2010.

The alarm bells for all income groups should be sounding, though. The Chancellor's announcement that public borrowing will hit a staggering £175bn this year means that if tax pain hasn't arrived today it will do after the next general election. The idea that the rich can carry the burden doesn't stack up. The Institute for Fiscal Studies says that the new 50 per cent tax rate will raise millions rather than billions. For starters, higher-earners will be able to disguise income as a capital gain, or simply up sticks and leave the country. The only way that the chasm in public finances is going to close is through a combination of spending cuts and higher taxes – not just on the rich, but on nearly everyone.