Darling Announces Pre-Budget Report

by Robert Lee, Tax-News.com, London

25 November 2008

As expected, UK Chancellor of the Exchequer, Alistair Darling, announced a temporary reduction in value-added tax to 15% on Monday afternoon, but a host of other tax breaks designed to support small businesses and low-income individuals through the economic downturn will be paid for through the creation of a new top tier of income tax.

Darling told the Commons during his pre-budget speech that the rate of VAT will be lowered by 2.5% with effect from December 1, 2008 to December 31, 2009. He also confirmed speculation that he would create a special 45% top rate of income tax for those with incomes of more than GBP150,000 from April 2011 and restrict the income tax personal allowance for those with incomes over GBP100,000 from April 2010.

For other taxpayers, the government will make permanent the GBP600 increase in the income tax personal allowance announced in May 2008 with a further increase of GBP130, meaning basic rate taxpayers pay GBP145 less tax a year in 2009-10. Darling said that the combined effect of all its reforms will mean that taxpayers with incomes below GBP40,000 will pay less tax and national insurance contributions in April 2011 compared to April 2008.

However, the employee, employer and self-employed rates of National Insurance Contributions will increase for all taxpayers by 0.5% from April 2011.

Measures to help businesses included:

• a new Small Business Finance Scheme to support up to GBP1 billion of bank lending, a separate GBP1 billion guarantee facility to support bank lending to small exporters, and a GBP50 million fund to convert businesses’ debt into equity, and a GBP25 million regional loan transition fund;
• a new HMRC Business Payment Support Service to allow businesses in temporary financial difficulty to pay their HMRC tax bills on a timetable they can afford;
• more generous tax relief for businesses now making losses;
• deferral of the increase in the small companies’ rate of corporation tax; and
• a package of reforms to the taxation of foreign profits, including the introduction of a foreign dividend exemption for large and medium-sized businesses, supported by a worldwide debt cap on interest.

Darling also announced that a number of planned tax reforms, including vehicle excise duty and air passenger duty will be modified.

To complement this attempt to stimulate the economy, Darling told the Commons that GBP3bn of public investment will be brought forward from 2010-11 to 2008-09 and 2009-10, the years when the impact of the economic shocks is predicted to be greatest. Government spending will grow on average for 2011-12 to 2013-14 at 1.2% a year in real terms, and public sector investment will move to 1.8% of GDP by 2013-14.

With its 'golden rule' on public spending now long discarded, Darling outlined a new temporary operating rule for fiscal policy thus: "to set policies to improve the cyclically-adjusted current budget each year, once the economy emerges from the downturn, so it reaches balance and debt is falling as a proportion of GDP once the global shocks have worked their way through the economy in full."

Recommended