The Chancellor's Pre-Budget Statement, Monday, 24th November 2008

Introduction

On Monday 24 November 2008 the Chancellor of the Exchequer, the Rt Hon Alistair Darling MP, delivered his Pre-Budget Report (“the Report”) to the House of Commons. Each year the Report provides a progress report on what has been achieved so far by the Government, gives an update of the state of the economy and public finances, and sets out the direction of Government policy in the run up to the spring Budget. However, this year’s Report proved to be radically different from those of previous years as it concentrated to a large degree on measures to help kick-start the economy and to assist both individuals and businesses in the present economic climate.

This summary of the Report is divided into the following sections:

The economy

This year’s Report is of special significance as it is set against a background of global recession. This section summarises the Chancellor’s assessment of the international and domestic economy.

This section of the summary explains what the Chancellor intends to do in relation to matters such as personal tax, National Insurance Contributions, mortgages, unemployment and assistance to be given to the young and old. Whilst a number of these measures are designed to provide financial assistance, others are intended to kick-start the economy by lowering prices and encourage spending, eg the reduction in the VAT rate.

Businesses

This section of the summary contains details of measures to assist businesses cope with the downturn in the economy, including direct and indirect financial assistance and tax relief.

The environment

The Chancellor stated that he was “determined that the present economic uncertainty does not push aside the importance of protecting the environment and our long-term needs for a greener and secure energy future”. This section includes details of measures to be taken by the Government in relation to these environmental matters.

Further details of the Chancellor’s Pre-Budget Report, including press releases, can be obtained from H M Treasury website at www.hm-treasury.gov.uk and H M Revenue & Customs website at www.hmrc.gov.uk.

Should readers of this summary require further information or advice in relation to the Pre-Budget Report, we would ask them to contact us.

The economy

The Chancellor commenced his Report by giving his assessment of the international economy. He stated that the present financial crisis began with the problems in the American sub-prime housing market which, in turn, spread through the entire global financial system. This caused a “disastrous tightening in credit” and undermined confidence. Dramatic falls in share prices followed, together with a substantial fall in the price of property in the United Kingdom and elsewhere.

At the same time, throughout the world, we were experiencing increases in the price of energy, food and commodities which caused inflation to soar and placed increased financial pressure on both individuals and businesses.

The Chancellor summarised the various actions taken by the Government to stabilise the situation, including measures to improve confidence in the banking system and the capitalisation of the banks by means of the Credit Guarantee Scheme.

The Chancellor also gave details of action to be taken in the future by both the United Kingdom Government and by other G20 countries. These include increasing the transparency of financial activities and better international supervision to prevent excessive risk taking by financial organisations.

The Chancellor went on to give his forecast for the public finances. He stated that because of the economic situation, tax revenues will undoubtedly fall. In the case of corporation tax this will be because companies will make less profit and, in the case of income tax because there will be a slower growth in wages. In addition, because fewer people are buying houses due to a shortage of mortgages and the fact that property prices are falling, the revenue from stamp duty will fall.

The Chancellor stated that because of the Government’s commitment to maintain spending this will mean that borrowings must necessarily increase and there will therefore be a sharp increase in national debt relative to GDP. Public sector borrowing is forecast to be £78 billion in 2008/09 rising to £118 billion in 2009/10.

The Chancellor forecast that GDP growth in the United Kingdom will continue to fall for the first two quarters of 2009 but then, because of decisions taken in the Pre-Budget Report, growth will start to recover. For 2009 GDP growth is forecast to be between -¾ and -1¼ per cent. For 2010 growth is forecast to be between 1½ and 2 per cent.

It is forecast that economic growth will increase more quickly from 2010/11 onwards and that public sector borrowing will be in the region of £54 billion in 2013/14. However, the Chancellor did not expect the Golden Rule to be met until 2015/16.

Inflation is forecast to reduce to ½ per cent by the end of 2009.

The Chancellor set out a number of measures that the Government will be taking “to support the economy and the people of this country”. These measures are summarised below.

Individuals

The Chancellor announced a number of fiscal measures to support individuals who were on modest or middle incomes.

In May of this year he announced an increase in the income tax personal allowance, for a period of one year (ie tax year 2008/09). This increase was intended to benefit basic rate taxpayers £120 a year and was introduced to assist those individuals affected by the abolition of the 10p tax rate.

The Chancellor announced that he was making this temporary tax cut permanent and would make a further increase of £130 above indexation from April next year (ie for the tax year 2009/10).

The Chancellor pointed out that those with the highest incomes have seen their earnings double since 1996 and he announced that he was to introduce two measures which would affect those on higher incomes.

• From April 2010, those earning between £100,000 and £140,000 will have reduced personal allowances so that they get the same benefit as basic rate taxpayers. Where an individual’s income is above the income limit of £100,000,the allowance will be reduced by £1 for every £2 above the income limit up to a maximum of one half of the basic personal allowance. Where an individual’s gross income is above £140,000, the amount of their allowance will be further reduced by £1 for every £2 above the income limit up to a maximum of the full amount of the basic personal allowance.

• From April 2011 a new rate of income tax of 45% will be introduced for those earning over £150,000. These individuals will also be taxed at a higher rate of 37.5 per cent on dividends. The dividend trust rate will be increased from 32.5 per cent to 37.5 per cent and the trust rate of tax will be increased from 40 per cent to 45 per cent.

Set out below are the income tax personal and age-related allowances for 2008/09 and 2009/10.

                                                                     2008/09             2009/10          Change

Personal allowance (age under 65)                      £6,035              £6,475            +£440

Personal allowance (age 65-74) (1)                      £9,030              £9,490            +£460

Personal allowance (age 75 and over) (1)              £9,180              £9,640            +£460

Married couple's allowance (age less than 75       £6,535              £6,865            +£330

and born before 6 April 1935) (1) (2)

Married couple's allowance (75 and over) (1) (2)     £6,625              £6,965            +£340

Married couple's allowance – minimum (2)            £2,540              £2,670            +£130

Income limit for age-related allowances                £21,800          £22,900           +£1,100

Blind person's allowance                                     £1,800               £1,890              +£90

(1)  These allowances reduce where the income is above the income limit by £1 for every £2 of income above the limit. They will never be less than the basic personal allowance or minimum amount of married couple’s allowance.

(2)  Tax relief for the married couple's allowance is given at the rate of 10 per cent.

The taxable bands for income tax are set out below.

                                             2008/09                      2009/10

Starting savings rate 10% *      £0 - 2,320                   £0 - £2,440

Basic rate: 20% *                    £0 - £34,800               £0 - £37,400

Higher rate: 40% *                   Over £34,800              Over £37,400

* There is a 10p starting rate for savings only. If an individual’s non savings taxable income exceeds the starting rate limit, the 10p starting rate for savings will not be available for savings income.

The pension scheme allowances are:

                                                2008/09                   2009/10                   Change

Annual allowance                         £235,000                 £245,000              +£10,000

Lifetime allowance                     £1,650,000              £1,750,000            +£100,000

From 6 April 2010 the lifetime allowance will increase to £1.8 million and the annual allowance to £255,000. The Chancellor also announced that he would hold the increased rates up to and including 2015/16.

National Insurance Contributions

The Chancellor stated that from April 2011 he proposed to increase by half a per cent all rates of National Insurance Contributions (NICs) for both employers and employees. Employees will pay Class 1 NICs at 11.5 per cent and at 1.5 per cent for earnings over the upper earnings limit. Employers will pay Class 1 NICs at 13.3 per cent. However, in order to assist those on modest incomes, the starting rate for National Insurance Contributions will be raised  to align it with the income tax personal allowance. This will mean that no one earning under £20,000 will pay more National Insurance Contributions in spite of the increase in rates. However, those earning in excess of £20,000 will be worse off.

Set out below are the National Insurance Contributions for 2008/09 and 2009/10.

2008/09                                              2009/10

Lower earnings limit, primary Class 1       £90 per week                                    £95 per week

Upper earnings limit, primary Class 1      £770 per week                                £844 per week

Primary threshold                                          £105 per week                                £110 per week

Secondary threshold                                     £105 per week                                 £110 per week

Employees’ primary Class 1 rate     11% of £105.01 to £ 770 p. w 11% of £110.01 to £844 p.w.
                                                                      1% above £770                                      1% above £844

Employees’ contracted-out rebate              1.6%                                                                1.6%

Married women’s reduced rate   4.85% of £105.01 to £770 p.w.   4.85% of £110.01 to £844 p.w.                                                                        1% above £770                                      1% above £844

Employers’ secondary Cl 1 rate      12.8% above £105 p.w.                  12.8% above £110 p.w.

Employers’ contracted-out rebate,                   3.7%                                                          3.7%

Salary-related schemes:

Employers’ contracted-out rebate,                1.4%                                                               1.4%

money-purchase schemes:

Class 2 rate                                               £2.30 per week                                       £2.40 per week

Class 2 small earnings exception         £4,825 per year                                       £5,075 per year

Special rate for  share fishermen          £2.95 per week                                     £3.05 per  week            

Special Class 2 rate for volunteer     £4.50 per week                            £4.75 per week    development workers                                      

Class 3 rate                                                          £8.10 per week                            £12.05 per week

Class 4 lower profits limit                                  £5,435 per year                              £5,715 per year

Class 4 upper profits limit                                 £40,040 per year                                                 £43,875 per year

Class 4 rate                                    8% of £5,435 to £40,040 p.a       8% of £5,715 to £43,875 p.a.   

                                                                       1% above £40,040                          1% above £43,875

Tobacco, alcohol and petrol duties

The Chancellor stated that the reduction in the rate of VAT (see below) lowers the amount paid on tobacco, alcohol and petrol. He therefore proposed to offset this reduction by increasing the duties on these items by an amount which would keep the overall cost to the consumer the same.

• The duty on alcoholic drinks will be increased by 8% with effect from Monday 1 December 2008.

• The duty on tobacco products will be increased by 4% with effect from 6pm on Monday 24 November 2008.

• The fuel duty rates for 2008 introduced in the Finance Act 2008 will be reinstated with effect from 1 December 2008.

The Chancellor announced that to assist motorists at this time, the previously announced new bands and rates of Vehicle Excise Duty  will now be phased in over a period and the increases in duty will be lower.

Savings

The Chancellor announced the setting up of the Saving Gateway to encourage those with modest incomes to save. From 2010 an individual on a low income who saves money through the Saving Gateway will have 50 pence added by the Government for every pound he or she saves.

Child Tax Credit

The two increases in Child Tax Credit previously announced by the Government and which were due to take effect next April and in 2010 will now both be introduced in April next year which will make the Tax Credit worth £2,235 for a family on a modest income.

The Government had already announced an increase in Child Benefit from £18.80 to £20 in April 2009. The Chancellor announced that this increase will now take place in January 2009 – 3 months earlier than previously proposed.

Pensioners

The Chancellor stated that he wanted to do more for pensioners.

The Pension Credit in to be increased from next April from £124 to £130 for individual pensioners and from £189 to £198 for pensioner couples.

State Pension

The Chancellor confirmed that the State Pension will increase in line with the highest rate of inflation this year. This will mean an increase in the basic State Pension for a single person from £90.70 to £95.25.

In addition to the winter fuel payment and the £10 Christmas bonus, in January next year every individual pensioner will receive a one-off payment of £60. Married couples will receive £120. The one-off payment, together with the Christmas bonus, will also be paid to children with disabilities.

Mortgages

The Chancellor stated that he wanted to take steps to improve the supply of mortgages.

Repossessions

The Chancellor stated that the repossession of a house by a lender should be the last resort and he confirmed that this has been recognised by lenders. He announced that the major lenders had agreed to wait for at least three months after a borrower had fallen into arrears with his or her repayments before initiating repossession proceedings. This period would help give lenders and borrowers time to find a solution.

The Chancellor announced funding of £15 million for free and impartial debt advice which would be available to everyone.

The Chancellor also announced an increase of £100,000 to the upper limit of the Support for Mortgage Interest Scheme.

The Government is to extend the Mortgage Rescue Scheme which assists vulnerable homeowners who are facing difficulties in staying in their homes. The scheme will now cover those who are at risk through taking out a second mortgage.

New homes

The Chancellor announced an acceleration of capital spending for new social rented homes and shared equity schemes. An additional £775 million this year and again next year will be available to invest in new and modernised social homes and in regeneration projects.

 

Unemployment

The Chancellor recognised that, as the economy slows, it is crucial that the impact on employment is minimised. He announced the expansion of the Rapid Response Service which provides support for those facing redundancy. In addition, more pre-redundancy re-training will be provided through the Train to Gain initiative.

The Chancellor also announced the creation of the National Employment Partnership, to be chaired by the Prime Minister, which will help fill over half a million unfilled vacancies.

Businesses

Value added tax

The Chancellor stated that to prevent the recession deepening it was necessary to put money into the economy. He concluded that the “best and fairest” approach was to cut VAT from 17.5 per cent to 15 per cent for a period of 13 months commencing on Monday 1 December. He stressed that this was to be a temporary reduction in the rate which would revert to 17.5 per cent on 1 January 2010 when the economic recovery was underway.

The reduction in the VAT rate is designed to stimulate retail spending and for this reason the Chancellor asked retailers to pass on the reduced rate as quickly as possible.

The Chancellor has given businesses very little time to implement the new VAT rate and all invoices issued after 1 December 2008 should use the new rate. There is an exception if the business provided the goods or service more than 14 days before the issue of the VAT invoice or the invoice was paid before 1 December 2008.

The threshold above which retailers cannot use a published VAT retail scheme is to be increased from £100 million to £130 million.

 

Corporation tax

The planned increase in the Small Companies Rate from 21% to 22% from 1 April 2009 has been deferred until 1 April 2010.

The loss carry back rules are to be extended, for Corporation Tax accounts ending between 24 November 2008 and 23 November 2009 and Income Tax accounts ending in 2008/09, by allowing the loss carry back for three years (previously one year). The amount that can be carried back to the previous year remains unlimited but there is a maximum carry back of £50,000 in total to the earlier two years.

Additional measures

The Chancellor stated that “small and medium firms are the engine of our economy” and that they employ around 60 per cent of the private sector workforce. He acknowledged that in today’s economic climate these businesses are facing difficulties in relation to cash flow and credit.

• The introduction in 2009 of an exemption for foreign dividends for large and medium-sized businesses.

• The improvement of UK rules for taxing Controlled Foreign Companies.

• A temporary increase for small businesses in the threshold for empty property relief. For the year 2009/10, empty commercial properties with a ratable value below £15,000 will be exempt from business rates. In addition, in order to reduce the cash flow impact on businesses, the Government will legislate to give more time to pay certain backdated business rates bills issued before 31 March 2010. Businesses having to pay these bills will be able to pay their liability for previous years in equal interest-free installments over 8 years, rather than immediately.

• Assistance to small businesses who need time to pay their tax bills. H M Revenue & Customs, through a new, dedicated Business Support Service will provide specific help to businesses to enable them to spread payment of their taxes on an agreed timetable that the business can afford. This will include corporation tax, income tax, national insurance and VAT.

• The monitoring by the Government of commitments given by banks to treat their business customers fairly and decently. In particular, those banks that have received Government funding should maintain the availability of lending to small and medium-sized businesses at 2007 levels and not increase overdraft prices for at least one year, in line with the commitment given by the Royal Bank of Scotland.

• Improving access to finance for small and medium-sized businesses by means of loans from banks that have received funds from the European Investment Bank and through credit provided by the Government through the temporary Small Business Finance Scheme.

• In 2009 the Government, through Business Link, will launch a new portal for credit-worthy small and medium-sized businesses who are having problems accessing credit.

• Additional support, through the Export Credit Guarantee Scheme, for smaller companies that export.

Income shifting

Some individuals are able to benefit financially from shifting part of their income to someone else who is subject to a lower rate of tax. This procedure is known as income shifting. It was thought that the Government would introduce measures to prevent this practice in the 2009 Finance Bill. However, because of the current economic challenges, the Government is deferring action but will instead keep this issue under review.

Capital allowances for business cars

The Chancellor confirmed that the Government is to modernise the tax relief for business expenditure on cars. The existing arrangements will be replaced by an emissions based approach and will take effect from 1 April 2009 for corporation tax and 6 April 2009 for income tax.

The environment

The Chancellor announced a number of specific measures to help protect the environment.

 

Air Passenger Duty

Air Passenger Duty rates are to be changed to a four-band system so that those who travel further pay more.

The new Air Passenger Duty rate changes will take effect from 1 November 2009 and from 1 November 2010.

Band and distance of capital city of destination country in miles from the UK

In the lowest class of travel (reduced rate)

In other than the lowest class of travel (standard rate)

	2009/10	2010/11	2009/10	2010/11
Band A (0 - 2000)	£11	£12	£22	£24
Band B (2001 – 4000)	£45	£60	£90	£120
Band C (4001 – 6000)	£50	£75	£100	£150
Band D (over 6000)	£55	£85	£110	£170

Aviation emissions

The Chancellor announced that the Government had successfully secured inclusion of aviation in the EU Emissions Trading Scheme from 2012.

 

House insulation

The Government is to provide an additional £100 million in new money and bring forward a further £50 million to help up to 60,000 more householders insulate their homes.

Energy prices

Ofgem is to monitor any price changes in the cost of energy and is to publish quarterly reports detailing the link between wholesale and retail energy prices. This measure is intended to ensure that the fall in price of wholesale energy is reflected more quickly in reduced household bills. The Chancellor also stated that the Government would use statutory powers to end unfair gaps in pricing between payment methods.

 

            Support for low carbon growth

The Government will support low-carbon growth and jobs by accelerating £535 million of capital spending on energy efficiency, rail transport, and adaptation measures.

 

Fuel increase

Pump prices have fallen by over 20 pence per litre from their summer peaks. The Government will therefore go ahead with the postponed two pence per litre fuel increase on 1 December 2008. However, due to the reduction in the VAT rate, motorists should see no increase in the price they pay at the pump this year.

 

 

 

 

 

 

 

 

 The Chancellor announced the following measures to assist such businesses:

 

Only standard-rated sales are affected. There are no changes to sales that are zero-rated or reduced-rated for VAT. There are no changes to the VAT exemptions.

 

 

 

The Chancellor announced his intention to set up a new body, the Lending Panel, which will monitor lending to businesses and households.

Following measures taken to recapitalise the banks, the Government considers it important that these banks maintain the availability of mortgages. In addition, the Government intends to support the mortgage market by providing a temporary guarantee for securities backed by new mortgages.

 

One-off payment

 

 

Pension Credit

 

Child Benefit

 

 

 

In 2009, duty rates for all cars will increase by a maximum of £5. From 2010 the more polluting cars will see an increase of up to £30 compared with the previous proposal of up to £90. Less polluting cars will see no increases or a reduction of up to £30.

 Vehicle Excise Duty

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax

 

Individuals