This article is taken from Merryn Somerset Webb’s free weekly personal finance email, Money Sense. Click here to sign up now: Money Sense
If you are a, “non-drinking, non-smoking pensioner who carries a wicker basket to the shops” as the FT’s Matthew Vincent put it, then you escaped last week’s budget relatively unscathed. Otherwise there were winners and losers as usual although overall it was a pretty grey affair.
Headline grabbing tax giveaways are ruled out by the parlous state of public finances, and Alistair Darling is already committed to a string of tax tweaks announced by his predecessor, Gordon Brown.
‘Sinners’ pay the price
First off the relaxing end-of-week drink will soon be dearer – a pint of beer will cost 4p more from 6th April, a bottle of wine goes up 14p and a bottle of spirits 55p. Smokers, just recovering from the smoking ban, will now also pay 11p more for a packet of cigarettes. Described by some as a justified assault on “sinners”, these measures won’t actually change anything – a binge drinker for example won’t suddenly go teetotal to save 4p a pint – they just put more unwelcome pressure on household budgets that are already reeling from higher food and energy prices.
Then there were some piecemeal “green” measures. In future, supermarkets will be charging us more for carrier bags to take ever-more expensive food home in, whilst getting to and from the supermarket will get pricier for many. That’s because motorists, already struggling with steep petrol price rises as oil flirts with $110 a barrel, will pay extra in vehicle excise duty (based on carbon emissions).
Sure, more tax on polluting vehicles could in theory help the environment, but these measures are really about raising money for the Treasury – after all the extra £950 also proposed on the already hefty purchase price of a typical gas guzzler from 2010 seems unlikely to persuade wealthy buyers to start taking the bus instead.
Will you pay more or less tax?
Tinkering with income tax, personal allowances and national insurance was something of an obsession for Gordon Brown and many of his parting shots as Chancellor from last year’s budget kick in from 6th April too. Ironically for a Labour government, the Independent reckons that up to 1.8 million lower paid workers earning between £6,500 and £15,000 could soon be paying an effective tax rate of up to 70%, thanks to the imminent scrapping of the 10% lower rate on the first £2,230 of income above the tax-free personal allowance of £5,225.
The news is better for those on higher incomes who will benefit slightly from the reduction in the basic rate from 22% to 20% however this win is somewhat diluted by a similar reduction in the tax relief on personal pension contributions.
For those lucky enough to be higher rate taxpayers the increase in the highest income tax threshold to £43,000 from April 2009 is welcome, although largely offset by the widening of national insurance bands. Overall, no revolution then. However, “rules that were already complex have been made even more complicated” as Andrew Tailby-Faulkes, an Ernst and Young tax partner puts it.
So who are the biggest winners?
So were there any real winners this time? A few, but none will be cracking the bubbly from 6th April. For savers, the annual ISA allowance, which has failed to keep pace with inflation since its birth in 1999, creeps up by £200 to £7,200. (For more on what to do with your ISA allowance, see ISAs: a good way to keep the taxman at bay.)
However given that the top rate of capital gains tax also comes down this April from 40% to 18%, the tax benefit of the shares component will be significantly reduced. Outside of an ISA this rate reduction is something of a mixed blessing for many who will see taper relief on longstanding gains disappear at the same time.
Pensioners, for whom sharply rising fuel bills are particularly painful if they spend quite a bit of time at home, should be a little happier after receiving an extra £50 a year while those over 80 get £100. However, these were the first such increases in 8 years and, “won’t cut the mustard in the battle against fuel poverty” as Paul Bates of Help the Aged commented.
Meanwhile certain key workers such as teachers and nurses will be entitled to a loan of up to 50%, rather than 25%, of the purchase price of a new property under the government’s Homebuy initiative. Trouble is, now hardly looks like an ideal time to enter the housing market and there were no changes to the stamp duty rules that currently saddle about 60% of all first time buyers with an unwelcome tax bill.
Perhaps the biggest winners were poor parents who qualify for child tax credits – an extra £50 is available, but not until April 2009, plus child benefit will be excluded from means-testing for housing benefit and council tax. Taken together these measures could save the right claimants up to £884 per year say accountants Blick Rothenberg.
Darling did manage to dream up one bona fide new initiative – the Savings Gateway. This will see the government match the monthly savings contributions of those on low incomes by up to £25 a month. Leaving aside doubts about whether our lowest earners can afford to save anything just now, the amount is hardly life changing and won’t be available until 2010.
Finally Darling decided not to give in after a long running feud with wealthy overseas individuals who chose to work here – the so-called, “non-doms” – and stuck with his planned £30,000 charge for those who hang around in the UK for more than seven years.
Overall then, most of us come away from Darling’s first budget facing a series of largely inconsequential tax tweaks that make already difficult economic times just a little grimmer. So visit our personal finance pages to find out how to get your finances into shape now.