Tax: Raft of changes to the tax regime

YESTERDAY'S Pre-Budget Report was defined by changes to Vat, income tax and National Insurance contributions.

A 2.5 per cent cut in Vat to 15 per cent will come into force on Monday and last until the end of next year, when it will revert to 17.5 per cent.

Ronnie Ludwig, a partner in Saffery Champness in Edinburgh, said the temporary decrease was welcome, but questioned the extent to which it would be implemented.

"The Chancellor was only able to 'encourage' retailers and other businesses to pass on the Vat savings to consumers.

"Consequently, although the cut will take effect next week, it is quite possible that the consumer will not see the benefit for some time."

From 2011, the top rate of income tax will climb to 45 per cent for those on £150,000 a year or more, while National Insurance contributions will go up by 0.5 per cent for workers and employers.

Elsewhere, the temporary tax benefit of £120 a year for basic rate taxpayers, introduced in May to compensate those who lost out when the 10p tax rate was abolished, is being made permanent and increased to £145 a year in April.

This is expected to benefit some 22 million basic rate taxpayers, but Carolyn Steppler, an associate partner at KPMG, said it still did not go far enough. "Having lost out to the tune of £223, the compensation now amounts to £148. So in a sense, the Chancellor still owes them £75 each."

It was confirmed that the basic state pension for the next tax year will rise to £95.25 a week, while pension credit rises to £130 a week, or £198 for couples.

The state pension increase will now be implemented in January, when pensioners will also receive a one-off payment in January of £60 each, on top of the customary £10 Christmas bonus.

"A one-off payment of £60 in the New Year is very welcome, as is the commitment to increase Pension Credit in line with inflation.

"But the extra benefit won't reach the millions of pensioners who are still missing out on the benefits they're entitled to," said Gordon Lishman, the director general of Age Concern.

Pensioners

ALL pensioners will receive a one-off payment of £60 in the New Year, in addition to what has become the normal £10 Christmas bonus.

Pension credit will rise from £124 to £130 a week (from £189 to £198 for couples), with the increase brought forward to January, while the basic state pension will rise to £95.25 a week, up from £90.70.

However, Teresa Perchard, director of policy at Citizens Advice, said more needs to be done to ensure pensioners benefit from the increases: "We are pleased the government has taken action to put more money in people's pockets this winter. But real improvements in encouraging take-up of benefits will be needed to ensure this money reaches those who need it most."

Joe Harris, general secretary of the National Pensioner's Convention, said: "Millions of people will get an increase next year of just £4.55 a week and no real extra help with growing fuel bills."

Child Benefit

CHILD benefit increases will be implemented in January rather than April. The benefit for the first child will increase from £18.80 a week to £20, while benefits for subsequent children will rise to £13.20 a week from £12.55.

The government has also said it will bring forward the increase in the child element of child tax credits by £25 above indexation from April 2010 to April next year – this means a rise of £75 above indexation to £3,235. But Kate Green, chief executive of Child Poverty Action Group. "New announcements for the poorest children will mean just £34.45 extra in 2009 for the oldest child in a family and £18.75 for younger children."

The Chancellor also announced that disabled children would receive a £70 payment in January next year.

VAT

ONE of the central tenets of the Pre-Budget Report was a cut in the Vat rate from 17.5 to 15 per cent, coming into effect on Monday. In a bid to offset this, the Chancellor announced rises in alcohol, tobacco and petrol duty. But Russell Hills, head of tax for KPMG in Scotland, said the Vat numbers did not add up. He said: "At an estimated cost of £12.5 billion, this is an expensive move and there is little chance of the Chancellor being able to fund it without paying dearly for it further down the line.

"Whether reducing prices by 2.5 per cent actually makes people spend remains to be seen."

Marc Welby, Vat partner at accountant BDO Stoy Hayward, said the reduction would save the average customer little more than £1 per week on a £100 supermarket shopping bill.

National Insurance

NATIONAL Insurance contributions will rise by 0.5 per cent from April 2011 for workers earning more than £20,000. The threshold will rise to be aligned with that of income tax.

Francesca Lagerberg, head of national tax at Grant Thornton, said: "Whilst these significant tax giveaways are hoped to have a quick impact on the economy, voters are likely to pay back these tax cuts soon after the next general election, not just hitting out at high-worth individuals but on low-income earners too."

From 2011, there will also be a top income tax rate of 45 per cent for those earning more than £150,000 a year. Russell Hills, head of tax for KPMG in Scotland, said: "It is a targeted measure that aims to use our higher earners as the oil to grease the wheels of the economy, albeit not until 2011, at which time he will also hit them with an increase in NI and from April 2010 with an effective reduction in their personal allowance."


THE PRE-BUDGET REPORT: FULL COVERAGE