The eagerly awaited UK Pre-Budget Report (PBR) was less startling than many expected. Perhaps the most surprising aspect of Chancellor of the Exchequer, Alistair Darling?s speech was that the publ
The eagerly awaited UK Pre-Budget Report (PBR) was less startling than many expected. Perhaps the most surprising aspect of Chancellor of the Exchequer, Alistair Darling?s speech was that the public finances were in a worse state than previously predicted. With a maximum of six months to go before the next general election, who knows how much taxes will rise by thereafter to reduce the public debt?
On the economy, Darling reported the UK?s net debt will rise to 78% of gross domestic product (GDP) by financial year 2014/15. It is currently 56% of GDP. He increased his forecast for this year?s public sector net borrowing (PSNB) to ?178 billion, up from ?175 billion as forecast in April. The forecast for 2010/11 borrowing also rose by ?3 billion, to ?176 billion. For 2011/12 financial year, the PSNB stayed the same as April's forecast at ?140 billion, while for 2013/14 it was reduced to ?96 billion from ?97 billion.
The Chancellor said that the UK economy is expected to contract by 4.75% this year but, as he forecast in the April Budget, he expected a return to growth in the fourth quarter and a growth of between 1% and 1.5% next year. His Budget forecast of 3.5% growth in 2011 and 2012 remained unchanged.
Not for the first time, many economists believe that Darling?s figures on the economy are too optimistic. Economist Roger Bootle said the Chancellor?s growth forecasts look ?highly ambitious? and warned, “If, as I suspect, growth turns out to be much weaker (and I expect 1.5% in 2011 and 2% in 2012) then the borrowing numbers will be much higher. I forecast ?190 billion for next year and ?150 billion for the year after.?
With such a huge deficit, spending cuts and various methods to increase taxation are inevitable. The Chancellor didn?t say a great deal about spending cuts, while the tax hikes that were put in place are likely to increase with the next government ? no matter which it is – and become more painful over the next few years.
Higher earners, who had feared being hit further with another increased tax rate were penalised again, this time along with middle income earners. In fact, anyone earning over ?20,000 will suffer a tax rise, albeit in National Insurance rather than income tax.
National Insurance Contributions will increase by 0.5% from April 2011, this in addition to the 0.5% rise announced in the last Budget, though those earning under ?20,000 will be spared.
Personal allowances for 2010/11 have been frozen, as has the threshold level from 2012 for those paying the higher rate of tax at 40%. 70,000 taxpayers who earn just over ?40,000 are more likely to enter the 40% tax bracket as a result.
Ernst & Young?s, Chris Sanger said: “Normally the Chancellor would try to avoid raising taxes on employment, but the problem is that 50% of the tax base comes from income, and unless he taps this, he will never be able to repay the deficit. This is the first of many tax rises.”
In the April Budget Darling announced a reduction in pension tax relief for people with incomes over ?150,000. In the PBR he amended this, introducing a floor to include those with an income above ?130,000. This extension of the restrictions could affect as many as 150,000 people. UK taxpayers earning over ?150,000 have already been dealt an increase in tax to 50% from 6th April 2010.
The inheritance tax threshold will be frozen at ?325,000 for next year, rather than increasing to ?350,000 as previously planned. As a result more estates will fall into the inheritance tax net, with the measure expected to yield ?440 million for the government over three years. British expatriates are also affected, since UK domiciles living overseas are liable to UK inheritance tax on their worldwide assets, and non-domiciles on any UK assets.
Penalties for tax evasion doubled
The PBR also gave notice that the maximum penalty for offshore tax evasion will increase in 2011 to 200% of the unpaid tax. The penalty will effectively be split in two, with 100% due for not letting the tax authority, HM Revenue & Customs (HMRC) know about the money and a further 100% if the evasion was deliberate. There will also be a new requirement to tell HMRC about any offshore bank accounts opened in certain jurisdictions.
Supertax on bank bonuses
Darling slapped a 50% supertax on bank bonuses above ?25,000 to run for a year. The tax will be levied on the bank and is expected to raise ?550 billion. Anti-avoidance measures will be put in place to try and stop the banks escaping the tax.
President of Barclays, Bob Diamond, who had previously defended the banking industry, repeated his warnings that bankers and financial institutions were ?mobile? and that the need for a ?level playing field? was urgent.
In an article in the Wall Street Journal immediately following the PBR, UK prime minister, Gordon Brown, and France?s president, Nicolas Sarkozy, called for world leaders to impose a one-off tax on bankers' bonuses as a matter of priority. They wrote: ?We must ensure that through proper regulation, the financial sector operates on a level playing field globally. There is an urgent need for a new compact between global banks and the society they serve.''
The UK has a long way to go to climb out of the red. There may still be tax rises to come whichever party is in charge of the country?s finances after the general election. Other EU countries are introducing higher tax measures in the wake of the global economic crisis. If you would like to reduce the amount of tax that you pay, wherever you live, talk to a tax and wealth preservation specialist such as Blevins Franks. There are legitimate tax planning opportunities which can mitigate your tax liability and preserve your wealth for your future and for that of your heirs.
By Bill Blevins, Managing Director, Blevins Franks
10th December 2009