Nothing but tough love from Darling

Published on 21st December 2009

With figures showing this years budget deficit now stands at an eye watering £180 billion, it came as no surprise that Alastair Darling had an air of the grim reaper about him in his pre-budget report last week. Planet Contractor investigates the impact of this year's PBR on our Contractor community.

The Chancellor has vowed to repay half of the current deficit within the next four years and the general focus of last weeks PBR was cutting expenditure both now and into the future whilst also maintaining efforts to lift the UK economy out of recession. This fiscal promise inevitably led to a collection of tax hikes and a declared £5bn cut in public spending which will gather momentum with further even more substantial cuts forecast to impact on almost every area of our lives, from transport to care for the elderly. In fact, it seems as if the only areas to survive ruthless budget cuts were a narrow definition of schools, hospitals and police spending.

Darling needs to be careful that businesses don't suffer too much as a result of his cutbacks as the country needs entrepreneurs and small businesses to survive and thrive in order to get us out of the current slump. It came as good news therefore, that the 'Time to Pay' enterprise scheme will be extended for as long as it is needed to help small businesses to pay their tax when they can, rather than being forced to cover a large bill in one go in the midst of the slump. Another positive for small and medium sized businesses is the news that the increase in corporation tax has been delayed.

Take from the rich to give to the...deficit?

Darling seems to be continuing in his Robin Hood approach to budgeting as he sticks by his plans to raise tax to 50% in April 2010 for those earning over £150,000 per year.

The Chancellor announced a tax on bonus payments for UK banks which means that if the an employee receives a bonus that exceeds the maximum allowance of £25,000 then the bank will face a one off tax of 50%. This is designed to deter the banks which are part owned by the tax payer from paying out large bonuses to their staff and any money recouped from this tax will be spent on initiatives to improve employment and training for under 24 year olds.

Darling likes to use the word 'fair' when describing his focus on higher earners to pay back the state budget deficit. He mentioned on several occasions his desire for a "fair" approach to taxation and that he would like those with "the broadest shoulders to bare the greatest burden". However, it remains to be seen if the extra income from all these tax hikes will go towards getting the economy back on track and training the next generation or if it will get lost in the system.

Taxes rise as confidence falls

One of the biggest shockers from the PBR is the 0.5% further increase in national insurance for employers, employees and the self employed from April 2011. This hike will apply to anyone earning over £20,000 per year and as such could represent a significant tax deduction for many Contractors.

The higher national insurance deductions make pension investment even more crucial for Contractors working via a PAYE umbrella or caught by IR35 via a one man limited company You can offset the higher NI deduction by investing more of your income into a pension. Any investment that you make is free from income tax and national insurance up to the annual allowance of £245k this year, so you could save a fortune in tax payments and make sure more of your money ends up in your hands rather than the tax mans. The only limit over and above the annual allowance applies if you earn over £130,000 when a pensions tax relief cap kicks in.

Thankfully, Darling has left the tax relief on pension's investment for anyone except the highest earners. This is a huge relief for the Contractor community as pensions continue to offer one of the few remaining tax breaks of any real size. The Chancellor has no doubt left pensions tax relief alone for the majority of savers in order to encourage people to invest towards their own retirement now that the state can so ill afford to cater for the ageing population in retirement whilst also trying to lower the current funding deficit.

VAT will revert back to 17.5% on January 1st 2010 against the wishes of retailers but at least it is not rising to 20% as was widely predicted in the run up to the PBR. The good news is that the new rate won't come into play until after Christmas so retailers should still benefit from the pre-Christmas rush but it remains to be seen if the higher tax will have a negative effect on consumer spending next year.

Later on in his report, Darling announced that Inheritance Tax allowances will remain frozen and not increase with the cost of living from the current £325,000. This is in stark contrast to the Tories who are aiming to abolish this tax altogether for most taxpayers and the Chancellor was therefore able to gain political capital at the expense of HM Opposition by stating that even given the dire need to raise revenue the Conservatives priorities were still wrongly focused on protecting inherited wealth. Under Labour any inheritance that is left above £245k will be charged at the rate of 40%.

The same freeze in allowances apply to the bands at which you fall into higher rate rate tax which will mean Contractors will pay 40% on a higher proportion of dividend and salary income.

Umbrellas/Dividends survive the storm

Umbrella companies have been seemingly under fire for a while now so it came as a welcome surprise that they escaped further scrutiny in the PBR. In isolation, various offshore tax planning vehicles will no doubt face renewed scrutiny in the year to come however.

Once again the scare stories that National Insurance would be applied to dividend income proved without foundation. Such a fundamental change to the tax regime would also have wide reaching consequences for investors and so its is very unlikely that this will never become a reality.

Two fat Chancellors......20

The other points raised in Darlings PBR ranged from initiatives to improve employment levels with help for under 24 years olds and over 50 year olds to get back to work and receive better training. Over 65 year olds will be given better access to working tax credits and students from lower income families will be offered greater support with internships whilst at and upon leaving University.

The stamp duty holiday that has helped many thousands of purchasers to get on to and move up the housing ladder will end on the 1st January but support for unemployed homeowners at risk of repossession has been extended for six months, offering extra support to help them keep their homes.

One utterly ridiculous announcement was to lower the bingo duty from 22% to 20%, although quite how Darling thinks this will bring the UK back from the depths of recession is anyone's guess.

It was certainly a mixed bag but it remains to be seen how the initiatives announced last week will impact on the economy. For Alistair Darling and the rest of his party, the balancing act now remains between cutting costs and losing votes.

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