Pre-budget report: tax on wealthy
Updated on 09 December 2009
Taxes up, wages capped but paying down the deficit? The chancellor's pre-budget report does not say how. Gary Gibbon reports.
This could be government's last will and testament on financial plans before the next election. Today's pre-budget statement from the chancellor strong on tax rises - National insurance now to be increased by a full one per cent in two years time.
Public sector wage increases will be capped. Then after that the 40 per cent income tax threshold will be frozen.
Spending on overseas development, on front line health and education services and on the police is to be protected, all this leaving huge cuts in prospect for everything else.
As to how it is to be done - we do not yet know. So millions of workers are to pay the price of the financial crisis: a political gamble for the chancellor as he announced that National Insurance will go up - and public sector pay will be squeezed - to boost growth without putting Britain's economic recovery at risk.
In his last pre-budget report before the general election, Alistair Darling promised to protect front line public services, but warned there will be pain to come.
National insurance will go up half a percentage point in 2011 - that is on top of the point five per cent already announced.
Public sector pay rises will be capped to one for two years from 2011, while the 40 per cent income tax threshold will be frozen the following year - hitting anyone earning over £43,000.
There will also be a one off 50 per cent tax on banks on bonuses higher than £25,000. Public sector unions are furious - and the Conservatives said every family in the country would be left paying for the government's mistakes.
Other measures
A scrappage scheme that will pay people £400 to replace old boilers with new ones has been announced in Chancellor Alistair Darling's pre-budget report.
"Each inefficient boiler adds over £200 to household bills and one tonne of carbon to the atmosphere," he said.
From April, some £200m would be added to help with energy efficiency to cut carbon emissions from homes, he said.
Mr Darling was able to give Labour MPs something to cheer about with the announcement of a 2.5 per cent increase in the state pension next year - and there was laughter when he followed it with a cut in bingo duty.
A 1.5 per cent rise in child and disability benefit kicks in April.
The chancellor also announced that contributions from the state to the pensions of teachers, local government and health workers and civil servants would be also capped.
The senior civil service pay bill would be cut by up to £100m over three years with any new government appointment over £150,000 and all bonuses over £50,000 requiring Treasury approval.
Plus In a footnote, it says that the Foreign Office will have to cut its perks for overseas diplomats by £13m.
A tax on the wealthy?
Government plans for a windfall tax on bank bonuses, branded as "populist" today by City figures, are one of several new tax measures on the rich.
Chancellor Alistair Darling said he wanted to "claw back" a chunk of the rewards paid to bank staff this year, but his pre-budget report was met with dismay by industry figures who said the country could suffer an exodus of financial firms.
The one-off measure - aimed at all UK investment and retail banks, building societies and UK subsidiaries of overseas banks - will target discretionary bonuses above £25,000 with a 50 per cent tax rate.
It will be payable by the institution, although top earners will also continue to pay the highest tax rate. Mr Darling said some banks were expected to rein in their bonuses this year as a result, but the scheme is nevertheless expected to bring in around £550m.
After the announcement the CBI business group warned: "The threat of an exodus of talent is real."
Director general Richard Lambert said: "A headline-grabbing tax on bankers' bonuses may have populist appeal, but the government needs to take care not to put the UK's financial services sector at a comparative disadvantage internationally."
The British Bankers' Association said the tax should be viewed from the perspective of existing agreements on remuneration. Chief executive Angela Knight said UK banks had already agreed to defer bonuses or pay them in shares rather than cash.
"Viewed from abroad, those foreign banks which reward their UK staff with contractually-agreed bonuses are likely to be the hardest hit," she said.
"London may well look to them now like a significantly less attractive place to build a business."
She added that only internationally agreed commitments, applied across the world, would succeed in reforming remuneration.
Others also spoke out with concerns over the position of the City of London in the wake of the measures. Colin Stanbridge, chief executive of The London Chamber of Commerce and Industry (LCCI), said the bonus tax, along with the government's 50p tax on higher earners, would "undoubtedly damage London's standing as a financial centre.
Main points of today's pre-budget report:
Tax
- A one-off 50 per cent levy on any banking bonus above £25,000 before April 5 2010, raising £550m to get unemployed into work.
- Planned 0.5 per cent increase in National Insurance contributions doubled to 1 per cent, meaning from 2011/12 employees will pay 12 per cent and employers 13.8 per cent - starting point for NI to be raised so those earning £20,000 will pay no more than at present.
- Plan to increase inheritance tax threshold to £350,000 scrapped for next year. Threshold will be frozen at £325,000 in 2010.
- Thousands more workers to be brought into 40 per cent income tax band by a one-year freeze on the threshold of around £43,000.
- Temporary 2.5 per cent cut in VAT to end on 1 January, with the sales tax returning to 17.5 per cent.
- Planned 1 per cent increase in small companies' corporation tax deferred for one year, leaving the tax at 21 per cent until 2011/12, when it will increase to 22 per cent.
- Bingo duty cut from 22 per cent to 20 per cent in the spring.
- 50p-a-month duty on landlines to pay for 90 per cent superfast broadband coverage by 2017.
- No Spending Review to be held.
- Basic state pension to rise by 2.5 per cent in April. Other inflation-linked benefits to rise by 1.5 per cent.
- State spending growth to be held to an average 0.8 per cent annually from 2011 to 2015, meaning cuts to some budgets and the scrapping of some programmes.
- Public sector pay bill to be cut by £100m over three years. All new appointments worth £150,000 and bonuses over £50,000 to require Treasury approval.
- Public sector pay rises - outside the armed forces - to be capped at one per cent for two years from 2011.
- Spending on frontline NHS and schools to be protected for two years from 2011.
- Savings of £5bn on IT projects, legal aid and prisons.
- Cap on state contributions to public sector pensions, saving £1bn a year from 2012.
- Extra £2.5bn for Afghanistan military mission next year.
- Extension of scheme allowing firms to spread tax payments and tax exemption for empty properties.
- Further year's extension of Enterprise Finance Guarantee scheme, guaranteeing a further £500m of small business loans.
- Six-month extension of mortgage interest support for unemployed.
- Guaranteed education or training for 16- and 17-year-olds leaving school in September 2010.
- Financial support for 10,000 internships in industry and professions for undergraduates from poor backgrounds.
- Cut from 12 to six months in period of unemployment before under-24s are entitled to guaranteed work or training.
- Free school meals extended to 500,000 primary children.
- Government to finance four carbon capture and storage projects.
- Extra £200m for household energy efficiency.
- Scrappage scheme to replace 125,000 home boilers.
- Tax-free payments for power sent to National Grid from home turbines and solar panels.
- Electric cars to be exempt from company car tax for five years.