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Budget 2008 - Potential Measures


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What Alistair Darling might have done to make your day or ruin it!

These are the key measures that had been expected by many commentators in the run-up to Budget 2008. Some were implemented, others ignored.

Security for mortgage borrowers

The Chancellor is on record as saying he wants to create a market for 25-year fixed home loans so house buyers can better protect themselves from the short-term movements in interest rates.

Nationwide is the only major high street provider to offer a 25 year fix. Its first product, launched last April, was pulled after five weeks because it was so popular. Other lenders to make these loans available include Kent Reliance and Norwich & Peterborough. Mr Darling will unveil how he plans to encourage lenders to offer these deals in his Budget.

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A better deal for savers

Nationwide Building Society has called on the Chancellor to do more to reform the individual savings account (ISA) system and to encourage children and parents to save. On ISAs Nationwide is calling for:

  • a withdrawal buffer that allows savers to make withdrawals and replenish their ISA within the same tax year this would particularly help people on lower incomes;
  • cash and stocks and shares ISA subscription limits to be equalised;
  • ISA subscription limits to be linked to inflation to ensure their true value is maintained.

Nationwide also thinks the Government can do more to encourage parents, friends and family to save for children whether they qualify for a Child Trust Fund (CTF) or not. The Society has called for:

  • the tax exemption thresholds for interest earned on savings for children by parents to be increased as Nationwide estimates that parents could be faced with a tax bill of £5,900 over 18 years;
  • a further Government contribution of £250 when a CTF child reaches the age of 11.

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Boosts for business

The Treasury is to consult on a new "gold standard" for covered bonds and mortgage-backed securities in order to head off instability in the housing market. Alistair Darling is due to report on the matter with his Budget. Mr Darling is hoping that, after consultation with lenders on the nature of the mortgages that will qualify, the scheme, which would kick-start the mortgage-backed securities market back into life, will come into being in the autumn.

The Chancellor has also indicated the Budget will include measures to encourage Dragon's Den-style "business angels" - wealthy investors who put money, either individually or as part of a syndicate, into start-up businesses with the potential for swift growth.

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The syntax of Sin Tax

There have been clear indications that Alistair Darling plans to increase the duty on alcoholic drinks as a measure to combat public disorder. It's also been said that the Chancellor will target "middle-class wine drinkers". The grounds for this is not that these are the people guilty of yobbery at 3am and the increased pressure on the police but that they are the ones who can afford to pay!

The speculation is that Chancellor Darling could be planning to put as much as £2.50 on spirits, £1 on a bottle of wine and 4p on a pint of beer.

John Wakely, a former managing director of investment bank Lehman Brothers who has been analysing the drinks market for more than 20 years and is now a strategic consultant, commented, "There is now an enormous amount of pressure from all political parties to tackle binge drinking and for the first time in my life I am hearing that the drinking age should be raised to 21.

"In a recession, when money is tight for Governments, they tend to raise money through so-called sin taxes."

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NI increase for high earners

The Chancellor will be casting around for ways to increase his tax income. MacIntyre Hudson predicts the Chancellor will raise the rate of National Insurance Contributions above the Upper Earnings Limit (£34,840) from 1% to 2%. He might also introduce higher supplementary rates for top earners, such as a 3% charge, on earnings above £100,000.

Nigel May, Tax Principal at MacIntyre Hudson, comments, "The chief attraction of this move is that it would only affect higher earners - those earning more than £670 a week - so would not ruffle the feathers of core Labour voters. Any move is likely to be deferred for a year, demonstrating the Chancellor has a strategy to tackle the budget deficit without further depressing the economy at this critical stage

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Limit tax relief on pensions

While the Chancellor will be keen to encourage everyone to pay into a pension, in order to minimise the number of people requiring benefits later in life, the new pension regime introduced on 'A-Day' in 2006 gives high earners tax relief on contributions of 100% of salary up to an annual maximum of £225,000.

The Chancellor may characterise the natural reaction of high earners in using this flexibility as an abuse of the system and limit this relief.

Reducing the annual limit on pension contributions would raise tax from high earners currently using their maximum entitlements. The Chancellor can argue that nobody making contributions at that level is likely to end up on state benefits in retirement, and so a lower limit would protect the states interests while minimising opposition, at least from traditional Labour voters.

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Going Green

Incentives for fitting solar panels or mini wind turbines to the roof may be on offer under proposals to be announced in the Budget. It is being suggested that those who generate their own renewable energy through the devices will be able to sell their surplus electricity to the National Grid, at a guaranteed price. The scheme, known as "feed-in tariffs", gives long-term financial security to home owners who install the expensive electricity-generating equipment. A similar scheme has already been highly successful in German - there are more solar panels in the German city of Freiburg than in the whole of Britain!

At the same time, the Chancellor, in search of revenue, could reintroduce a Car Purchase Tax under a new, greener incarnation, which would exempt greener cars and charge gas-guzzlers at a penal rate. It would be similar to the tax Norman Lamont abolished to help the car industry in the last recession in November 1992. He may also introduce a 3p tax on plastic bags.

Patrick King of Macintyre Hudson comments, "With the momentum behind green taxation and the facts that car prices have fallen significantly in real terms and there is no longer a substantial British car industry to protect, the reintroduction of Car Purchase Tax could be an attractive measure for a Chancellor in search of revenue. A tax on plastic bags would also demonstrate green credentials while raising revenue."

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Stamp Duty Land Tax increase

The dire state of the housing market may not be enough to make the Chancellor pause from looking here. An increase in the nil rate band threshold for Stamp Duty Land Tax from £125,000 to £150,000 is on the cards and could be accompanied by two new bands for stamp duty of 5% for property over £750,000 and 6% for property over £1 million.

Over the past decade, Stamp Duty Land Tax has proved to be Labou's golden goose, as rising property prices have pushed more transactions into the higher bands. Yet now both property prices and transactions are falling, threatening a serious loss of revenue. Faced with the Conservatives' popular plans to abolish Stamp Duty for first-time buyers of properties valued at up to £250,000, Mr Darling could introduce a similar crowd-pleasing measure at the lower end, whilst still seeking to milk the cow at the top of the market.

Budget 2007 introduced a rebate for eco-homes. However, it would appear that a grand total of six households have so far qualified, prompting accusations that the measure is a 'green tax con'.

The tiny number who have benefited from the eco-rebate is in stark contrast to the huge increase in the stamp duty haul on mainstream homebuyers. The Treasury raised a total of pounds £6.4 billion from stamp duty last year, 40% more than a year earlier. Stamp duty has been one of the most controversial 'stealth taxes' since Labour came to power and a serious burden on first-time buyers.

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Bringing forward corporate tax payments

Changes to corporation tax rates are already in the pipeline. Mr Darling may take the opportunity to adjust the payment regime for Corporation Tax, bringing companies with profits above £500,000 into the regime of quarterly instalments on account, helping the Government's cashflow.

At present, only companies with annual profits of more than £1.5 million are required to pay in quarterly instalments, while smaller companies pay the full amount nine months after their year end.

Adjusting the payment regime would not bring in more money in the long term, as payments are balanced out at the end of the year, but the move would bring in money to plug the budget gap in its year of introduction.

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Windfall tax on oil and gas

The high price of crude oil means the oil and gas industry is a likely target for a windfall tax to generate one-off revenue. However, the Chancellor will need to tread carefully to minimise the extent to which any increase in taxes is passed on to the consumer at the pump, as he is currently facing renewed calls to scrap the 2p increase in fuel duty due to come into effect on 1 April 2008.

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12 March 2008 © Moneyextra.com

 

Our senior editor Robin Amlôt recommends you should consider taking independent financial advice before acting on any article. Please contact us for help with your individual circumstances if any assistance is required.