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Pre-Budget Report 2009: Delaying the inevitable

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11th Dec 2009
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If you believe the chancellor’s Pre-Budget Report, we’re in a strong position to halve the staggering £178bn of public debt over the next four years. So strong, Alistair Darling has introduced a legal commitment for his successors to do so. Unfortunately, no-one in their right mind would want to take over as chancellor in 2010, writes Danny Cox, head of advice, Hargreaves Lansdown.

The Pre-Budget Report headlines are brief:

  • Bankers’ bonuses will effectively be capped at £25,000 this year
  • The income threshold for higher rate tax relief on pensions has fallen from £150,000 to £130,000
  • VAT will return to 17.5% from 1 January
  • National insurance will increase by 1% not 0.5% from April 2011
  • The state pension will rise by 2.5% (even though inflation is negative)
  • A scrappage scheme for old boilers is being introduced
  • Tax rebates for electric cars and wind turbines
  • Fall in bingo duty to 20% (from 22%)

Instead of making the tough decisions, Alistair Darling chose a political report, perhaps one designed to boost Labour’s  hopes of re-election in 2015, having dealt the next Government the worse economic hand in history. The inevitable sweeping cuts and tax rises have only been delayed, potentially making the situation far worse and harder for whoever inherits it.

Against this backdrop, take another look at your finances – batten down the hatches ready for the new wave of taxes. ISAs have become the absolute banker; the must have for savers and investors this Christmas. Sheltering investments from tax will ease your tax burden, potentially saving income tax and capital gains tax, both likely to increase in one form or another in the future.

Those under 75 should also consider the tax advantages of pensions. For basic rate tax payers, the tax relief alone boosts your initial investment by 25%, taking an £800 contribution up to £1,000. In this example, most higher rate taxpayers (those who earn under £130,000) could claim a further £200 in tax relief (an additional 20%) - but higher rate tax relief is probably not going to be around for much longer. Like ISAs, pensions such as a SIPP grow free from capital gains tax, meaning they grow faster than comparable taxed funds.

If you plan to make any capital gains, use your annual allowances – you can realise profits of up to £10,100 a year before you start to pay capital gains tax. This must be done before the end of the tax year. Finally, ensure you’re making best use of your personal allowances and tax rates, by investing in the name of the person who pays the least tax. This is based on our initial understanding of the changes announced, however experience has taught us that the finer details are often hidden in the small print released later, it is always subject to change. 

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