Page last updated at 19:00 GMT, Monday, 24 November 2008

The breathing space budget

By Anne Redston
Professor of tax law at Kings College, London

Anne Redston
Some people who earn more than 150,000 a year will now enjoy a personal income tax rate of about 50%.
Anne Redston

Mr Darling has announced a raft of major changes to the tax system.

Most of them were well trailed in the national press, but the headlines hide an important distinction.

Most of the good news will last for but a short time; waiting in the wings are significant tax increases.

VAT is to be cut, but only for 13 months.

Mr Darling believes that "the recovery will be underway" by the time it goes back up to 17.5%.

This seems over-optimistic, given the recession's global reach.

Changes deferred

The planned increase in corporation tax for small business from 21% to 22% has been deferred, but only until 2010.

Businesses can now carry back losses up to 50,000 for three years instead of the normal one, but again, this extension is only for a year.

New legislation to prevent income being moved between spouses, which the government regarded as a big tax loophole, has also been put on the back burner.

But these temporary reliefs will vanish within just over a year, and instead we will see new structural changes to the system.

These include the 0.5% increase in national insurance from 2011 and a new top rate of tax for those earning over 150,000.

Those who earn over 140,000 will also lose all the benefit of their current basic personal allowances, while those earning between 100,000 and 140,000 will lose half of their personal allowance.

This tinkering will also create challenges for the already over-burdened PAYE system.

It is worth noting that some people who earn more than 150,000 a year will now enjoy a personal income tax rate of about 50%.


One welcome change is a more helpful attitude to those who are finding it difficult to pay business taxes, including VAT.

If you are already involved in court proceedings with HMRC, or if you have received a warning letter, you should get in touch without delay.

Unless your affairs are complicated, HMRC says that it should only take them 10 minutes to give you a decision as to whether they can be more flexible.

Help is also offered for those who are waiting for a VAT repayment, where this is causing cashflow problems.

Good news, too, for those who can benefit from the new Savings Gateway.

The government will top up your savings by 50%, which makes interest rates rather academic.

The maximum government payment is, however, capped at 300, but an estimated 8 million people will benefit.

A further reform is that, from April 2009, the tax relief on company cars will be based on their CO2 emissions, rather than, at present, on their cost.

For the most part, though, this is a breathing space budget, with welcome tax breaks in the short term, but more pain to come.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.

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