In his 2009 Budget, Chancellor Alastair Darling has delivered one of the most important Budgets in years against a backdrop of rising unemployment, soaring government borrowing and quite possibly the hardest hitting recession since the Second World War. He predicted that economic growth will fall by 3.5 per cent over the year and said that government borrowing will hit a massive £175 billion.

The Chancellor also said that workers whose incomes exceed £100,000 next year will see their personal ‘tax-free’ allowance (£6,475), cut and tapered down to zero. A new tax rate of 50% will be imposed on all earnings over £150,000, with 42.5% on dividends replacing the 45% proposal but coming in a year earlier.

Taken with an announced grab on high earners’ pensions, whose tax relief will be capped at £51,000, raiding the rich should net the Treasury £7 billion a year from 2012. The measures, which break Gordon Brown’s 2005 pledge to not raise tax on top earners, are widely seen as populist for making the City pay for a meltdown it helped create.

In truth though, the government can’t tax their way out of trouble, because taking even more money out of the economy is the last thing we need. Taxing the rich certainly isn’t going to do it both because the amounts are a pittance and also because they’ll end up getting around higher taxes either by finding loopholes in the tax system, or simply moving abroad (thus reducing the tax-take from them to precisely NIL).

Come budget time, rightly labelled the Day Of Reckoning by the Conservative opposition, the government didn’t have a lot of wriggle room.

While I normally avoid making political comments on this blog, saving them instead for my forum posts, this is without doubt an ‘Old Labour’ budget, designed to rob the rich (those who make money for the country), with the intention of buying votes from the poor (to help Labour win another term in power).

But they also hit property investors, property developers and all entrepreneurs whose taxable income reaches those levels. While the proposals do not target property investors or developers specifically, many might be among their collateral along with thousands of other entrepreneurs.

If you have visions of avoiding that problem with tax-free draw-downs of equity (tricky at present for many investors as property values plummet!) then you should be aware of a new anti-avoidance measure that is being introduced that affects interest relief: Backdated to take effect from 19 March 2009, legislation will be introduced in the Finance Bill 2009 to block tax avoidance schemes that allow individuals to claim relief for interest payments that are used in avoidance arrangements that guarantee that the borrower will be able to make a profit as a result of the availability of the relief.

Now that may not specifically affect the manner in which you operate at present, but it does give HMRC another lever to prise with, and if they can’t get what they want from that then it’s fair to assume the next budget will help them further with more anti-avoidance measures.

With the then Chancellor, now Prime Minister, Gordon Brown breaking his 2005 election pledges to claw in more cash it’s fair to assume that the public finances are in a pretty-dire state and Old-Labour will do anything and everything in its power to extract money from its subjects.

Alastair Darling also pledged various support measures for business, including a credit guarantee scheme and a temporary 40 per cent capital allowance rate, and committed the government to a £1.7 billion job creation package (a small proportion of the £7 billion it is taking above, from the very people who may actually be able to create jobs if encouraged and motivated to do so).

Below is a summary of the more significant announcements.

Housing and Homeowners

The scheme to help people pay their mortgage interest when they lose their jobs is to be extended for six months.

The government is also to guarantee mortgage-backed securities in order to promote more mortgage lending.

The stamp duty holiday for homes worth up to £175,000 is to be extended to the end of the year.

Some £500 million (a mere £0.5 billion!) will go towards kick-starting housing projects that have stalled because of the credit crunch.

Savings (Individual Savings Accounts – ISAs)

The ISA limit is currently £7,200, of which £3,600 can be saved in a cash ISA with one provider.

The limit will be raised to £10,200, up to £5,100 of which can be saved in cash. The new limits will apply to people aged 50 or over in 2009/10, and for all ISA investors from 2010/11 onwards.

Raising the ISA limits for people aged 50 or over for 2009/10 will have effect on or after 6 October 2009, and for everybody else on or after 6 April 2010.

Businesses

To help companies with cashflow problems, the scheme that allows loss-making companies and unincorporated businesses to reclaim taxes on profits made in the last three years is extended to November 2010.

To help the car industry, a ‘scrappage scheme’ will be introduced next month giving drivers a £2,000 discount on new vehicles if they trade in cars which they have owned for more than 12 months and that are more than 10 years old. The scheme will run until March 2010.

There will be a temporary 40% first year allowance for expenditure in 2009/10 on plant and machinery normally allocated to the main capital allowance pool.

A new £750 million Strategic Investment Fund is to help emerging technologies and regionally important sectors. As with the job-creation package though, this is really just a drop in the ocean of what is needed.

Mileage Allowances

If you are using your car for business, then you may as well claim what is allowed. Do be careful to keep records in case of a challenge by HMRC though.

The approved maximum tax and national insurance free mileage allowances for employees using their own transport for business remains as follows:

Flat Rate          First 10,000 Miles          Over 10,000 miles
Car or van          40p                              25p
Motorcycle          24p                              24p
Bicycle               20p                              20p

Note that these allowances are ‘per employment’ so if you have a full-time job in addition to running your property business, even if your mileage exceeds the threshold in one employment you may still be able to claim the higher rate in the other.

I do wonder how many people cover over 10,000 miles in the course of business on their bicycles every year though!

Fuel, Alcohol & Tobacco

Contrasting with the fact that mileage allowances remain unchanged, fuel duty does not and will increase by 2p per litre in September and by 1p a litre above indexation (note that bit because it means more than 1p every year in practice) each April for the next four years.

The duty on alcohol rises by 2% from midnight on 22 April and on tobacco by 2% as from 6pm on 22 April.

Pensions: Limiting Tax Relief for High Income Individuals

I suspect that the majority of people reading this have already wised-up to the fact that property they control is a far better place to put their retirement pot, than a pension that the government controls and retrospectively changes the rules around at will. However, no balanced portfolio would be complete without some form of pension, so our budget review must also report what is changing here.

In simple terms, it’s back to Old-Labour that I started this post talking about: if you work hard and are successful, they are resentful and punish you for it!

The Government has announced its intention to restrict, to the basic rate of income tax, tax relief on pension contributions with effect from 6 April 2011 for people with taxable income of £150,000 or more. As from April 2009, pension contributions tax relief for those earning more than £150,000 will be cut so that it gradually reduces to 20%. This obviously runs concurrently with increases in the tax rate for those same individuals!

It will not be possible to increase pension contributions between now and 6 April 2011 to take advantage of the delay in restriction in the tax relief, if the following conditions are met, for an individual with an income of £150,000 or more who, on or after 22 April 2009:

  • Changes their normal pattern of regular pension contributions; or 
  • Changes the normal way in which their pension benefits are accrued; and 
  • Their total pension contributions/benefits accrued exceed £20,000 a year.

These anti-forestalling provisions will apply to both final salary and money purchase pension schemes on or after 22 April 2009. Individuals with income of less than £150,000 for the tax year, and both the preceding two tax years will not be affected. Neither will individuals with income of £150,000 or more between now and 6 April 2011, providing their existing pattern of making pension contributions does not change, and they do not make any additional contributions.

In cases where regular pension savings exceed £20,000, the new tax charge only applies to any pension savings made on or after 22 April 2009 in excess of regular savings. If the regular savings are less than £20,000, the tax charge only applies to any excess over £20,000. The tax charge restricts tax relief on the additional pension savings to the basic rate of income tax.

The Economy and Public Finances

Are in a dire state after 10+ years with Gordon Brown at the helm! Alastair Darling described the global downturn as the most serious for 60 years.

In the 1930s, a failure to act turned a serious downturn into a prolonged recession, but Mr Darling said the same mistakes will not be made again. He argued that the action already taken in the UK, and internationally, will help the economy to begin expanding again towards the end of the year.

It’s now obvious that the success of the financial services sector was built on a huge pile of unsustainable debt, underpinned largely by over-inflated house prices. When the sub-prime crisis kicked in and house prices started falling, firstly in the US then in the UK and most other western economies, the whole house of cards quickly and dramatically came tumbling down.

The success of the financial services industry masked the decline in other parts of the economy, particularly manufacturing and the oil and gas sectors. Now that we’re left with a financial sector being a mere fraction of its former self, and with little hope of it recovering to its former glory-days in the near future, the UK economy is stuffed.

Mr Darling said that measures taken to save the banking system and to promote lending are having an effect. But he conceded that, as an open economy, the UK has suffered through the collapse in demand around the world. Consequently, he cut his predictions for growth. He forecasted that the UK economy will shrink by 3.5% in 2009.

However, he predicted the economy would recover, growing by 1.25% in 2010 and by 3.5% in 2011 and future years. Of course, his predictions have been wrong before, so I wouldn’t personally “bet the farm” on anything that he says!

Consumer Price Index inflation is expected to fall, reaching 1% by the end of 2009. The Retail Prices Index will drop to -3% (that’s minus 3%) before moving back into positive territory next year.

The Chancellor said that the recession has seen a reduction in the government’s tax revenues and that tax income will require a number of years to recover.

Public borrowing will be £175 billion in 2009, the equivalent of 12.4 per cent of GDP, the most the UK government has ever borrowed in peacetime. In 2010/11 it will be £173 billion, then £140 billion, £118 billion and £97 billion in the following years.

UK net debt will rise to 59% of GDP this year, increasing to 68%, 74%, 78% and 79% in 2010/11 to 2013/14 before stabilising and then beginning to fall in 2015/16.

In short, we’re all in a huge mess and can expect to spend very many years bailing out the country from the problems this government has caused: after 12 years in power, they can no longer blame their predecessors!

Opinions & Quotes

The general consensus among the business community is that, while the 2009 Budget contained some useful measures, it did not do enough to tackle the problems facing both the economy and
individual firms.

Richard Lambert, Director General of the CBI:

“The Chancellor’s economic forecasts for next year and beyond look optimistic. On the fringes of this Budget, there are some worthwhile micro measures, including support for businesses struggling to access trade credit insurance. The changes on investment allowances and the ability for firms to carry forward losses are also welcome.”

Chas Roy-Chowdhury, Head of Taxation at the Association of Chartered Certified Accountants:

“If the Government wishes to make the fiscal stimulus work, then it needs to stop talking about tax increases. While tax rises have been brought forward in order to balance the books, it does nothing
to encourage spending.”

Michael Izza, Chief Executive of the Institute of Chartered Accountants in England and Wales:

“As we have seen with previous Budgets the challenge will be to ensure that businesses are able to take advantage of the new measures announced today with the minimum of delay.”

The bottom-line though is that we better all hope it all works out alright. We better hope all the budding entrepreneurs out there, ourselves included, can start up and grow successful businesses. We better hope a new sector rises from the ashes of this recession to take the place of the battered and bruised financial services industry.

Whatever happens, this government deserves its marching orders come the next general election, preferably before. It’s time for someone else to have a shot at it, and a new strategy. I would personally have more faith in a government where the vast majority of the cabinet had actually built successful businesses, from nothing, themselves. That is what we need to turn around the mess that Tony Blair (remember ‘Teflon Tony’?) and Gordon Brown have put us in.

In the shorter term though, from our perspective here at Summit, we foresee a time of great opportunity ahead for brave and shrewd investors. It’s just unfortunate that it results from gross economic mismanagement that shatters the hopes and dreams of so many hard-working people, who will suffer great financial, personal and emotional hardship as a result.

If you’ve got any views on the Budget let us know using the comment feature below.


Pension worries? Tired of the rat race? Click here for the solution!

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