Budget 2009: Income tax cuts or hikes?
Wednesday, 08 April 2009 08:09
Alistair Darling may well be boxed in at this year's Budget, but some changes to tax levels could leave some better off and some facing a tax hike.
In the pre-Budget report last year, the chancellor brought in tax cuts - which should be hitting pay packets from this week - but the short term gains have to be paid for in the long term.
"I think the chancellor will be talking about savings. The public finances are in a dreadful state," said Martin Weale, from the National Institute of Economic and Social Research (NEISR).
So while no tax cuts or rises in the short-term are forecast, Mr Weale predicted further tax increases could come.
"National Insurance could go up and income tax could go up, but it would be difficult," he said.
"There will be tax increases."
He added: "He will also be talking about limiting growth in public spending."
From this week, the Personal Allowance is being increased from £6,035 to £6,475 - which was in part brought in to act as compensation for those who lost out with the abolition of the 10p tax band, but the government now represents it as a boost to the economy.
The earnings limit for National Insurance was raised also to £110 a week, meaning a person on average earnings would be £119 a year better off.
However, National Insurance contributions will rise by 0.5 per cent from April 2011.
The upshot of all these changes along with changes to tax credit thresholds is those on lower incomes may be worse off.
Francesca Lagerberg, head of tax at Grant Thornton, said: "As well as not being aligned, all of these figures are much lower than someone working 37.5 hours a week on the minimum wage would earn and it seems preposterous that the minimum wage suffers a tax liability."
Personal allowances for higher income earners are also set to be raised.
With most of the future tax rises already in the pipeline, Mr Darling seems to have little room to manoeuvre.
Ms Lagerberg, is calling for changes to simply the complex system.
"Not only will people be keen to undertake planning, for example by making pension contributions to ensure that their income does not fall within one of these narrow bands, it will also prove an administrative headache as PAYE coding notices will simply not be able to cope with this mechanism of withdrawal," she said.
"Given the amount of lobbying that has been happening on this point, we hope that the chancellor will come up with a sensible alternative at the time of the Budget."
The Chartered Institute of Taxation (CIOT) is calling for a moratorium on further major changes to the tax system - pushing the idea in turbulent economic times, it is better to consolidate and complete what is in hand and not introduce new measures.
Nick Goulding, CIOT president, said: "At a time when business and individuals are facing very challenging financial circumstances, they need stability.
"Part of achieving that is to ensure there is certainty and that the government works towards a simpler and fairer tax system.
"A less complex, and therefore simpler, system would be one way to make things easier for the taxpayer."
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