Wednesday, 24 March 2010

Budget 2010: Alistair Darling to Freeze Income Bands in 'Stealth Tax'

The Chancellor has decided to freeze all income tax bands, which will lead people to pay more tax on their earnings.

The tactic is being described as a classic 'stealth tax' by the Daily Telegraph and will be far larger than previously attempted. Personal allowances were last frozen almost a decade ago.

Every higher-rate taxpayer earning more than £43,875 will pay an additional £489 in tax as a result of the move, and 75,000 more people will pay this higher-rate tax for the first time.

The level at which inheritance tax becomes payable will also be frozen.

The moves are expected to be confirmed in the small print of the Budget and the rates will apply from next month.

The income tax grab comes on top of the new 50p higher rate of income tax which will come into effect next month for those earning more than £150,000.

Mr. Darling will also remove tax breaks for those earning more than £100,000. The targeting of people earning more than £100,000 is expected to raise an additional £1.2 billion.

Mr. Darling is also expected to confirm that Government borrowing is on course to total more than £1 trillion over the next few years following the 'extraordinary' actions taken to tackle the financial crisis. But speaking to Parliament at 12:30 this afternoon, he will refuse to sanction any immediate cuts to public spending, warning that it may endanger the recovery.

The Chancellor, who may have to cross a picket line of striking civil servants in order to deliver his third Budget, will today deliver what he promises will be a 'sensible, workmanlike' package of financial measures.

Mr. Darling is still expected to unveil billions of pounds in new public spending. He will announce that £1 billion of taxpayers’ money will be used for a new green investment fund. Extra money will also be earmarked to help the long-term unemployed. Schools are also set to be given extra funding.

The extra spending will be paid from the extra tax take. Government borrowing is also expected to be about £10 billion less than expected which has given Mr. Darling some room for manoeuvre.

Among the measures he is expected to announce is a new drive to stop tax evasion; a move to force banks to offer bank accounts to anyone who wants one in an effort to help those who see it as a barrier to employment; and he will update MPs on how far he has progressed to get international agreement on a global bank levy.

But discussions are still taking place over whether Mr Darling could afford to halt a planned 3p rise in fuel duty. If he does go ahead with it will mean motorists will have to pay even higher pump prices at a time when they are already heading through the 120p a litre barrier because of soaring oil prices.

There is also likely to be bad news for drinkers with a planned 5% increase on all wine and spirits.

Mr Darling is expected to revise down slightly the borrowing figures and will use it as a sign that the worst for the economy is over and that a feared 'double-dip' recession will not happen.

In a statement last night the Chancellor could not resist a barbed comment directed at Prime Minister Gordon Brown. Mr. Darling said Britain had come
"through what had been the most difficult circumstances for well in excess of 60 years."
When the Chancellor stated in the autumn of 2008 that the crisis would be the worst for 60 years he was attacked by Number 10. Last month, in an uncharacteristic intervention that lifted the lid on tensions between him and Mr. Brown, he admitted 'the forces of hell' had been unleashed on him by the Prime Minister’s advisers.

Mr. Darling attempted last year to play down the impact of freezing tax allowances as inflation was actually negative. However, inflation has now begun rising sharply which means the freezing of the tax bands is set to become a major financial issue. Inflation is currently running at three percent.

All of the main income tax bands will be frozen for the next year – including the tax-free allowance and the level at which higher-rate tax becomes payable.

This so-called 'fiscal drag' means that people pay proportionately more tax on their earnings, after receiving a pay rise. Most pay deals are linked to inflation. Income and other tax allowances typically rise in line with inflation.
If keeping pace with inflation, the tax-free personal allowance should rise from £6,475 to £6,669. However, by freezing the rate at £6,475, the Treasury will raise an additional £1 billion and every taxpayer will pay an extra £40 in tax.

The rate at which higher-rate tax is paid will also be frozen at £43,875. However, it should increase to £44,995. The Treasury will make an extra £450 million as a result - £489 for every higher-rate taxpayer, according to accountants.

The inheritance tax threshold is being frozen at £325,000 – which will raise £60m in extra revenues for the Treasury.

Last night, Mr. Mike Warburton, tax partner at Grant Thornton, the accountants, said:
"Inflation was negative last year so this was not an issue – but it certainly is not negative now. Freezing the allowances in this way shows ministers are back to their old stealth tax tricks."
The Conservatives will today warn of the extreme danger to the British economy if the debt problem is not addressed more quickly. The opposition have drawn up new research that shows the Government’s debt interest payments could reach more than £106 billion a year within five years.

Using what has happened in Greece as an example of how Britain’s debt problem could spiral. That figure would represent a trebling of the Government’s annual debt interest bill and it would be more than the annual NHS budget in England.
It would mean the cost of paying the interest on the national debt interest would rise from the equivalent of £24 per family per week to over £80 per week, or from £1,250 per year to £4,320 per year.

The Conservatives last night also announced that they are inviting people to dissect the Budget via the Tory party website – known as 'crowd sourcing'.

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