Pre-Budget 2008: Taxation

Support for families and businesses underpin Alistair Darling’s fiscal changes announced in the Pre-Budget Report.

Speaking to the House of Commons yesterday, he said: “Monetary policy is not enough.

“To prevent recession deepening we need to take action.

“I propose to cut VAT from 17.5 per cent to 15 per cent until the end of next year.”

The cut will come from December 1st and last for 13 months. In total it will put £12 billion into the economy.

A new income tax rate of 45 per cent will be introduced for those earning over £150,000 – affecting one per cent of households – from April 2010.

The temporary £120 allowance for people who lost out as a result of ending the 10p tax rate in May will be made permanent.

The allowance will rise to £145.

“This will help 0.5 million households for good,” Mr Darling said.

However, national insurance contributions will be increased by 0.5 per cent from April 2011.

The starting point for paying national insurance will also be increased so “no-one earning under £20,000 will pay more National Insurance,” Mr Darling said.

People earning over £100,000 will see personal tax allowances brought into line with those on middle incomes and personal tax allowances will be abolished for incomes over £140,000 from April 2010.

Pension credit will increase to £130 for single pensioners, and to £198 for couples.

The basic pension will rise to £95.75

“Pensions should see real benefit of falling inflation,” Mr Darling said.

Child benefit increase from January to £20

For pensions he said: “I will ensure every pensioner will receive a one-off payment of £60 from January and £120 for couples.”

The hope is that the cut in VAT will spur spending on the high street, with cuts in time for Christmas shopping.

However, a 2.5 per cent cut to VAT will not automatically drop prices on the high by 2.5 per cent.

But the reduction is being hailed as a method of helping lower income households – which pay a greater percentage on income on VAT.

The cut will also be seen as a boost for small business.