Budget Special - Editors Comment

Editor’s comment - Budget 2009

When he stood up to make his budget announcement the Chancellor had to balance, on the one hand, the need to support an economy deep in recession and on the other, the need to reassure markets that the dreadful state of the public finances could be credibly returned to health in the coming years.

If the economic recovery turns out to be more muted than the Chancellor’s projections, the next government will have to work a lot harder to reign in spending and increase tax revenues than currently envisaged if it is to retain the market’s confidence in financing the huge borrowing requirement.

Peter Newland, a Senior Economist with Barclays Wealth, doubts that the Budget will generate as much revenue as the government apparently anticipates. “The Chancellor’s forecasts for GDP growth certainly seem to be on the optimistic side. Basically, it looks as though everyone will be hit by an increase in taxation, though it is high net worth individuals who have been most clearly targeted.”

Jeremy Woodley, Associate Director, The Fry Group, says, “The budget to me seems to fall into three areas in connection with personal financial planning, pensions, high earners and ISA’s.

For pensions, the Government has restricted relief on a sliding scale which means for those earning over £180,000 the relief is restricted to basic rate.  This throws up the situation where pension planning for a spouse earning less than £150,000 becomes increasingly important. If the spouse is a non tax payer then funding up to £3,600 would give tax relief even if no tax paid. For a spouse with earnings in excess of basic rate and below £150,000 you can still gain higher rate relief by funding the spouse’s pension.  Note there is anti-abuse rules in the budget to stop massive funding in advance now.

High Earners will now look more towards capital gain generating assets to use allowances or even with CGT at 18% pay a lot less than 50%. This also just made VCT and EIS investments that qualify for tax relief and tax free dividends incredibly more attractive.

The ISA increase is probably overdue and a good idea, although it would have been better to have given it to all from October rather than just the over 50’s as it just makes things more complicated. It also as income from the ISA is tax free probably made them given no forced annuitisation and flexibility on taking benefits more appealing than pensions for many people.

These are my initial thoughts on what has been announced however, as always, the devil will be in the detail.”

“I certainly get the impression that HM Revenue & Customs are taking a far more stringent approach than they have in the past. The assumption appears to be that there is more £1 billion worth of unrecovered tax, but it is not entirely clear to me how this figure has been arrived at.

“The one element that is abundantly clear is that the Government has sufficient powers, under the Proceeds of Crime Act 2002 and other anti-money laundering legislation, to demand offshore account details of UK citizens.”