Clare Francis, Site Editor
Public reaction to Alistair Darling's first budget has been largely negative. We look at why consumers are feeling so let down...
Let's face it, it was never going to be an easy task. With a global financial crisis, £100billion of taxpayers' money tied up in Northern Rock, record oil prices, fears that the United States is on the verge of a full-blown recession and a slowing economy here at home, the Chancellor was in no position to be flash with his cash.
Having said that, while all the aforementioned factors are hitting the Government's coffers, they're also taking their toll on the man on the street. As Tim Moss, head of loans and debt at moneysupermarket.com, talks about in his article Majority of consumers fear for their finances, thousands of households really are struggling to make ends meet at the moment, and a budget provides the Government with the perfect opportunity to make things a little easier for people.
Alistair Darling failed to do that. Instead he has been accused of announcing a set of financial measures which severely punish middle England.
Higher alcohol and cigarette duty will be bad news for many households and while the Government is trying to encourage more people to drive environmentally friendly cars, thousands of families across the country face a £100 a year hike in the cost of road tax.
Vehicle excise duty on most bands of cars will rise by £5 a year. However, duty on Band-G cars, which emit the highest levels of carbon dioxide, will increase by £100.
There has been a backlash to this announcement from people in rural communities who claim a 4x4 is a necessity not a luxury.
Drivers of large cars, including many estates and people carriers which are popular with families, face a further tax burden when a new levy is introduced in 2010. Dubbed the 'showroom tax', motorists who purchase new cars will have to pay up to £950 for their first year's tax disc.
Any good news?
One bit of good news is that the planned increase of 2p per litre in fuel duty, has been postponed - this will be welcome relief to millions of motorists who have already seen the cost of a tank of petrol rise by about 10% in recent months. However, the tax increase has only been delayed until October.
Among the main beneficiaries of the budget are key workers and those on low incomes who are trying to get onto the housing ladder through a shared ownership scheme - this is where you only own a percentage of the property and a third party, normally a housing association or social landlord, owns the rest. Darling announced that a new scheme will be launched for key workers who can only afford to purchase 50% of a property.
He also said that anyone buying through shared ownership will be exempt from stamp duty unless they own more than 80% of their home.
This announcement was welcomed because stamp duty can add thousands to the cost of buying a home. According to recent research from Halifax, 64% of first time buyers now pay stamp duty and the average bill is £1,751. However, many had called for the Chancellor to go further, by making all first time buyers exempt from the tax.
Richard Farr, director of the Association of Mortgage Intermediaries, said: "Neither of these schemes will help the substantial number of ineligible applicants who are also struggling to purchase their first home.
"Last week, Halifax published a report showing that the cost of stamp duty for first time buyers had risen by 82% (since 2002). The Government hasn't increased stamp duty thresholds in line with property prices, and it is increasingly becoming a stealth tax."
Many of the other positive announcements, such as an increase in Child Benefit and to the child element of the Child Tax Credit, changes to the way Housing and Council Tax Benefit is calculated, and the national roll-out of the Savings Gateway savings initiative, don't take effect until April 2009, at the earliest.
One new benefit for savers, that comes into effect next month is the higher Isa allowance, although this was announced by Gordon Brown in last year's budget. Individuals will be able to invest £7,200 a year in a tax-free Isa, up from £7,000 currently, and savers will be able to hold £3,600 of that in cash. At the moment, the maximum cash element is £3,000. In a bid to simplify the system further, the distinction between maxi and mini Isas will be abolished.
What else changes next month?
There are a number of other changes announced last year, that take effect when the new tax year begins on April 6.
Income tax
The one that will have the greatest impact is the abolition of the 10% income tax band. Accountants believe that more than 1.8million of the poorest workers will effectively pay around 60% tax on thousands of pounds of their income because of the withdrawal of the 10% rate.
At present individuals pay 10% on the first £2,230 of taxable income, but this will be scrapped next month and this tax band will be amalgamated into the basic 20% band. Accountants have calculated that the worst affected by this change will be those earning between £6,500 and £15,000 a year.
Capital gains tax
The capital gains tax (CGT) system is also being overhauled. At the moment capital gains above £9,200 are taxed at your marginal rate of tax - 40% for higher rate taxpayers and 20% for those in the basic rate band. However, with non-business assets such as buy-to-let property, second homes and equity investments, the proportion of the gain on which tax is liable reduces after the asset has been owned for three years. This is known as taper relief and it brings the effective tax rate down to 24% for those in the higher-rate band, and 12% for basic rate payers, if the asset is sold after 10 years.
Taper relief was introduced in 1998. An indexation allowance is applied to assets that were bought prior to that. However, in a bid to simplify the system, both taper relief and indexation allowance will be abolished next month. Instead a flat rate of 18% will be levied on capital gains above £9,600 (the CGT allowance rises from £9,200 to £9,600 on April 6).
The new system will benefit higher-rate taxpayers as they will pay less tax. However, many basic rate taxpayers could face a bigger tax bill when they sell assets.
Don't lose your allowances
With many people set to lose out as a result of the budget, it's more important than ever to make sure you make use of as many of this year's tax allowances as you can before you lose them at midnight on April 5.
If you have not opened an Isa yet, there is still time and there are some great deals available. Barclays' Tax Haven cash Isa is paying 6.50%, while Abbey and Alliance & Leicester are both offering easy access accounts at 6.25%.
Don't forget your CGT allowance either - if you have made profits on any investments, it may be worth realising them now and selling some of your holdings. The current CGT allowance of £9,200 means that gains up to that amount are tax-free.
Disclaimer: Please note that any rates or deals mentioned in this article were available at the time of writing.
Relevant Links
