Pre-Budget Report – what it means for you

This year more than ever, all eyes were on the Chancellor for the Pre-Budget Report - and it offered the usual carrots and sticks. Immediate VAT cuts, followed by future tax hikes were widely anticipated, as was the fact that high earners would be hardest hit.

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Housing market measures were modest to say the least, while SMEs were given a boost with a package that included the deferral of an unpopular corporation tax increase and the right to defer all tax payments for as long as they need.

But what do the announcements mean for you?

Shopping

VAT will be temporarily cut to15% from 17.5% from December 1 2008 until 2010 in a bid to stimulate spending. It’s not a huge amount, saving consumers around £10 on a new TV for example. The success of this cut relies both on retailers passing it on, and more importantly consumers actually spending, which seems unlikely given the worries over job losses and housing market instability. Consumers will quite rightly want to put any spare money aside for a rainy day. At the very least though, it might ease the burden of Christmas shopping in the next few weeks.

To offset the VAT savings the Chancellor is raising alcohol, tobacco and petrol taxes – so no savings there. This will come as a blow to drivers as the VAT cut had been widely anticipated, but not this increase in petrol duties, which will completely obliterate any savings.

Consumers will see no savings on their fuel bills as VAT on gas and electricity is to be maintained at its 5% level, unaffected by the wider VAT cuts.

Tax

In 2011, we will all be hit in the pocket, when tax hikes will be implemented across National Insurance contributions, and income tax for some. The basic rate of National Insurance paid by employees will go up 5% to 11.5% from 2011, and self-employed NI charges will rise to 8.5% from 8%. However the NI hike will only apply to those earning £20,000 or more.

From April 2010, those earning more than £100,000 will see their personal allowance halved, and then removed completely from 2011 for those earning over £140,000.

A new 45% tax rate will also be introduced for those earning over £150,000.

Savings

A new scheme to encourage low income savers will be rolled out across the country. The Savings Gateway has already been piloted but will now be opened to 8 million people claiming tax credits or benefits. The Government will add 50p for every £1 saved via the scheme, which will be on offer through banks and Post Offices. Further details on the savings limits will be announced in due course.

Kevin Mountford, head of savings at moneysupermarket.com said: "This scheme is of course very welcome and will hopefully encourage more people in the lower income bracket to put money aside. These are the people least likely to have savings so any initiative that motivates them is a step in the right direction. The only risk is that job losses and financial pressures prevent people from being able to save at all in the current environment.

"Also, far more needs to be done by the Government to encourage savers, whatever their income."

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Borrowings

The report has already provoked a strong reaction from the housing and mortgage markets, saying the Chancellor should have done more to encourage buyers into the market. Instead he focused on helping those existing homeowners already in trouble.

Homeowners that cannot keep up repayments have been told that major lenders will not begin court proceedings until at least three months after the first missed payment.

Louise Cuming, head of mortgage and protection services at moneysupermarket.com says: “While this is welcome news, the reality is that this happens anyway with many lenders, who work with borrowers and implement payment plans before seeking possession. Indeed many already spend significantly more than three months trying to get the borrower back on track, for their own benefit and to fulfill FSA regulation already in place. This is not a new initiative.

"It should also be noted that in some cases, delaying possession simply causes the borrower to rack up more interest and charges, making the debt larger. In a falling property price environment delaying possession could also mean the home is eventually sold for less."

The Government is extending its £200m mortgage rescue scheme which aims to help 6,000 of the most vulnerable mortgagors. The scheme, which works in a similar way to the much maligned sale-and-rent-back schemes is a Government alternative for struggling borrowers to sell their property to a housing association and rent it back. While the extension is welcome, it will apply to a relatively small number of borrowers. 

The maximum size of mortgages covered by ISMI (Income Support for Mortgage Interest) will be doubled from £100,000 to £200,000 and the qualification period reduced to three months. Louise Cuming added: "This increase will help more borrowers who have been made redundant and need tangible support quickly to get them through a difficult time until they find new work. Given past rises in house prices the increase in the size of mortgage covered was a necessary step."

Struggling borrowers will also get free access to a national advice network to help them work out the best way to manage and repay their debts - £15m is being made available for this initiative. Tim Moss, head of loans and debt at moneysupermarket.com, said: "The Government has recognised the seriousness of secured and unsecured debt problems and this commitment to providing free advice is very welcome and a necessary move. In addition to this it needs to continue pushing through its financial education initiatives to ensure people understand the credit commitments they are taking on."

What about Stamp Duty?

Did the Chancellor miss a golden opportunity to increase the lower Stamp Duty threshold to a level that would help first-time buyers across the country? Louise Cuming thinks not: "The £175,000 temporary threshold does little for borrowers in the South," she says. "Indeed the previous increase had no effect on kick-starting the first-time buyer market as hoped, so I didn’t expect any move from the Chancellor in this area. I don’t think Stamp Duty is what’s really stopping people from buying, but mortgage availability and property price concerns."

These mortgage availability concerns were also addressed by the Chancellor. He announced plans for more Government intervention in the mortgage market, including the possibility of guaranteeing £100m of mortgage assets. But Louise Cuming said: "The Government has already invested billions in the mortgage industry without freeing up the market. It is now not only liquidity issues but lender aversion to risk that is causing many of the market’s problems."

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