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Tax raid on £40,000 earners
Joe Murphy, Political Editor24 Nov 2008
A TAX rise of £3 a week for the better off was the sting in the tail of a “spend now, pain later” mini-Budget today.
Chancellor Alistair Darling announced a half penny on National Insurance contributions from 2011 plus a new 45p top rate of income tax.
Together with other tax measures, the National Insurance and income tax changes mean everyone earning above £40,000 will be worse off by at least £150 a year.
It will help repay a massive cash injection of £20 billion over the next two years using borrowed money. Government borrowing will soar by an unprecedented amount — £300 billion over the next five years, including £118 billion next year.
Shadow chancellor George Osborne said state debt would hit a new record high of one trillion pounds.
The package was welcomed by the stock markets with the FTSE-100 index of shares soaring 9.84 per cent — the biggest one-day rise in history — to close up 372 at 4142.96.
Unveiling a series of giveaways to get Britons spending their way out of recession, Mr Darling gave pensioners an extra £4.55 a week, with the rise to £95.25 for a single person being brought forward to January instead of waiting until April.
Pensioners will also get a £60 one-off payment in January to spend as they like, on top of the £10 Christmas bonus and the winter fuel allowance.
Also accelerated is a big rise in child benefit — up by £1.20 to £20 a week for the first child. As widely trailed, VAT is cut from next week to 15 per cent to get the tills jingling at Christmas.
The lower rate lasts until 2010 — but petrol, cigarettes and alcohol are conspicuously excluded from the bonanza, as their duties will rise by the equivalent amounts. In another boost, the cut for basic rate taxpayers worth £120 announced earlier this year will be made permanent, at a cost to the Treasury of £3 billion a year.
Dozens of spending projects adding up to £3 billion are being accelerated to support jobs during the slump. For the first time, Mr Darling confirmed that the economy is entering recession.
Growth will stop next year and the economy will contract by between 0.75 per cent and 1.25 per cent. It will grow again a year from 2010 but Mr Darling said it could be 2016 before the public finances are back in balance. And having turned on the taps to get through the worst, he revealed how he will claw back the money from 2011 onwards — conveniently for Labour, the year after the likely election date.
Even bigger sums will be recouped by imposing an agonisingly tight corset on government spending. With the tax rises, that will crush some £16 billion from the economy in 2012.
In effect Mr Darling and Gordon Brown are gambling that the economy will be recovering strongly enough by then to withstand the pain without being slowed down again.
Mr Darling made a virtue of being open about the discomfort that will follow the national shopping spree. The halfpenny on National Insurance contributions will be the big earner for the Chancellor, who will be the first in memory to go into a general election openly boasting of his plans to raise tax afterwards. It will rake in £4 billion to £5 billion a year after 2011.
By contrast the 45p tax rate on the very rich will raise a token £1.6 billion, hitting only 400,000 people who earn more than £150,000.
People earning below £40,000 will be slightly wealthier, the Chancellor promised, because personal allowances will be raised to compensate them.
But anyone earning over £100,000 will be hit much harder than the rest, because their allowances will be tapered away over time.
In a confident performance, often interrupted by heckling, Mr Darling told the Commons: “My aim is to provide support and protection for families and businesses when they need it most.
“To maintain our commitment to investing in schools, hospitals and the nation's key infrastructure. And to put in place the measures necessary to ensure sound public finances in the medium term so that as a country we live within our means.
“Not one single initiative, but a comprehensive plan, to support families, business and the economy.”
But his Tory shadow called it “a huge unexploded tax bombshell timed to go off underneath the future economic recovery”. Mr Osborne went on: “Stability has gone out of the window.
Prudence is dead. Tax giveaways for Christmas paid for by tax rises for life.” Mr Osborne said the Chancellor was giving away £20 billion but would claw back £40 billion.
Sipping tap water at the Despatch Box, the Chancellor said public borrowing will rocket to £78 billion this year and £118 billion the following year — huge increases from the forecasts made in the Budget just eight months ago of £43 billion and £38 billion. A freefall in tax revenues from the City (down 35 per cent) and stamp duty (down 40 per cent) drove down the public finances. There were real fears in Government that it will be years before London's financial services are strong enough to deliver the massive tax revenues that Chancellors came to take for granted.
From 2010 onwards the borrowing rate will stay at massive levels but will fall each year - to £105 billion, £87 billion, £70 billion, and then £54 billion.
Mr Darling defended his decision to tear up his borrowing rules, saying: “In the current circumstances, to apply the rules in a rigid manner would be perverse and damaging,” he said. “We would have to take money out of the economy, making a difficult situation worse.”
He insisted that there was no alternative against a background of “economic uncertainty not seen for generations”.
He went on: “I want to take fair and responsible steps to protect and support businesses and people now — while putting the public finances on the right path for the future.”
The bitter medicine of tax rises was mainly to soothe nerves in the City, where there were fears that bond markets would be spooked by the scale of the borrowing binge.
But it also sets the scene for a bloody political showdown between Mr Brown and David Cameron at the next election.
Among the £3 billion of spending projects originally planned for 2010 and being brought forward are school and hospital refurbishments, new railway carriages, and minor road improvements.
A project to install insulation in council homes and other social housing will create extra jobs.
The 2012 Olympics is expected to support thousands of construction jobs to help bridge the slump in London. A package of measures is be aimed at helping small firms. A special loan guarantee scheme will see the Government underwrite 75 per cent of the risk when banks lend to small firms.
A 1p rise in the small companies rate of corporation tax planned for April will be delayed. Revenue and Customs has been ordered to give small firms extra time to pay their tax bills if they seek help.
To stem an exodus of firms, tax relief will be given on dividends paid on earnings overseas.
Reader views (40)
Correct me if I'm wrong, but those people who seem to think that G Brown is an 'un-elected' prime minister should be aware that the party appoints the PM and not the populace. We are not the US.
- Cp, Oxford, UK, 16/02/2009 21:28
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I earn more than 100k a year. I pay more tax than most and also more council rates than most. I have a mortgage and a wife who is expecting our first child. I am talented and sell UK plc services across Europe. I will plan know to move to Spain - (Madrid and North) and take my skills to a european country and sell its services - Labour is back to class war and when the fiscal stimulus could have targetted income tax to better benefit not a deflationary VAT fools errand. Labour never trust them with the finance they always spend more than we have - they have done so again.
- Christian Ball, London, UK, 25/11/2008 09:27
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the 45% tax rate is Mandelson's work. Clever move as it puts the Tories on the back foot - they won't look to reverse it as it is basically likely to be quite popular. It affects 1.6% of the working population, it is so far away from the vast majority of peoples earning expectations, it does not really hit aspirations. When people say they will leave the country because of this, it is difficult to believe. London particularly is full of very highly skilled people in Fin Services who were attracted by high pay and low taxes, if they go it will be because of the collapse in the banking sector not the tax rate. these folks are far more worried about getting no bonus this year - when they got half a million last year, than an extra 5% of pay over £150K
- Martin_Clerkenwell, london, 25/11/2008 09:23
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Retailers in an effort to encourge sales reduce their prices by 10, 20, 30 percent, taking the view that a little of something is better than all of nothing.
Will the public notice a 2.5% temporary reduction in Value Added Tax, I think not.
They will certainly notice the reintroduction in 2010, will there be a little hike in the basic rate, do you suppose.
- J R J, Ballagarey, 25/11/2008 08:53
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It isn't a giveaway when you may not get it (retailers may not pass it on) and you know that you will have to give it back in a year. That is a loan. It will be interesting to see if the increase in fuel duty will be reduced once VAT is restored to %17.5 (or higher) in 2010.
- H Phull, Northolt, 25/11/2008 08:39
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Welcome back to the 1970s folks!
- Andy, London, 25/11/2008 08:31
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If Darling and Brown really want to support small businesses, then they should abolish IR35, reduce corporation tax for small companies, accept the people really do employ spouses in their companies (OK for Labour MPs, why not businesses?), abolish the huge amount of extra tax rules, reinstate pension tax credits. And how about reinstating the 10% income tax bracket?
America has a fantastic new start. We have a tired rehashed ending.
To paraphrase The Sun, can the last person leaving please turn out the lights?
- Srs, London, 24/11/2008 23:39
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Why does Nu Labor not call an election? This bunch is worse that with Tony Blair at least he looked competent. I am afraid I can not give any votes to Crash Gordon or Liz Derling.
- Jacqueline, Hampstead, London, 24/11/2008 23:28
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Steveo: "How can this country have let this UN-ELECTED IDIOT let the economy crash so quickly?!"
So quickly? Real professionals would brought the economy to bankruptcy in months, not threatened to do it over the next few years. Witness the achievements of the bosses of Northern Rock, Lehman, Bradford & Bingley and Citibank. Their shareholders would love to be just £150 a year off, rather than losing everything.
- Tonyb, Melbourne, Australia, 24/11/2008 22:23
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Hang On-- you forget that Tony Blair managed the Uk ship for some years, jumped ship and Cast Brown & Darling adrift, heading for an Iceberg without a paddle.
And Tony Blair is no longer worried about Tax increases or the price of a pint.
But of course you should not forget to share the blame with the Financial Services for their clamour for toxic loans and very bad debt.
You taxpayers must now smile and shoulder that burden. No doubt someone in the City will still get his new Porsche for Christmas.
- Mike, France, 24/11/2008 22:08
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i am 80 year old i would like to say thank you for the £60 you gave me today, .until i realised were you stole it from. i was paying PAYE when it first started in 1944 at 16 it was my duty to. as it was going to a just cause, the war. not to help to fool the voters into forgetting who are to blame for this MESS no mr brown i do not sell my vote for bent cash j.g
- John Green, Nottingham uk, 24/11/2008 21:31
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yet again the people that get of their bums and work hard are being penalised whislt those that expect it all for nowt continue to get it - arrrggghhh
- Neeley, london, 24/11/2008 21:31
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So he wants to spend his way out of this mess. Just try telling the tax man, Insurance Man and Bank Man why you cannot pay them because you are bust spending the economy better and see the response you get. Apart from the last Man who will get you even deeper into debt the other two should lock you up.
- Ayliff Mcnab, Spain, 24/11/2008 21:20
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MCW- you are quite right - I only just earn £40k, have just bought my first flat - sorry mate - I have spent as much as I can afford - going to squirrel away from now on.
My question is - I believe in the govt spending on projects that benefit and help the poor, underpin our society as a whole - but I want to see the government run by people who are competant - I hope you chaps have got your figures right, and have done 10 year plans! regardless of the fact you won't be in.
My biggest fear is we don't have competant people at the top or in the civil service - or indeed anywhere - where have all the smart people gone.
- Jc, se1, 24/11/2008 21:15
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Let's spread the wealth around. Where did I hear that one? OH that's right Obama said it. I guess Darling heard him.
- John (Brit Exp Pat), Phoenix USA, 24/11/2008 20:38
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I earn a lot. And people like me will leave the country.
I pay over £100,000 in tax a year. That pays for a good doctor, who pays over £40,000 in tax a year which pays for a very good teacher, who pays over £16,000 in tax a year that pays for a soldier, who pays tax ....
If I leave, that's all gone. Someone else will have to pay or they'll all be out of a job too. I'm not a banker, I work hard and add a lot to this economy as do all the others like me. The country needs the high earners to pay the bills...
All those that think this is a way to get the country out of a hole really have no idea....
- Andy, London, UK, 24/11/2008 19:18
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Former chancellor Lord Lawson said on Sky News that the increase in tor rate tax would not happen if the tories win the election. So no change there look after the rich and leave the rest to suffer. Remember VAT is so high as it was used by a previous tory government to cut taxes for the rich.
That leaves Cameron to explain how he would cover for not increasing top rate taxes on people who can afford to pay more given the proposal is for those earning £150 K or more which is just 1% of taxpayers.
Will tories still cut inheritence tax for millionaires that is the real question we need an answer to.
- Melvyn Windebank, Canvey Island, Essex, 24/11/2008 19:14
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This seems like an awfully large amount of debt money to attemtp to steal some pre-election points from the Torys.
Whoo hooo, £1.20 on child benefit that's almost a whole tin of Irish Stew.
- Vince, London, Capital of Nowhere land!, 24/11/2008 19:12
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I find the lack of comprehension and understanding of the average contributors to this comment board utterly depressing.
Ignorant. Mis-informed. I don't know.
But when a headline states that middle class people will be 3 pounds a week worse off to pay for the crisis and that's meant to be a tax bombshell then I'm baffled. I can't get a pint of lager for three pounds. So I have to do without a pint of lager once a week to help my country out of a financial crisis. Sounds like a bargain, not a bombshell.
- Dan Edwards, london uk, 24/11/2008 19:07
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If it's not too late;
Emigrate
- Anglo, Sussex UK, 24/11/2008 18:21
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I am baffled as to what the drop in VAT is supposed to achieve. Whilst retailers may benefit, the goods on sale are mostly manuactured outside of the UK. A feel good factor for Christmas before reality kicks in in the new year?
- Bj, London, 24/11/2008 18:20
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Absolutely NOTHING for the worker: no incentive to earn more than £40,000; giveaways to the elderly and those on benefits; a meagre VAT cut that means nothing in the real world; extra NI payments.
Where is the real tax cut to give me more money to spend? Where is the reduction in the size of the civil service and its pensions?
Bring on the election.
- Nobby Clark, Perth, Scotland, 24/11/2008 18:02
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So, what is everyone going to spend that extra 2.5% of VAT on, assuming of course, that the shops bother to cut their prices accordingly (nice leather belt, sir, was £50 last week, now only £48.94, thanks to Super Gordon!), which of course they won’t.
I reckon I may buy a few sheets of black paper to put over the windows until the Labour party is forced to call an election.
- St, London, 24/11/2008 18:02
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How long can our unelected prime minister keep on deceiving the voting public. As chancellor he lied about not raising taxes, and immediately took away allowances. He and his erstwhile colleague who got out when he saw the writing on the wall, lied about the Dartford tunnel toll by renaging on the promise to make it free when it had paid for it'self, and have now added insult to injury by raising the toll. Many other stealth taxes have been introduced. Now he is producing an adverse legacy to any future British leader by a staggering borrowing programme whilst giving the pensioners a measly £5 per week. he is outrageous and must go, and the sooner the better! Yesterday on BBC TV,he said being a leader is about dealing with current problems. No Mr Brown, leadership is about planning for an effective future, not continually firefighting as you have always done!
- Dg, folkestone, kent, 24/11/2008 18:00
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The Government's tinkering with taxes shows its economic Titanic is heading full speed for the nearest iceberg. It is time they stopped polishing the brass and started to manage the economy.
- Brian Edmonds, Farnham UK, 24/11/2008 17:50
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Has anyone thought about the fact that the ones taxed the most now are ones most likely to create jobs? Wave them good bye because they will be leaving this country very shortly...
- Carsten, London, 24/11/2008 17:49
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Did anyone notice that when Vince Cable was speaking the camera went onto the PM and he was busy looking at his watch. He shows rudeness and contempt for all, I find this totally unacceptable.
- Den, London, 24/11/2008 17:46
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If the government had not squandered the surplus years on wasted public services investment, we would have had reserves to cushion against the downturn.How can the man responsible for such appalling fiscal "prudence" claim to have saved the economy.Totally discredited Labour government deserve one last public act.....defeat at the next election.
- John Duffy, London, 24/11/2008 17:23
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Penalise the hard workers and reward the lazy - that's the way to get the country moving!
- Casper Slides, France, 24/11/2008 17:19
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There was a comedy film about the hire purchase boom in the 1960s called 'Live no, pay later' starring Ian Hendry.
Today we had a re-run in colour of Alistair Darling reprising the role.
We have a tally man government, and we will all have to pay for their spendthrift policies.
- John, London, 24/11/2008 17:14
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Well, if it takes an extra £150 of my money to show Britain that Nu Labour = Old Labour (the one which at the last two attempts at Government (including this one) have left the country in the most incredible economic quagmires), then in the long run it's money well spent.
Goodbye Crash Gordon, you just signed your p45 today.
I think the decision not to tax booze and fags more is astonishing.
- St, London, 24/11/2008 17:09
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No wonder this sad excuse for a human being won't dare risk a General Election. The knows he'll be out on his ear as soon as it happens.
- L.Taubler, London / UK, 24/11/2008 17:02
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Socialism's answer to everything - squeeze the tax-payer some more. How long before someone starts suggesting that everyone works for the good of the nation's economy only (as defined by those in power of course!) and gets an allowance from the government instead of a pay packet? That way there won't be that 'socially divisive' difference between those who actually work and those who live off the earnings of others!
What actually amazes me is that there are any gainfully employed men and women who still support Labour in this day and age.
- Rogan, Irving, 24/11/2008 16:54
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Once again the middle classes get suckered punched by this bunch of idiots running, ooppps sorry attempting to run this country. When are the people responsible for this whole situation i.e. the banks and government going to be put in the dock instead of being richly rewarded for gross incompetence. If there is a god please let a small meteorite fall on No10 and do us all a favour!
- Fly, London, 24/11/2008 16:52
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So that's pretty much an increase in tax for much of the population. £40k is not exactly a huge salary these days, I for one fall into this bracket and am hardly that well off living in London. This new sting is going to encourage me to tighten the purse strings rather than do the opposite...
- Mcw, London, 24/11/2008 16:47
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A very creative pre-budget. Well done Mr Darling! Mr Osborne, on the other hand, wasn't prepared to do anything!
- Blair S, London, 24/11/2008 16:47
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The top people will just go abroad, which is probably what Labour want.
It will throw a spanner in the works of the Tory government when they get in.
- Eric, London UK, 24/11/2008 16:46
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In the picture from this article is Mr Brown laughing at the little girl because she will be about 70 by the time we finish paying for Mr Browns fiscal policies.
- Stuart, London, 24/11/2008 16:10
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Polls show that the people prefer Brown to Cameron where the economy is concerned. Are they mad? Who got us into this mess?
This will not work and already small shops are saying that they will not pass on the reduction in VAT. Debt debt and yet more debt. This will lead to Sterling collapsing, massive inflation, high taxes, unemployment and the ruins of a once proud nation. You can also expect numerous strikes as the Govt tries to cap pay. What a joke the UK has become.
You just wait for 2009. Unbelievable.
- Mgrelton, London, 24/11/2008 16:03
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How can this country have let this UN-ELECTED IDIOT let the economy crash so quickly?!
- Steveo, London NW1, 24/11/2008 15:52
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