Budget 2009 overview

Chancellor increases tax rate on high earners

The Chancellor, Alistair Darling, unveiled his plans to increase taxes for the highest paid, rein in public spending and substantially increase borrowing to restore the public finances.

The economy is forecast to contract by 3.5 per cent in 2009, but growth is expected to resume ‘towards the end of the year,’ according to the Chancellor.

Growth is predicted at 1.25 per cent in 2010, and the Chancellor said he expected the economy to grow at a rate of 3.5 per cent from 2011 onwards. The current public deficit was ‘set to halve within four years.’ He also said the Budget would cut growth in real spending on public services from 1.2 per cent to 0.7 per cent from 2011.

Public borrowing is set to reach a post-war high of £175bn this financial year, or 12.4 per cent of gross domestic product, falling to £173bn next year and £140bn the year after. The public sector net debt will almost double to 79 per cent of national income by 2013/14. After that it is expected to stabilise and then start to fall only from 2015/16.

Provision for the cost of banking bail-out and intervention measures the Chancellor said would be more than £50bn, at 3.5 per cent of gross domestic product. But he promised to halve the public spending deficit within four years in order to ensure confidence.

“There are no quick fixes, there are no overnight solutions,” he said. “We need a clear path to recovery here, both fiscally and building a path to recovery.”

The previously planned introduction of a new 45 per cent income tax rate on income over £150,000 from April 2011 will now be brought forward by a year, and the rate will increase to 50 per cent.

In addition, the personal tax allowance will be withdrawn for those earning more than £100,000 from next April, instead of a year later. From April 2011, the Exchequer also intends to restrict pension tax relief for those with incomes above £150,000.

Other measures included the introduction of a car scrappage scheme, paying buyers of new cars £2,000 if they dispose of cars that are more than ten years old. The scheme will run until March 2010.

The government aims to cut carbon emissions by 35 per cent by 2020, and will offer additional funding for energy-efficient homes and buildings. There was also funding for green manufacturing.

The Chancellor also doubled capital allowances for businesses this year to 40 per cent, in an effort to encourage companies to bring forward investment.

For savers, the annual Individual Savings Account limit has been increased from £7,200 to £10,200, half of which can be invested in cash. The new limit applies from October this year for the over-50s, and from April 2010, becomes available for all other savers.