Business News

The Budget 2010

24 March 2010

Chancellor of the Exchequer Alistair Darling delivered the last budget of this parliament at a time when the focus has shifted slightly from tackling the recession to how to deal with the large amounts of debt built up in doing so. While the economic data over recent months has been decidedly mixed, most economists agree a recovery of sorts is under way for now, although some fear the economy could slide back into recession unless a credible plan for dealing with the budget deficit is presented. With a general election only months away, normally a ‘giveaway’ budget could be expected, but the state of the public finances has largely prevented this.

Summary of key proposals

  • Stamp Duty abolished for first-time buyers for the next two years on properties worth up to £250,000. Stamp Duty on properties worth over £1million to increase to 5%.
  • 50% income tax rate on earnings above £150,000 and 1% rise in National Insurance from next April confirmed. No additional changes to income tax or National Insurance rates.
  • VAT remains at 17.5%. Taxes on alcohol and tobacco up; planned 3p fuel duty rise to be introduced in stages.
  • One-off reduction in business rates for small firms from this October. Doubling of Annual Investment Allowance for small firms and Capital Gains Tax relief for entrepreneurs.
  • Creation of new body to co-ordinate business support measures.
  • Creation of new investment bank to fund ‘green’ projects.
  • £94billion in lending agreed from Lloyds and RBS, with new Credit Adjudication Service to intervene on behalf of firms which have been unfairly denied credit.
  • ‘Time to pay’ scheme, which gives businesses more time to pay their tax bills, to be extended for the whole of the next parliament.
  • 15% increase in number of government contracts going to small and medium-sized firms.
  • Education or training guarantee for 16 and 17-year-olds, and for under-24s who have been out of work for more than six months, to run for another year.

Setting the scene

Mr Darling began by saying that the government had made “the right calls” during the recession last year, and that government borrowing and unemployment were set to be lower than predicted. He said the government now needed to support small and medium-sized businesses.

He said the government had been right to bail out the banks, saying the Treasury had already received £8billion from them in exchange for the support received, in addition to the £2billion raised from the one-off bank bonus tax, announced in the pre-budget report. He said he would continue to push for an internationally-agreed tax on the banks, rather than adopting one unilaterally, as proposed by the Conservatives.

It was announced that the UK economy had contracted by 6% during the course of the recession, which officially ended in the last quarter of 2009. He stuck to his prediction of growth of between 1 and 1.5% during 2010, but revised down his prediction for 2011 to between 3 and 3.5%, in line with predictions in the city.

He repeated the government’s pledge to halve the deficit in the next four years and said borrowing would be around £167billion this year – lower than the earlier forecast of £178billion. He said borrowing would also be lower than predicted in future years, falling to £74billion by 2014-15 – £8billion lower than forecast.

Mr Darling also stuck to his previous figures of a 2.2% rise in public spending during 2010-11, before spending started to be cut back. He said the government had already identified £11billion of savings, including keeping public-sector pay settlements below 1% between 2011 and 2013, and relocating civil service jobs to less expensive locations outside London.

VAT and duty

The Chancellor made no announcement on VAT, meaning it remains at 17.5%. The planned increase in fuel duty, scheduled for April 2010, will now be staged, going up by 1p in April, 1p in October and a final 1p next January.

Tax on tobacco was increased by 1%, and alcohol duty went up by 2% – although the duty on cider will see a larger rise of 10%.

Income tax

Income tax rates remained unchanged at 20%, 40% and the new rate of 50% from April. The thresholds were also unchanged, meaning real term increases for many taxpayers.

Mr Darling said the government would continue to crack down on tax avoidance and intended to sign more tax disclosure agreements with other countries, along the lines of the recent deal with Liechtenstein. To start with, he revealed deals with Belize, Grenada and the Dominican Republic would be signed shortly.

National Insurance

There was no change to the Chancellor’s plan to increase National Insurance by 1% in April 2011, despite the concerns of some business groups. Mr Darling confirmed that the threshold at which people begin to pay NI will be raised, so that those earning under £20,000 will not end up worse off.

Business and enterprise

There was some temporary relief for small businesses, after a one-off reduction in business rates was announced, from this October. The Annual Investment Allowance will be doubled to £100,000 for small firms, to help new companies get off the ground, as will the Capital Gains Tax relief for entrepreneurs.

As widely predicted, a ‘green’ investment bank will be set up, with £2billion to invest in green energy and transport projects.

The partially state-owned banks, RBS and Lloyds, will provide another £94billion in small business loans this year, while a new Credit Adjudication Service will be created to intervene in disputes where businesses claim they have been unfairly denied credit. The licensing process for new banks will also be speeded up in an effort to promote more competition.

The ‘time to pay’ scheme, where struggling firms can ask for more time to meet their tax bills, will continue for the whole of the next parliament, Mr Darling said. There will also be a 15% increase in the number of government contracts going to small and medium-sized firms.

Funding for 20,000 new university places was announced, together with a £35million fund to help university-launched businesses.

A previously-announced 10% tax on income from patents to fund new research in science and technology and the 50p-per-month levy on landline phone bills to pay for the rollout of high-speed broadband, were both confirmed.

Housing and mortgages

In an effort to help first time buyers, the Chancellor announced that they will not have to pay stamp duty on properties worth up to £250,000 for the next two years. This will be paid for by an increase in the stamp duty rate to 5% on properties worth over £1million. Other house buyers will continue to pay stamp duty at 1% on homes worth over £125,000, while everyone will pay 3% on homes worth over £250,000 and 4% over £500,000.

Benefits and working families

The guarantee of work or training for under-24s who have been unemployed for more than six months was extended to 2012.

For families, those with one and two-year-old children will receive an extra £4 per week in child tax credits from 2012.

Reductions in housing benefit for those living in expensive properties were announced, which will save £250million.

It will be made easier for over-65s to receive working tax credits, by reducing the number of hours they need to work to qualify.

Pensions and retirement

As previously announced, the Basic State Pension will rise by 2.5% next month, while the Minimum Income Guarantee will increase to £132.60 a week for a single pensioner and £202.40 for a pensioner couple. Winter fuel payments will continue at £250 for at least another year.

The Chancellor also re-stated his intention to reduce the amount of pension tax relief that could be claimed by people earning more than £150,000 per year from the 2011-12 tax year.

For savers, the annual ISA limit will rise from £7,200 to £10,200 next month, as previously announced, and ISA limits will then continue to increase in line with inflation each year throughout the next parliament.

The Inheritance Tax threshold will remain frozen at £325,000 for the next four years.

Company cars

As announced in the 2009 Pre-Budget Report, the multiplier on free fuel for Company Car drivers will increase from £16,900 to £18,000 from 6 April 2010. The van fuel benefit charge will also increase from £500 to £550.

The Company Car Tax rate will be amended from April 2012, so that the minimum 10% band will only apply to cars that emit 99g of CO2 or less per km, compared to the current limit of 120g. The tax rate will increase by 1% for every 5g of CO2 after that point.

The environment

The proposed ‘green’ investment bank will have £2billion of capital to invest in green energy and transport projects, with an early focus on wind energy schemes.

There was a commitment to reduce government departments’ carbon emissions by at least 30% by 2020, and plans to develop a Pay as You Save scheme to reward householders for saving energy.

Car tax for ultra-low carbon cars will be halved for five years starting in April, to encourage the take-up of such vehicles.

Official documents from Alistair Darling’s 2010 Budget