BrilliantWithMoney

Whilst we don’t yet know the date for the Pre-Budget Report, it is likely to take place in late November or early December.  A possible date is Wednesday 25th November 2009.

Public finances are in a bad way.  The Treasury expects public borrowing to reach £175 billion for the year as the economy continues to feel the pressure of the recession.  Interest payments on these debts cost £5.9 billion in September. 

The Government has given the banking system financial support to the tune of £1 trillion, described recently by the Govenor of the Bank of England as “breathtaking”.

Against this backdrop, and keeping in mind this Government needs to call a General Election no later than 3rd June 2010, here are our top five predictions for the Pre-Budget Report 2009:

1 – VAT hiked up to 20%

Value Added Tax (VAT) is the tax we pay on purchases of most goods and services.  It was temporarily cut from 17.5% to 15% at the start of this year, to encourage increased consumer spending and help retailers drive the economy out of recession.  This was only a temporary cut.  VAT is scheduled to go back up to 17.5% at the start of 2010.

Even when VAT goes back to 17.5%, a recent survey from accounting firm KPMG found that this results in Britain having the fifth lowest rate of indirect tax in Europe. In fact, the average rate of VAT in Europe is 19.8%.

Treasury papers last year showed that a VAT rate of 18.5% was under consideration. It is possible that VAT in Britain will become 20% in 2010 or 2011, regardless of which party is in power.

2 – More tax attacks on the ‘wealthy’

The Budget in April contained a number of quite punishing tax hikes for wealthier individuals. These included a new top rate of income tax at 50% from April 2010 and measures to restrict higher rate tax relief on pension contributions. The removal of the income tax personal allowance for people earning over £100,000 means an effective income tax rate of over 60% for some higher earners.

Recent reports of a high bonus culture returning to the City could result in a further tax attack on those individuals perceived as contributing towards the global banking crisis. Higher earners are already braced for a bigger tax bill in 2010, so (for some) further measures could be the last straw.

Where we expect to see a further attack on higher earners is capital gains tax.

The gap between capital gains tax at 18% and income tax at 50% is likely to result in some creative use of capital gains to result in lower tax charges. The Treasury is likely to be aware of the tax planning strategies for higher earners currently being touted by some accountancy firms, so a preemptive strike on capital gains tax is a reasonable thing to expect this autumn.

3 – Low-cost concessions to savers

On 6th April, the Individual Savings Account (ISA) allowance for people who are 50 or over by 5th April 2010 was increased from £7,200 to £10,200. It is due to increase to £10,200 for younger investors as well from the start of the 2010/11 tax year. Increasing the ISA allowance like this was not a particularly expensive exercise for the Treasury. This will continue to be the case against a backdrop of continued low interest rates.

Savers are continuing to feel the impact of historically low interest rates on their savings. By increasing the ISA allowance again, the Government could placate those savers by offering the ability to protect a greater level of their savings interest from income tax. If the ISA allowance had been increased in line with average earnings since they were introduced in 1999, it would already be at £10,500.

A more radical, and certainly more expensive, move might be to abolish all basic rate income tax on savings interest.

4 – Higher ‘green’ taxes

The latest climate change summit, which gets underway with the involvement of the United States and Europe this week, will still be fresh in the mind of the Chancellor when he delivers his Pre-Budget Report. So-called ‘green’ taxes on things like home energy consumption, petrol and diesel, and air travel, are likely to continue their rise in the future as Government grapples with the possible consequences of man-made climate change.

Recent proposals from the Green Fiscal Commission (GFC), a Government-supported think tank, would see home energy bills increase by £800 over the next decade. This includes tax of 80% of the cost of the average gas bill and 30% of the average electricity bill, by 2020. They also proposed a tripling of fuel duty over the next decade and a tax of up to £3,300 on new cars.

Within the Pre-Budget Report we might see these green taxes introduced earlier than originally expected, as a way not only to tackle climate change but also to help pay off some of the national debt.

5 – Some nasty pension surprises

Within the Budget Report earlier this year we saw a new measure to restrict the payment of higher rate income tax relief on pension contributions. This will only hurt higher earners who will no longer be able to claim the full level of tax relief on larger pension contributions.

Whilst encouraging greater levels of private pension provision should be considered as a priority for Government, they might also see pensions as a bit of an easy target for raising additional funds. Some nasty pension surprises might include restricting all pension contribution tax relief to 30%, increasing the State pension age or even making cash lump sums from pensions taxable.

How can you plan for this?

The simply answer is, you cannot.

It would be foolish to make major personal finance decisions today based on predictions about what might or might not arise within the Pre-Budget Report. However, it is always important to have a general awareness of how different tax and investment rules might change in the future.

Understanding what the easy targets are and how political motivations might influence policy decisions does enable you to remain nimble in your personal financial planning and react swiftly to any relevant changes.

Martin Bamford is site editor of BrilliantWithMoney and a Chartered Financial Planner at Informed Choice. You can follow him on Twitter @martinbamford. He does not have a crystal ball.