Pre-Budget report: what to look out for

Here is what to look out for when Alistair Darling delivers the pre-Budget report on Wednesday.

The threshold for paying inheritance tax – currently set at 40 per cent – is due to rise with inflation to £350,000 in April, but the Chancellor is likely to announce in the pre-Budget report that it will be pegged at £325,000 in an effort to create a dividing line with the Tories.

David Cameron has pledged to abolish inheritance tax for everyone except millionaires. The Tories promised to enact the necessary legislation in their first term.

Forecast: Threshold frozen at £325,000. Likelihood: 7/10


Alistair Darling has instructed officials to draw up plans to target bankers with a windfall tax to sate growing public anger at excessive bonuses. Two windfall options - a tax on employee bonuses, and a tax on bank profits - are on the table. Any measure would apply to all banks operating in Britain, including overseas firms, and would rake in substantially more than £1 billion a year for two or three years.

George Osborne has called for the Treasury and the FSA to prevent banks paying bonuses entirely in cash, arguing that traders would be less willing to take short-term risks if they received much of their bonus in shares in their company. While saying that he "wouldn't rule out" a windfall tax on bonuses, the shadow chancellor yesterday said he preferred measures to prevent banks from limiting their tax exposure by setting future profits against current losses.

Forecast: One-off tax on large bonuses. Likelihood: 6/10

A new top rate of income tax of 50 per cent on earnings over £150,000 comes into force next April. The Chancellor could lower the threshold to include those paid more than £100,000 a year, but this is thought unlikely. The accountants Ernst and Young have predicted that he could introduce a new 60 per cent band for people earning more than £500,000, raking in an extra £2 billion a year. More realistically, the accountants Grant Thornton have calculated that an extra 70,000 people a year will to be dragged up into the 40 per cent tax bracket as Darling freezes the personal allowance on which no tax is due, despite rising average earnings.

George Osborne says that he opposes the new 50 per cent tax rate but has not pledged to abolish it – at least for the first few years of a Tory government. Despite opposition from business groups the Conservatives have said that the upper bracket will remain in place for much of their first term, and won't be scrapped while lower paid groups are also struggling with other tax hikes.

Forecast: Threshold of new 50 per cent rate reduced to £100,000. Likelihood: 3/10

Profits on capital investments, including the purchase of second homes, are currently taxed at just 18 per cent. This is far less than most people pay in income tax and is seen as rewarding speculation. The accountants BDO say that Darling may address this discrepancy by increasing CGT to at least 20 per cent, and possibly up to 40 per cent for some short-term gains. Receipts from CGT have fallen sharply during the recession – the taxman is expected to take £2.2 billion over this financial year, down from £7.85 billion the year before – and raising the rate would help fill the hole in the public finances.

A commission set up by the Tory party to investigate possible reforms to the tax system in 2006 also proposed closing the gap between CGT and income tax rates. Osborne is said to be in “listening mode” about whether businesses would welcome such a change.

Forecast: CGT increased to 20 per cent. Likelihood: 5/10

The question of whether the tax system should be used to reward and promote marriage will be a hot issue during year's general election campaign. Harriet Harman, the deputy Labour leader and minister for women and equality, will say in a speech this week that tax breaks for married couples, which are backed by the Tories, would reward wealthy middle-aged men on their second or third marriages at the expense of single mothers and divorced women. With the cost of introducing tax allowances for married couples calculated at £5 billion a year, Darling is unlikely to announce a change in Labour policy.

What Tories would do: Women who do not work will be able to transfer their personal tax allowance to their husband, saving families between £1,295 and £2,590 a year. The policy is designed to encourage mothers to stay at home and look after their children, as it would have no benefit for couples both of whom work.

Forecast: Darling makes a point of attacking Tory policy as unfair and uncosted. Likelihood: 9 /10

The Chancellor will announce a number of measures to cut public spending in an effort to reduce in the deficit. Hundreds of millions of pounds will be saved by shelving part of the NHS computer database programme, which has already cost more than £12 billion. He will also flesh out plans to move more civil servants out of London and cut the salaries of the highest paid public sector bosses by 20 per cent over the next three years. Certain budgets within departments – cancer care, teaching, police numbers and transport infrastructure – will be protected from across-the-board cuts, meaning other areas will be hit with savage reductions of up to 20 per cent. Darling is also expected to disclose that the Britain's deficit will rise to more than the £175 billion he predicted, but not reach £200 billion...

What Tories would do: They have promised more aggressive action to reduce central government spending than Labour, while ring-fencing NHS and international development budgets. "This country is virtually bust," Osborne said yesterday. "If we don't deal with those debts then we are not going to have the sustainable recovery and the jobs that this country so desperately needs at the moment."

Forecast: Legislation committing government to halve deficit within four years. Likelihood: 10/10

In last year's pre-budget report Darling cut VAT from 17.5 per cent to 15 per cent in an effort to stimulate consumer spending. That reduction is due to expire on New Year's Day, although the Chancellor has been lobbied by retailers to push the date back. Ernst and Young accounts have predicted that he may consider extending the discount for another three months, then claw back the money by setting VAT at 20 per cent when it is reimposed. Estate agents are also calling for the stamp duty holiday, which affected properties worth between £125,000 and £175,000, to be prolonged beyond Jan 1.

What Tories would do: The party has criticised Labour's surprise VAT cut as an ineffective and expensive gesture. Reports this summer indicated that senior figures in the shadow cabinet were considering plans to increase the rate to 20 per cent within weeks of coming to power.

Struggling firms would be allowed to defer their VAT bills for up to six months, while the Tories have also pledged say they will abolish stamp duty for nine out of ten first-time buyers.

Forecast: Darling confirms that VAT will go back up to 17.5 per cent next month. Likelihood: 8/10

With one in five young people currently unemployed, the Government is expected to announce £2.5 billion has been set aside to extend a scheme to provide training or an internship for anyone between the ages of 18 and 24 has been out of work for 12 months. Yvette Cooper, the Work and Pensions Secretary, said that this "big further push" should ensure that young unemployment begins to fall in the second half of 2010.

What Tories would do: Money earmarked for unemployment benefit would be diverted to provide tax breaks to support the creation of new jobs. They are also calling for the government's various schemes to provide small firms with access to capital to be simplified. The Conservatives proposed a £50 billion nation loan guarantee system during the height of the recession, but are now calling for "failed" Government alternatives to be overhauled, with less red tape.

Forecast: £2.5 billion to train the long-term youth unemployed. Likelihood: 9/10

And of course the usual: Petrol and diesel prices up, fags up, booze up, car tax up. MOTs up, food up, gas and electricity up, wages down, productivity down, economy down, morale down, depression up, and bankruptcies up, makes you proud to be British doesn’t it?

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