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On 22 April 2009, Alistair Darling, the UK's Chancellor for the Exchequer, presented his second budget speech. Against the current back drop of considerable economic uncertainty and hardship, many UK taxpayers were perhaps looking for certainty and a clear way ahead. Instead Mr Darling's Budget presented them with a large amount of very specific and detailed measures. Time will also tell whether this Budget will help the UK emerge from recession with a sustainable competitive advantage.
While business may welcome the short-term incentives introduced this year to help stimulate the economy, the increase in the top rate of income tax for high earners, coupled with the phasing out of basic personal allowances for certain taxpayers, will leave many individuals with much increased tax bills going forward. In addition, the substantially increased differential between income tax and capital gains rates may distort economic behaviour and investment decisions - it is not clear if this is intended or desirable. The removal of the higher rate relief for pension contributions could also discourage saving in this form given pension income will continue to be taxed at the higher marginal rate.
From a macro perspective, the tax changes announced by the Chancellor, both individually and collectively, are unlikely to have any real impact on the UK Government's fiscal deficit. For example, the increase in higher income tax rate to 50% is predicted to raise just over £1bn in 2010. In the context of a budget deficit of £175bn, this is a very small amount when compared with the impact on the perceived attractiveness of the UK as a place to do business which will be much greater.
As in previous years, the raft of detailed changes announced does nothing to help progress towards the UK Government's stated aim of tax simplification. Continual tinkering with the system detracts from the consistency which business and investors alike need to commit to longer-term investments. There also remain a number of areas where the Government will continue to consult and review, and where further changes can only be expected.
For additional comment and analysis, please visit our 2009 UK Budget website. Full details of the measures can also be found on the UK Treasury website.
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