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Your Money > Tax Articles > Tax cuts: How much could you save?
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By Richard Evans
"One way you can get the economy moving is by tax cuts," Gordon Brown said recently. "That's something we've got to look at in the next few weeks." And faster than you could say "fiscal stimulus", the other political parties and various economic experts weighed in with their suggestions for the most effective measures. Tax cuts cost money. For example, each percentage point cut in the rate of VAT would reduce the Government's income by £5 billion, experts estimate - so it's vital to make the right changes. If the Government spends billions without significantly reducing hardship or encouraging spending to keep the economy moving, it could just make matters worse. The Chancellor is likely to announce any changes in the Pre-Budget Report, which is expected as soon as next week. So which taxes are most likely to be cut - and how much do we stand to gain? VAT Possible savings: £250 a year One of the most eye-catching suggestions was that VAT should be slashed to 12.5 per cent (this one came from the Centre for Economics & Business Research). Such a drastic reduction may be unlikely, but a cut to 16 per cent is predicted by BDO Stoy Hayward, the accountancy firm. The minimum level under EU law is 15 per cent. A household on typical earnings of £25,000 could save £250 if VAT were cut to 15 per cent, says Bill Dodwell of Deloitte, another firm of accountants. "Such a family might have taxable expenditure of £10,000 a year, so they would save £250 if VAT fell to 15 per cent," he says. He adds that it would cost £10 billion in lost tax revenue. "The cost is huge but the benefit to each household is not that large," Dodwell says. "The aim would be to boost spending and help keep the economy going but I doubt that the prospect of a 2.5 per cent saving would make a big difference to people's buying decisions. Income tax Possible savings: £315 a year Changes to the basic and higher rates of tax are unlikely, observers say. But the Government could still put more money in taxpayers' pockets by changing thresholds. The easiest change would be to decide not to reverse this year's increase in the personal allowance - the first slice of earnings, on which no tax is paid. This increase was supposed to be temporary, as it was intended to soften the blow of the abolition of the 10p tax rate. "I'd be amazed if they took this 'temporary' rise away - it would be a terrible time to do it," Dodwell continues. The concession is worth £120 a year. In fact, the Government is likely to increase the personal allowance in line with inflation. "The tax-free threshold is meant to rise in line with the Retail Price Index," he adds. "I doubt the Chancellor will try to avoid this, and taxpayers will do well because the increase is based on the RPI in September, when it peaked at 5.2 per cent. This would mean you pay no tax on the first £6,350 of earnings, rather than the current £6,035 - an increase of £315." Inflation-linked increases will almost certainly be applied to the National Insurance threshold and to state benefits, such as pensions and unemployment benefit, Dodwell suggests. Putting extra money in the pockets of those on lower and middle incomes is reckoned to be a good way of boosting the economy as these groups usually have little choice but to spend it. Stamp duty Possible saving: £2,500 There could be a further increase in the stamp duty thresholds in a bid to support the troubled housing market, says BDO Stoy Hayward. The £175,000 level at which 1 per cent duty becomes payable and the £250,000 threshold for 2 per cent could both be raised, the firm predicts. Someone buying a property worth £250,000 currently pays stamp duty of £2,500, so this would be the saving if the levy were abolished up to this level. But Dodwell doubts whether the move would be of much help. "The previous temporary lift of the threshold to £175,000 has done nothing. The barrier to house buyers has been the availability of credit and the belief that prices will be lower next year, not stamp duty," he says. "This move wouldn't be effective so my advice would be don't waste money on it. I don't think it will happen." Help with mortgage payments Possible saving: £14,000 The Government could reintroduce state benefits to cover mortgage interest for those who can't meet their repayments - a benefit abolished by the previous administration. "A family with a mortgage of £200,000 at an interest rate of 7 per cent could benefit by £14,000 in a year," says Dodwell. "This would cost the Government a lot of money, so there would probably be limits on the size of the payment and how long it would be paid for. But it would prevent rising unemployment feeding into a spate of repossessions, which would depress the property market even more and risk worsening the recession. "I don't know if the Government is considering it, but it is the kind of targeted benefit that could make a bigger difference to the economy than an across-the-board handout." Other possible measures The Tories want to introduce a "holiday" for employers' National Insurance contributions, which could encourage recruitment and help the unemployed. But changes to the rate at which individuals pay NI are thought unlikely. There has been speculation that proposed increases to car tax will be put on ice, but the rise in petrol duty postponed earlier is likely to take effect next April, according to experts. A cut in VAT on gas and electricity is highly unlikely, he reckons, as the 5 per cent level is the lowest that EU law allows on such services. Taxes on savings pose a dilemma for the Government, he says. "An increase in the Isa limit, say, risks upsetting the balance between saving and spending. You are giving away to the wealthiest, while those on average incomes are unlikely to be able to benefit." | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Would you like to see VAT cut to 12.5 per cent? Or stamp duty abolished for homes worth less than £250,000, perhaps? How about a simple cut in the rate of income tax, or the state paying your mortgage interest if you lose your job? All of these possibilities have been floated after the Government dropped some heavy hints that it plans to help people struggling with the financial crisis.
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