Taxes

Basic rate tax benefit will increase from £120 to £145 a year on a permanent basis.

This is a surprise. Chancellor Alistair Darling was widely expected to extend the basic rate tax benefit for a further two years. Instead, the estimated 22 million people who will benefit from the move will do so permanently. The decision will help those Britons who have suffered since Mr Darling scrapped the 10 per cent starting tax rate this year.

People earning over £150,000, which is equal to around 1 per cent of the UK population, will see their tax rate increase from 40 per cent to 45 per cent from April 2010.

Whispers that the Government would renege on its 1997 pledge not to tax the rich emerged late last night and gathered pace today. The measure, which is expected to come into force if Labour wins the next election, will affect 300,000 people and generate around £1.2 billion in tax receipts.

National insurance contributions will rise by 0.5 per cent by April 2011 but earners under £20,000 will not pay additional costs. Chancellor expects incomes to be growing at 4 per cent by 2011.

VAT will be cut from 17.5 per cent to 15 per cent from next Monday until the end of next year - a 13-month reduction in total - after which it will return to the original rate. Darling states that he expects retailers to pass this on to consumers.

Cutting the VAT rate cost the Government £12.5 billion.

The Government was expected to reduce VAT but the decision is fast being seen as a bit of damp squib. Mr Darling hopes the move will stimulate spending on the high street. However, a number of retailers have already begun holding huge sales with discounts of up to 25 per cent - far above the measly 2.5 per cent cut in VAT. Also young families, often seen as being most at risk, certainly in an economic downturn, are unlikely to feel the benefit of falling VAT since neither children's clothes or food are taxed anyway.

VAT will return to its normal level by 2010 "by which time we expect recovery to be under way", said Alistair Darling.

However, duty on alcohol, tobacco and petrol will be raised to off-set the reduction of VAT on these goods.

The big question has been how the Government is going to pay for today's stimulus package. This surprise rise in alcohol, tobacco and petrol duty will not please those people who were stung in the Budget earlier this year. A rise in petrol duty will also hit motorists who have been struggling with the knock-on from higher oil prices. The price of oil has since fallen but corporates have been less than enthusiastic about passing on the benefits to consumers.

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