Ahead of the budget, here is a prediction: in the next 6 months, either inflation will go up, or interest rates will go up, or they both will go up.

The challenge therefore is not to second guess what is going to happen, but what you are going to do about the inevitable increases.

At the start of the recession, interest rates tumbled to their lowest level in living memory. To remind yourself what it was like, work out what the additional cost of an increase of 1% on your borrowings would be. Now multiply that by 4 or 5. That is how much better off you are at the moment, and how much you will need to find again when interest rates go up.

In the mean time, inflation is creeping up. No change there. However, pay awards are being held flat or low. Certainly lower than inflation.

My real prediction is that life could be a lot worse.

Having looked at the numerous summaries of the budget, I am left feeling somewhat bemused.

The media has led us to expect a significant budget, responding to extraordinary economic circumstances. Having run the “what this means to you” calculator a couple of times I can’t see any dramatic change to my personal, or business, circumstances.

Perhaps the message is that the chancellor hasn’t got a wand to fix the problem. In fact, perhaps the problem is not tangible enough to fix. I have suspected that a good proportion of our current and future woes are self perpetuated, by the “ever ready to tell a bad story approach” of the media, and by our own insecurities.

If there is a way out of the hole we are in, perhaps the message is that it’s up to each of us to grasp opportunities as they come, and take control of our own destiny.

With thanks to Martins Money Tips (www.moneysavingexpert.com) , welcome to the new tax year, here is a brief summary of the highlights (last year’s figures are in brackets).

The good:

Personal allowance UP! Every man, woman and child can now earn £6,475 (£6,035) before paying income tax. For those aged 65-74, it’s £9,490 (£9,030), and for over-75s, £9,640 (£9,180).

Basic rate tax threshold UP. You now pay 20% tax on the first £37,400 (£34,800) over the personal allowance, meaning under 65s hit the higher 40% rate at £43,875 (£40,835).

National insurance start point UP. You now need to earn £110 per week (£105), before paying for NI, usually 11%.

State pension UP. It’s £95.25 (£90.70) a week for a single person.

Pension credit UP. The minimum guaranteed income’s now £130 for single pensioners (£124.05), and £198.45 for couples (£189.35).

New Health in Pregnancy Grant. All pregnant women will get a non-means-tested £190 in their 25th week.

Inheritance tax threshold UP. You can leave £325,000 (£312,000) tax-free.

And the not so good:

Fiscal drag. This isn’t Alistair Darling in women’s clothes, it’s when increased allowances aren’t as generous as they seem. If wages and/or inflation increase by more than the allowances, effectively the government gets more tax revenue anyway, and the real value of the increase is less.

National insurance upper earnings UP.  You will pay 11% NI on earnings up to £43,888 a year (£40,040) and 1% above that.

ISA limits. No change. Yet again, the amount savable tax-free hasn’t increased with inflation or earnings.

Child Tax Credit family element. No change. Many families get this, and the freeze at £545 is an effective cut. Yet the means-tested element has increased to £2,235.

Remember to take proper advice before making any decisions…

www.moneysavingexpert.com is a great source of advice and help to those seeking to save money.

There is some confusion about the implications of the change in VAT.

First off, the potential saving is 2.1%, not 2.5%. This is because the saving relates to the VAT, not the whole value.

So a widget that sold for £11.75 on 30 November should cost £11.50 on 1 December. The saving is therefore 25p. 25p as a percentage of £11.75 is 2.128% (call it 2.1%), not 2.5%.

Hardly something to write home about and I have my eyes peeled to find anyone who is actually passing this saving onto the customer. Anyone found a bargain yet?

With thanks to David Pugh of Daymar Ltd

Well at 3.30 yesterday I settled down to watch the Report. The first half hour told me nothing except how well the government had done and that today’s problems were solely due to USA sub-prime borrowing. The next half hour mainly told me what they had leaked out to the weekend press anyway, so why bother ? And why bother indeed was the feeling after Alastair had sat down.

So for those of you who might have felt too excited to watch it – a quick update for you.

Gordon was there just behind Alastair – presumably just a coincidence that Alastair behaved like a glove puppet of Gordon. And Gordon did his nodding act again, and this time we got a few smirks as well. Good to see how seriously he takes our economic problems.

Apparently one of the main reasons for the global economic crisis is the high level of debt everywhere. So the government solves this by ….yes…increasing our country’s debt. But (in the words of the M&S advert) this is not any normal increase, but an increase to the highest level in history.  Hmmm – what was it that our friend Gordon used to say about “prudence” ?

Still don’t worry – Alastair said his budget should be back in balance by 2015/2016 – what a shame we can’t all wait for that date for our personal and company budgets.

Alastair has given us one short term (temporary) benefit before we pay (permanently) through our nose for this debt. Yes – VAT down 2½% from next Monday up until 2010. This is supposed to give a boost to spending. But……….. there is no VAT on food, children’s’ clothing, books, papers, postage, train and bus fares or council tax. There will be no reduction in petrol or diesel, or in heating bills. So no reduction in prices of the things you pay for every day. But there will be a price cut in televisions and all those things you buy once in  a few years, and then only when you have the disposable income to do so. Hmmm – so where is the boost to the economy?

Even so, with stores slashing prices by 20 to 30% I am not sure how we will actually notice this. In fact, how many retailers will keep the VAT cut as a contribution to their margins, or use it to offset the costs of changing tills, brochures, price lists and overtime for everybody to do this over the next weekend, and not pass it on? However, I am sure we will see the increase clearly when it goes back to 17 ½% on new year’s day in 2010 – so a happy new year to look forward to then. Still, if it does get consumer spending up, it will be on consumer goods in shops – so good news for employment in China as everything is made there now, but not much benefit for the UK. 

This VAT cut does nothing for our heating bills, as these have 5% VAT and this is not affected.

But prices for tobacco, alcohol and fuel will not go down – because he is increasing duty to offset the VAT reduction. In fact those of us claiming VAT back on petrol and diesel lose out because there is less VAT to reclaim! I wonder if Alastair has thought of how goods get to the shops ? That lorry derv will now cost more so food prices will go up even more and there is no offsetting as food generally is not subject to VAT.

And when VAT goes back up at the end of 2009 – will they reduce the fuel duty and the alcohol duty to compensate for the increase in VAT – am I being cynical if I think not? So yet another rise in fuel and drink prices again in 2010 then – by the extra fuel duty today plus the extra VAT which in turn is charged on top of the duty.  And that increase in fuel prices will feed through to higher prices of everything else. Hmmm – and this budget is designed to boost the economy?

And tax increases to come in April 2011 – is it just coincidence that this date is after the next general election ?

Increased income tax in April 2011 for those earning over £145,000 – up to 45%, and detrimental adjustments to the personal allowances for those over £100,000. Also not until April 2011 is that other income tax increase (oh sorry I mean national insurance which of course is not income tax is it?) when it will go up for both employers and employees – an extra ½% on all rates.  But it’s more than that – between you and your company you will be paying 1% more. And this is on top of the national insurance increases which happened just this last April – he forgot to remind us of those.

So no higher tax or national insurance until 2011 – is this because after then Gordon and Alastair and company expect that they will not be earning their high salaries by then ? (can’t think why not…………………). So it’s a good job that London MPs last August quietly awarded themselves a £6,065 rise in their London allowances to take effect next April to help them through this.

But some good news – the personal allowance increase this year (after the 10p tax fiasco) will become permanent. This is the amount you can earn before income tax is taken off. And that 2p income tax he proudly announced early this year off earned income – well it  has still not been taken off savings income, although again he did not mention this.

For those on state pension – well, not bad as there will be an increase in the basic amount from January (although this is not a budget point as it would happen anyway) plus a £60 boost payable in January.

So how is it for those of us with small businesses and companies ?

Well some (temporary) good news – the increased corporation tax rate for small companies next year from 21% to 22% has been “postponed” – he did not say until when but probably only 12 months deferment. It has still been increased from the 19% we enjoyed a couple of years ago.

But of course the increased employer national insurance will hit – not just on salaries but on benefits in kind too. He also forgot to remind us that in 2012 we will also have to bear a compulsory 3% employer costs on pensions.  So a good help to employment in the economy by then……….

He also gave some help in spreading tax bills if the company needs it – but it means phoning a specific helpline and negotiating with HMRC, and interest will still be payable on the delay. Still if it all does not help – then company losses (up to £50k) can be offset by previous years’ profits up to 3 years, increased from the previous one year limit.

They have confirmed there will be no action in 2009 on “income splitting” following the Arctic systems case, but they are keeping it under review. So we are OK for sharing dividend income with our spouses next year but we don’t know for how much longer. With the increase in national insurance we will help you to avoid this by paying through dividends which we can continue to do under current legislation.

So in summary – not really any good news in the short term despite the government spin  - no reduction in food prices, heating bills, fuel prices, council tax or anything else we classify as essentials – but bad news in the long term as we will all be paying for that increased government borrowing in the future.

But if you get really stuck – you can now pay tax to HMRC by credit card (for a fee which they will charge you as well) – and this from a government complaining we have put too much on credit. Am I being cynical again?

As always we need to see the details in the press releases which may refine some of the points above, but we will keep you up to date with developments. Please feel free to raise any queries with us, or to refer us to any colleagues who we can help.

Oh and don’t be fooled by the stock market increase yesterday – that was due the US bailout of Citigroup and not Alastair’s speech. So we have to be grateful to Bush after all.