Enjoy these tax cuts now as it will get tougher

AS expected, the Chancellor announced tax cutting measures in the pre-budget report.

They are designed to increase the spending power of individuals in an attempt to stimulate the economy and reduce the effect of the impending recession.

However, good news today comes potentially with bad news for the future.

VAT will be reduced from 17.5 per cent to 15 per cent with effect from Monday for a period of 13 months.

However, the reduction in VAT will have no effect on alcohol, petrol and cigarettes as increases in the relevant duties will mean that the prices of these products will remain unchanged. Further good news for individuals is that the rebate introduced this year for basic rate taxpayers to compensate for the abolition of the 10 per cent rate of income tax is to be made permanent.

The good news of these tax cutting measures will be received by taxpayers, and especially high earners, with reduced enthusiasm as tax rises have been announced for the future. With effect from April 2011, the rate of national insurance paid by individuals and businesses will increase by 0.5 per cent. It is expected that no one earning less than £20,000 per annum will be worse off as the level at which national insurance begins to be paid will be increased to the same level as that for income tax.

High earners received further bad news with the announcement that with effect from April 2010 the income tax personal allowance will be tapered for individuals earning more than £100,000 per annum.

Additionally, with effect from April 2011, individuals earning more than £150,000 per annum will pay an increased rate of income tax of 45 per cent.

Therefore, although the pre-budget report announced tax cutting measures which will be welcomed by many taxpayers, tax increases in the future mean that some taxpayers will not be putting the Chancellor on their Christmas list.