STAMP DUTY ON PROPERTIES UNDER £175,000
82. On 2 September 2008, the Government announced
that there would be a one year stamp duty holiday for all purchases
of houses costing up to £175,000.
Budget 2009 extended this holiday until 31 December 2009.
The Chancellor explained that the reduction in first-time buyers
was undermining the housing market, therefore he had decided to
extend the stamp duty holiday "until the end of the year".
 The Treasury
calculated that 60% of residential properties would be exempt
from stamp duty as a consequence of the initiative. 
The Chancellor hoped that this would "encourage modest and
middle-income home buyers".
83. We have previously questioned the effectiveness
of this measure in our analysis of the 2008 Pre-Budget Report,
where we noted that the stamp duty holiday was not "having
any widespread effect". We were also concerned that measures
introduced by the Government might not "be adequate in the
face of the crisis in lending".
Mr Weale was concerned that the extension of the stamp tax holiday
might "slow the adjustment of house prices to what many people
would regard as a more sustainable level". 
John Whiting was also unsure if the stamp duty holiday helped
a great deal "given the prices of housing generally".
He highlighted the greater importance of improving "the availability
of mortgage credit for those who wish to borrow, continued low
interest rates so it can be serviced and the confidence that both
84. The Chancellor told us that owning a home was
an aspiration for "millions of people" and the Government
wanted "to help people fulfil that."
There were two fundamental aspects to supporting this aspiration:
one was "the availability of employment because it is people's
jobs and their incomes which will determine their willingness
and their ability to purchase, and the second is the availability
85. Mortgage lenders have been unable to provide
previous levels of mortgage finance in recent months as credit
markets have tightened. As we have discussed in previous reports,
the dependence of mortgage lenders on securitisation
increased markedly between 2005 and mid-2007.
Since the start of the current financial market disruption, these
markets have effectively been closed to new issuance.
86. The Government announced in January 2009 that
it would establish a guarantee scheme for asset-backed securities
to help support the availability of mortgage finance.
The Budget revealed that initially the scheme would be available
until October 2009, for "banks and building societies to
use alongside the existing Credit Guarantee Scheme to support
their lending in the economy".
The Chancellor told us that the scheme would allow "for greater
securitisation, therefore, as the market picks up, more money".
87. The recovery of the housing market is clearly
linked to the recovery of the economy as a whole. It is therefore
vital that the Government take steps to reinvigorate the market
at this time. However, we note that the resurgence of the property
market is particularly dependent on the availability of mortgage
credit to homebuyers and we are unconvinced that other schemes
to boost the market, such as the stamp duty holiday, will have
any marked effect. We call on the Government to report in the
PBR on the implementation of the asset-backed securities scheme
and to provide a cost-benefit analysis of the effectiveness of
the stamp duty holiday.
88. We welcome the help announced in the budget
for homeowners. Whilst we welcome the diversity of the schemes,
we regret the delays in implementation and the lack of clarity,
in respect of some of the schemes, especially in entitlement to
Support for Mortgage Interest. We recommend that the Government
takes urgent steps to ensure that clear information is provided
for homeowners on the support that is available to them if they
get into financial difficulties as a result of the recession.
Vehicle scrappage scheme
89. In Budget 2009 the Government announced the introduction
of a vehicle scrappage scheme to "give a boost to the car
industry during the current downturn".
From mid-May 2009 until the start of March 2010,
a discount of £2,000 will be offered to consumers buying
a new vehicle to replace a vehicle more than ten years old which
they have owned for more than twelve months. The Government will
fund £1,000 of the discount and the remaining £1,000
will be funded by participating manufacturers.
The Government will spend up to £300m on the scheme, supporting
the sale of up to 300,000 new vehicles.
The Society of Motor Manufacturers and Traders Limited welcomed
the scheme, which it believed would kick-start demand in the car
and van market.
90. The evidence we gathered suggested the scheme
would provide only a small boost to the car industry. The Treasury
told us that, although difficult to model how much extra demand
would be created, it estimated 90,000-100,000 of the 300,000 new
vehicles supported could be considered additional sales or purchases
made earlier than planned.
This corresponds with issues raised by the IFS. It suggested that,
since a significant proportion of cars more than ten years old
were already scrapped each year, a large part of the scheme would
support vehicle replacements that occurred anyway. 
Some households would bring forward their vehicle replacement,
leading to fewer sales after the scheme ended.
Mr Chote also queried the focus on just one industry, suggesting
arguments could be made for helping a number of different industries
at this time.
He told us, "when people talk about the particular strategic
importance of the car industry over other industries, I am not
entirely clear exactly on what basis those judgements are made".
91. Not only could the scheme fail to generate many
additional new vehicle sales, it will also boost the foreign-based
car industry more than British motor manufacturers. Mr Chote told
us that benefits of the scheme could go abroad since very few
new vehicles bought in the UK are produced in the UK.
The Treasury subsequently confirmed that around 86% of new cars
sold in the UK are imported.
When this proportion is applied to the estimated 90,000-100,000
additional new vehicle sales expected from the scheme, it means
only 12,600-14,000 new British-made vehicles might be supported.
92. The possibility that the scheme could support
the sale of only a few new UK manufactured vehicles raises doubts
about its value for money. If the Government's £300 million
of funding supported the sale of only an extra 12,600 new British-made
vehicles, this is the equivalent of spending more than £23,000
on each vehicle. This is obviously much larger than the Government's
nominal contribution of £1,000 towards each new vehicle sold
through the scheme. It demonstrates that a considerable amount
of the £300 million funding could be spent on supporting
sales of foreign-manufactured cars that would have happened anyway.
The scheme will also contain potentially large 'dead weight' costs.
93. When questioned about possible 'dead weight'
costs, the Chancellor told us that there were arguments that "you
can run both ways" about the scheme.
He highlighted the fact that, whilst many cars might be assembled
abroad, they would have British-made components, and that the
distributive part of the car trade would benefit regardless.
He also said that he had looked at similar schemes operating abroad
such as in Germany, where the scheme had cost more and had been
extended. He had concluded that "on balance, given the importance
of the [car] industry
it was right to see whether or not
[the scheme] would work, but that it is cash
and time limited".
94. We recognise the importance of the car industry.
The vehicle scrappage policy has been welcomed in some quarters.
Although it will support 300,000 new vehicle sales, it is likely
that only one-third at most will be additional sales. Moreover,
of these additional or accelerated sales, just 12,600 could be
new UK-manufactured vehicles, although we accept that most other
cars sold contain high quantities of UK-manufactured parts and
that car retailing will benefit. We note the Chancellor's reservations
regarding the scheme and await the Pre-Budget report 2009 to assess
how effective it has been.
The 50p tax rate
95. In its 2008 Pre-Budget Report, the Government
announced that it would restrict the income tax personal allowances
of those with incomes over £100,000, and would introduce
a new top income tax band of 45 per cent for those with incomes
above £150,000 from April 2011.
The Government then amended its proposals for the new top rate
in Budget 2009, moving implementation forward to April 2010, and
raising the top rate of income tax to 50 per cent for those with
incomes over £150,000.
HM Treasury estimated that via the introduction of this new rate
of tax, the Government would raise £1,130m in 2010-2011,
£2,480m in 2011-12 and £2,400m in 2012-13.
The Chancellor stated that his intention was "that this was
the fair way of ensuring that we did raise sufficient revenue".
Also announced in Budget 2009 was a measure to cap the income
tax relief available on payments into their pensions of those
earning over £150,000 from 2011-12.
96. Our expert witnesses commented on the behavioural
changes that might impact on whether the Government would raise
these projected revenues from the introduction of the new top
rate of income tax. Mr Chote, for the IFS, outlined several ways
in which high income earners might try to circumvent the new top
rate of income tax. He suggested out that "There could be
a conventional labour supply response in the sense of people simply
thinking that it is not worth working as hard or as long or worth
taking opportunities to earn more than they could do".
Other responses might include outward migration from the UK or
people who were considering working in the UK being deterred from
coming to the country.
As well as this, some high-earners might choose to top up their
high earners might also decide to try and shift some of their
income into capital growth. John Whiting explained the consequence
of such a move: "people will look at
to try and build a business rather than just take income and maybe
that is no bad thing. But it does mean an 18% tax rather than
50% plus national insurance."
The Chancellor himself suggested that another route out of paying
the tax would be if people took advantage of his increase in the
maximum permitted levels of ISAs.
97. Mr Williams, Director, Personal Tax and Welfare
Reform, HM Treasury, told us how the Treasury believed these behavioural
changes would impact on the revenue raising capability of the
new top rate of income tax. He explained that the theoretical
maximum amount that could be gained in revenue could be calculated
by looking at those currently earning above £150,000, and
paying 40%, and then applying the new 50% tax rate.
When the Treasury then took into consideration the behavioural
effects, it expected the yield to be 31% of the theoretical maximum
When the pension changes discussed below are implemented from
2011-12, the Treasury expected the yield to rise to 38% of the
theoretical maximum, as one of the ways of avoiding paying would
When we asked the Chancellor whether he thought such a high level
of loss would undermine public support for the measure, he explained
Tax-planning has been with us, presumably, since
the beginning of the 19th Century when, you will remember, income
tax was introduced on a temporary basis during the Napoleonic
Wars and, I dare say, ye olde tax planners have been doing a roaring
trade ever since. It is perfectly legitimate for people to tax-plan.
They are only obliged to render unto Caesar what is due to Caesar
and that has always been a feature of their case. What I tried
to do here though, I am raising revenue both in indirect taxes
and from next year from those earning over £100,000 in direct
taxes, and of course I will always be vigilant about loopholes
and indeed we announced various measures in the Budget there.
I think the answer to your question is that to dig up the entire
system at the present time would have been, I think, difficult
98. In a report on the initial Pre-Budget Report
2008 measure of a 45% new top rate of tax, the IFS suggested that
the Treasury was possibly overestimating the revenue to be gained
from raising the tax on those who earn over £150,000, in
two ways. Firstly, using a different estimate to that of the Treasury's
of the "taxable income elasticity"
might mean that such a higher top rate would actually lose revenue,
rather than raise it.
The IFS's second concern was that the Treasury appeared not to
have taken into account the impact of this measure on other taxes
other than income tax.
This included taxes such as VAT, which might see a reduction as
a consequence of reduced spending by this income group. The Treasury
noted that the costing of the new top rate of income tax included
direct behavioural effects, such as those associated with labour
supply decisions, including around migration, and use of tax reliefs.
The costing however excluded indirect effects that the new top
rate of income tax may have on levels of income and spending,
which the Treasury stated were meant to be taken account of by
changes to the economic forecast.
99. We also questioned why the figure of £150,000
had been chosen as the threshold beyond which the top rate of
income tax would be 50%. The Chancellor acknowledged that little
analysis had been used to determine the threshold: "There
is no science behind it, it is just simply my judgment that I
thought that figure was an appropriate figure. It is the top 1%,
as it happens, of earners in this country and I decided that that
was the right level at which to pitch it."
100. We believe there are considerable uncertainties
over the yield to be raised by the new 50% top rate of income
tax. We therefore recommend that the Treasury, in the 2011 Pre-Budget
Report, should report on the revenue raised, both nominally and
as a percentage of the theoretical maximum revenue, by the new
top rate of income tax. We also recommend that the Treasury assess
at that time the yield obtained from the higher rate against its
disadvantages. If the higher rate were to be continued it would
be appropriate to consider what further reforms would be needed
to prevent further leakage of potential revenue from this measure.
The Treasury should indicate if it would revise the rate in the
event that the estimated revenue yield fell well below their forecasts.
Finally, we were concerned that the Chancellor lacked a robust
basis for selecting the threshold from which the new top rate
of tax would apply and for choosing what that rate should be.
Tax relief on pensions
101. Budget 2009 introduced measures to restrict
tax relief on pension contributions for those with incomes of
£150,000 and over. Currently individuals receive tax relief
on pension contributions at their marginal rate of income tax.
This means that a basic rate taxpayer would receive tax relief
at 20% and those paying the higher rate of income tax at 40%.
As Budget 2009 noted this meant that "those on highest incomes
benefit disproportionately from this relief" whereby "in
2008-2009 individuals with incomes over £150,000 represented
1.5% of pension savers, yet received a quarter of all tax relief
on contributions (£6.1 billion)". The proposed changeson
which the Government plans to consultmean that for those
with incomes of £150,000 or more, the value of pension tax
relief will be tapered down until it is 20% for those on incomes
over £180,000, which Budget 2009 explains would make it "worth
the same for each pound of contribution to pension entitlement
as for a basic rate income taxpayer". These reforms leave
in place the £1.8m lifetime allowance on size of pension
pot and the annual allowance on pension contributions which currently
stands at £245,000 or 100% of income whichever is the lower.
102. Mr Chote told us that one of the reasons behind
the changes to the pension tax relief regime was "in part
to close off one of the opportunities that people have to avoid
paying that [the 50 pence] rate".
Our expert witnesses cautioned that the changes would introduce
complexity into the system and offered alternative ways in which
the Government could reduce the tax relief paid to higher earners.
John Whiting, Chartered Institute of Taxation and PricewaterhouseCoopers,
wondered why the Government had:
not just adjusted the existing annual amount
that one can be contributing, which would at least be simple
logic might say if you want to control the amount that very high
earners can contribute, why not cap the amount at that level,
i.e. £150,000, and have done?
Mr Chote reminded us that Adair Turner, now Lord
Turner, who chaired the Pension Commission looking at the long-term
future of UK pensions "had said the only practical way to
limit tax relief to higher earners in order to distribute it to
low earners would be to reduce the value of the 1.8 m limit".
Mr Chote referred to the complexity of the changes, telling us
that the "whole issue about how do you value employer contributions
to define benefit schemes means that
it is going to be
enormously complicated to operationalise this". Mr Mike Williams,
Director, Personal Tax and Welfare Reform, defended the Treasury
against the charge that reducing the lifetime allowance would
have been a simpler way to proceed:
I think there are two reasons primarily why the
option is not as good as I agree it looks prima facie to be. First,
and I think most crucially, if we do significantly reduce the
lifetime allowance you are in some circumstances hitting people
much lower down on the income scale.
Mr. Williams did not however, offer any argument
against the reduction of the annual contribution limit as a means
to the same end.
103. The Chancellor defended the principle of the
tax relief measures, telling us that whilst he could "see
of simply aligning the relief with whatever the
rate of tax happens to be", there was a stage where:
if a quarter of everything that the general taxpayer
forgoes in terms of tax relief is going to 1% of top earners,
you do begin to think, "That can't be right", and it
is about £3.5 billion, it is quite a lot of money. "if
you were starting from here, you would not develop a system where
a quarter of all the relief you get goes to 1% of the top earners".
104. We note that this budget marks a departure
from the long-standing principle that tax relief for pension contributions
should be given at an individual's highest marginal rate. We urge
the Treasury to monitor the effect of this change on pension savings
and to keep under review the possibility that a cap on annual
contributions might be a more equitable way of reducing the percentage
of tax relief that benefits the highest earners.