There was much speculation in the run up to today’s Pre-Budget Report about how Chancellor Alistair Darling would address the issues facing our economy. The widely forecasted cuts in public spending and the introduction of the controversial ‘bonus tax’ have proved to be correct.

In a Pre-Budget Report that he said was “about building a fairer society”, the Chancellor announced that public spending will be reined in to provide £5bn in savings whilst “[protecting] frontline services and sustain[ing] the improvements that have been delivered over the past decade”.

The controversial and much mooted tax on bonuses was announced about two thirds of the way through the speech. At a time when banks “should be…[rebuilding] their capital base and becoming stronger”, Mr Darling concluded that “a tax on profits, as has been suggested, will prevent them from doing this”. Instead he introduced a “special one-off levy of 50% on any individual discretionary bonus above £25,000” payable by the bank and not the bank employee. In addition, highly paid bank staff will also have to pay income tax at the top rate on any bonus.

Income tax rates and allowances for 2010/11 will remain unchanged for the current tax year. For the 2012/13 tax year, the higher rate threshold (the point at which someone starts to pay higher rate tax) will be frozen at the 2011/12 amount. The personal allowance will be increased and the basic rate limit will be reduced by the same amount.

National Insurance Contributions (NIC) will rise by 0.5% in addition to the 0.5% increase to NIC rates already announced in the 2008 Pre-Budget Report, making a 1% increase in total from 6th April 2011. However, to ensure that lower earners avoid this further increase, the primary threshold and lower profits limit will be increased by £570.

Following the announcement in the April 2009 Budget that pension tax relief would be reduced for those with incomes over £150,000, the Chancellor today announced that he has decided to “include employer pension contributions in the definition of income for this tax measure” with a floor that will ensure that “no one with an income below £130,000 will be affected”.

There had been questions about how the Government might act to narrow the gap between the current 18% rate of Capital Gains Tax and the 50% top rate of income tax due to be introduced in April 2010 but the Chancellor made no mention of this in his speech.

Plans for VAT remain unchanged and it will revert to a rate of 17.5% from January 2010.

In an attempt to protect small businesses the 1% increase in corporation tax has again been deferred and it will remain at 21%.

In terms of Inheritance Tax, the threshold is to remain at £325,000 for individuals (and jointly £650,000 for spouses) for another year and will not rise to £350,000 as had been planned. There was also some anti avoidance legislation introduced from today with regard to Inheritance Tax.

The Chancellor’s statement also confirms that the Stamp Duty Land Tax holiday for residential property up to the value of £175,000 will end as planned on 31 December 2009.

The Chancellor’s theme or phrases for today’s speech were, the terms “growth” and “fairness” being peppered throughout. He predicted a return to economic growth in the 4th quarter and a move to get the UK’s debt “in line with other G7 economies”. This was, however, against the backdrop of his admission that the economy had contracted in 2009 by 4.75%. We hope that his predictions for ‘growth’ in our economy in 2010 come to fruition.