Having set the scene with the first half of his speech George Osborne went on to outline what we all want to know; what changes will he make, and how will they affect you?
In his effort to the reduce public sector debt there were significant cuts, large tax rises, and some new taxes but there were also some concessions and one or two tax cuts.
In a widely anticipated move VAT will rise from 17.5% to 20% with effect from April 2011. In his speech the Chancellor said that “the years of debt and spending make this unavoidable,” he went on to say “that is £13 billion we don’t have to find from extra spending cuts or income tax rises.”
VAT exemptions on food, children’s clothes, books and newspapers have been preserved.
The increase in VAT will raise significant revenue for the Chancellor, however there is a risk that the rise will dampen consumer spending and push inflation higher.
There were no changes announced to the main rates of income tax.
However in an effort to help the lowest paid it was announced that from April 2011 the personal allowance will rise from £6,475 to £7,475, although this rise will not apply to higher rate tax payers. This would seem to be a sensible move, as not only will it help the lower paid but it is clearly highly inefficient to levy tax only to give them the money back in the form of benefits.
The desire to move towards a personal allowance of £10,000 was reiterated, something promoted by the Lib Dems in the election campaign.
As indicated in the coalition agreement, a rise in CGT (Capital Gains Tax) was announced; however the amount of the rise was not as bad as many had feared. For basic rate tax payers i.e. those that pay tax at 20%, CGT will remain at 18%, for higher rate tax payers it will move to 28%.
The annual exception will remain at £10,100, which is good news meaning that those with relatively modest gains will not be pulled into the world of CGT and potentially complex calculations.
In an unusual move the rise will be introduced immediately.
A word of warning though, it is not as simple as saying “my salary is taxed at 20%, therefore I will be taxed at 18% on my gain”. To calculate the rate applicable to you it will be necessary to add your income for the year in question plus the capital gain and deduct your personal allowance and the annual exception, if this figure puts you on the cusp of higher rate tax you could well end up paying some CGT at 18% and some at 28%.
Osborne said the change in the headline rate would target the wealthy saying “Some of the richest have paid less than the people who clean for them. It is therefore right that CGT should increase to create a fairer tax system.” It is a matter for some debate whether the difference of 22% between the new CGT rate and the highest rate of income tax will deter high earners from trying to switch their ‘income’ to ‘capital gains’.
In an effort to encourage business, entrepreneur’s relief, offering a lower rate of CGT (10%) on gains arising from the sale of certain business assets, has been extended from £2m to £5m.
Since the election the government has been wrestling with the problem of how to increase CGT for the wealthy whilst not punishing those people that have saved hard; these measures seem to achieve this aim. However despite calls from some quarters the Chancellor did not reintroduce either indexation or taper relief. This will disappoint many who believe that tax should not be paid on any gain arising simply from inflation, although it could be argued that the lower than expected rate of tax makes up for the absence of indexation or taper relief.
There will be no further rise in alcohol, fuel or tobacco duties although planned rises will still come into effect.
The main rate of corporation tax, currently at 28% will fall to 24% over the next four years.
The corporation tax rate paid by small businesses will also fall from 21% to 20%.
The National Insurance threshold for employer contributions upped by £21 per week.
It was confirmed that the State Pension will be subject to a ‘triple lock’ and rise in line with RPI, earnings or 2.5%, whichever is higher.
The move was promised in May’s coalition document and reinstates the link between the State Pension and earnings. The move is good news for pensioners as wages tend to rise faster than inflation.
It was also confirmed that the compulsory retirement age will be scrapped and that the State Pension age will be raised to 66 quicker than was originally planned.
The complicated system of taper relief introduced by the last government to decide how much tax relief higher rate tax payers will be entitled to will be reviewed with the Chancellor indicating he preferred a simpler system, providing it raised at least as much revenue.
In a move that will please many, compulsory annuitisaton will be scrapped from April 2011. As an interim measure the age at which someone will have to purchase an annuity will be raised to 77, allowing those turning 75 between now and April 2011 to benefit from the proposed change.
There will now be a period of consultation before new rules are announced which will take effect in April 2011.
It also seems that there is potentially positive news on Inheritance Tax levied on pension plans held by those over the age of 75, although further details need to be confirmed.
ISAs (Individual Savings Accounts)
The annual ISA limit will increase in line with RPI (rounded up to the nearest £120) from next April.
The income level for eligibility for tax credits will be cut to £40,000. However there will be a rise of £150 per child, above inflation, in the child element of tax credit for those on the lowest incomes.
Child Benefit, which some thought would become means tested, stays in its current format, although the amount that is paid will be frozen for the next three years.
There will be cuts in housing benefit designed to save £1.8bn per year.
All benefits, except the State Pension and Pension Credit will now be linked to the Consumer Price Index (CPI), which, according to the Chancellor will save £13.15 billion over four years.
Unlike the RPI the CPI does not include mortgage interest payments which rise with interest rates and council tax. CPI is lower than RPI hence the saving that can be achieved.
Public Sector Pay
The pay freeze will now last for two years, longer than had been anticipated. Although those earning below £21,000 a year will be exempt and given a flat £250 pay rise in each of the next two years.
The CPI will replace the Retail Price Index (RPI) as the index used by public sector pension schemes to track the cost of living.
As with any budget there are winners and losers, the spending cuts are dramatic as are a number of the tax rises. However, for some, there are some silver linings in amongst the darker clouds. Much of the detail and practical application of the announcements will become clear in weeks to come, you can be sure we will keep you fully informed as well as highlighting any opportunities that may arise from the budget.
No one can accuse George Osborne of not being bold with his first budget and the desire to balance the books is certainly ambitious, only time will tell in which direction the budget will take the economy.