What Does the Emergency Budget Mean for You?

24-Jun-2010

The first Budget under the Coalition Government was announced on Tuesday by the new Chancellor of the Exchequer, George Osborne. The Budget sets out a five-year plan to both pay down the country's deficit and also encourage economic recovery.  Below we explore some of the Budget's main features, and look at how they will affect you.

Work

The income tax threshold is to be raised for under 65s to 7,475 GBP, a 1,000 GBP increase.  This means that you can now earn up to this amount before you are charged income tax on your earnings, a move that the Chancellor estimates will lift 880,000 people out of income tax altogether.

There will be a two-year pay freeze for those working in the public sector.  The exception will be for the 1.7 million public sector employees earning less than 21,000 GBP, who will receive a flat 250 GBP pay rise in both years.

The Government announced that the Default Retirement Age of 65 would be reviewed, with the likelihood being that it would eventually be scrapped altogether.  This would give people the opportunity to make their own decisions about continuing to work into older age.

In a bid to make the UK one of the world's most attractive places to do business, the Government announced a four-year reduction in the rate of Corporation Tax.  Currently at 28%, the tax rate will fall by 1% each year until 2015/2016 when it will remain at 24%.

Pensions

From April 2011, the government has announced a 'triple-lock' guarantee for those receiving the basic State Pension.  This will see the basic State Pension rising each year in line with income, prices or by 2.5%, whichever of these is highest.  This measure is being put in place to ensure that the basic State Pension allowance increases at the rate of inflation.

Osborne announced plans to repeal rules put in place by the previous government that would have seen higher-rate tax relief being gradually withdrawn for employees earning 130,000 GBP or more.   Instead, it is envisaged that there will still be a reduction in the total amount that a higher earner can enter into a pension fund each year, but via a scheme that is far simpler to administrate.

The government will scrap compulsory annuitisation at 75 from April 2011 onwards, as a way of giving people more control over the way in which they manage their retirement savings. 

Property and Investments

Capital Gains Tax (CGT) will remain at 18% for anyone paying income tax at the lower rate.  For everyone liable for the higher and additional rates of income tax, the rate of Capital Gains Tax has now risen to 28%.  Capital Gains Tax applies to gains that you make when you sell or give away an asset that has increased in value.

CGT does not apply when you sell your main home (in most cases), when you sell personal belongings worth 6,000 GBP or less, or when you receive interest on tax-free savings in an Individual Savings Plan (ISA) or a Personal Equity Plan (PEP). Capital Gains Tax does apply when you sell a second home or a rented property that you have never lived in, you sell business assets (office premises or shares) or when you receive interest or dividends from most investments.  You can find a full list of assets that are liable for CGT on the HM Revenue&Customs site here.

Council Tax rates may remain at current levels in your local area, as the Government has offered to work with local councils to implement a Council Tax freeze in 2011-2012.  Although central government cannot force any local council to freeze their Council Tax rates, any council that does cooperate by increasing their public spending by just 2.5% on the previous year will receive a rebate of the same amount from Whitehall.  This would then enable that council to keep their Council Tax at the same level.

Household Spending

The standard rate of Value Added Tax (VAT) will rise from 17.5% to 20% from 4 January 2011.  The 0% rate of VAT will still apply to essentials such as food and children's clothing.  A consumer survey by shopping website Kelkoo showed that 16% were more likely to rush and buy items before the increase comes into force, so we may see a sharp increase in purchases of larger items such as cars, electronics and home appliances before next January.

From 4 January 2011, there are plans to raise the Insurance Premium Tax (IPT) rates.  The standard rate of IPT will rise from 5% to 6% of the total cost of an insurance premium, whilst the higher rate of 17.5% (charged on travel insurance, some vehicle insurance and domestic appliances) will rise to 20%. This rise will mean higher insurance costs for all, but it will have a particularly significant effect on younger drivers who already pay higher car insurance premiums.

Welfare

The tax credit system, developed by the previous government, involves a series of benefits that are available (on a sliding scale) to families with a joint household income of less than 58,000 GBP per year. From April 2011, there will be a reduction in the tax credit eligibility for families with a household income above 40,000 GBP (previously 50,000 GBP).