Tax News

The emergency budget was the first time we really saw how the coalition is going to operate. Pre-election the two parties, Conservatives and Liberal-Democrats, had very different views on whether to cut or increase spending.

How exactly did George Osborne bring both seemingly opposing ideologies together, and what exactly does it mean for you?

Income Tax

Personal Allowance to increase by £1000 from April 2011.
Higher Rate threshold frozen until 2013/2014

The Lib-Dems have had their way – a long term goal is to increase the level of tax-free Personal Allowance to £10,000 from its current £6,475.

This will come in stages though, with the first £1000 starting from next year.

Effectively this would save around 23 million people £170 per year. It will also mean 880,000 people are taken out of the tax system altogether.

Part of this will be paid for by freezing the threshold for paying higher rate tax. Currently anyone with taxable income over £37,400 pays 40% tax on the excess. Freezing the threshold will mean that more tax is paid on any increases in income than would have been the case had the threshold increased. (This is a good example of fiscal drag – a tax rise disguised as a freeze.)

Capital Gains Tax

CGT higher rate introduced at 28%

Capital Gains Tax is again tinkered with. Not long after the rate was reduced to 18% and the system was supposedly simplified, Osborne has now changed it again.

From midnight tonight, higher rate taxpayers will pay 28% on profits made on the sale of assets. The standard rate is currently 18%.

VAT

VAT will rise to 20% from 17.5%.

This rise of 2.5% will not make much difference to most things we buy, adding only 2.5p to every £1 we spend on most things. For more expensive purchases it can make more of a noticeable impact with £25 on top of £1,000, or £250 to £10,000 (for a car purchase for example).

Added up over total spending it does make a substantial difference though. That level could become noticeable. For a household it is estimated that the total cost will average £425 per year.

This is still below the average VAT rate of all major EU states, 21.3%.

For the Treasury it may be more noticeable. Estimates show that this change could pull in more than £11 billion extra.

It will not happen until 4 January next year though. This is a similar tactic to the controversial temporary reduction from 17.5% to 15% introduced to fight the recession in 2009, which met with mixed views on its success.

Although there were rumours of an increase to VAT on food and non-alcoholic drinks, currently charged at 0%, no announcement was made. It could have generated an extra £3.5 billion, but the chancellor avoided using his current political muscle.

Cigarettes and Alcohol

No additional rises

This was not expected, but quite welcome. The chancellor did say this matter would be revisited in autumn, when he will look at health issues.

Children

Child benefit frozen at current levels for three years
Child element of tax credits increased by £150 over inflation next year

Child benefit is paid at £20.30 per week for the eldest child, plus £13.40 for any other children. That’s £1752.40 per year for a two child family.

And that’s how much it will stay for the next three years.

Freezing the level of benefit is effectively the same as reducing it at the same rate as inflation each year.

However, this is offset by an above inflation increase to tax credits. As these are paid to those on lower incomes this should reallocate payments to the

Businesses

Corporation tax reduced to 24%, with a special small business rate of 20%

Good news for businesses, but probably not as great as some had expected. Corporation tax will be cut to a standard 24%, while smaller businesses will pay only 20%. This was expected, but probably does not go as far as the government would have liked.

Both measures are intended to offer a stimulus to the economy. The opposite viewpoint says that special support measures that allow businesses grow and make profits, rather than blanket reductions in tax on the profits themselves, would have offered more of a fiscal boost.