Emergency Budget speculation mountsTax rises and major spending cuts predicted
09 June 2010
Coalition Chancellor George Osborne has pledged to reduce Britain's £156bn deficit in his emergency budget, scheduled for 22 June. Capital gains tax seems certain to rise, and higher rate pension tax relief may be cut. Major spending cuts are also in the pipeline.
Income tax rises were implemented by the previous government in April 2010. It seems likely that the 50% tax band for those with taxable income above £150,000 will be retained by the new administration, despite Mr Osborne's earlier description of it as 'temporary'.
Many taxpayers will benefit from a government pledge to increase the amount of income you are allowed to keep tax-free, before income tax is charged on the rest. This is your personal allowance. The coalition will make 'a substantial increase in the personal allowance from April 2011', with the benefits focused on those with lower and middle income. It has said that it will 'further increase the personal allowance to £10,000' as a longer-term policy objective. Personal allowance for 2010-11 is £6,475, the same as it was for 2009-10.
The withdrawal of personal allowance for those earning over £100,000 is set to continue, however, meaning those who earn above £112,950 pay tax on everything they earn.
In 2009-10, income tax earned the Treasury just under £140bn.
The second-highest source of revenue for HMRC, generating £94bn in 2009-10, National Insurance Contributions are set to rise by 1%, to 12%, for employees from April 2011. A previously planned similar rise in National Insurance for employers has been scrapped by the new Government, which described it as a 'jobs tax'.
Tax relief on pensions
At the moment, pension contributions receive tax relief at your highest marginal rate of income tax. This means that 40% taxpayers enjoy a considerable boost to their pension savings. There has been considerable speculation that the new Government will reduce higher rate relief or abolish it altogether. Those making pension contributions would still get basic (20%) tax relief. Critics have argued that this would severely reduce the attraction of pension schemes for wealthier individuals.
Increase in ISA limits
The ISA limit is currently £10,200 (£5,100 for cash ISAs). There have been suggestions that this could rise as a way of encouraging investment and rewarding long-term savers.
Value added tax (VAT) is the third biggest source of revenue. In 2009-10 it generated £67bn. The standard rate was restored to 17.5% in January 2010 after a temporary reduction to 15%. There has been speculation that the new government could raise the basic rate to 20%. This would bring in much-needed revenue but has been warned against by retailers, who fear that it will reduce spending. The British Retail Consortium has estimated that this could amount to a fall of £3.6bn over four years.
Capital gains tax (CGT)
The previous government reduced capital gains tax to 18% in 2008. Before this it was charged at 40% for higher rate taxpayers. The coalition government has signalled that it 'will seek ways of taxing non-business capital gains at rates similar or close to those applied to income'. Many commentators have taken this to mean that CGT will rise to 40% or 50%.
There has been considerable pressure against such a hike, with Conservative politicians such as John Redwood calling for a reintroduction of taper relief to reduce the impact of CGT on long-held assets. He has proposed a reducing rate of CGT, with no charge at all for assets held longer than five years: 'It would send a strange signal if a Lib/Con government decided to more than double the CGT rate set by a Labour government. It would damage the revenues and be unfair to anyone who saves, is prudent, or who ventures their money for the greater good.'
The Government has yet to spell out details of the proposed CGT rise, but the Prime Minister was recently quoted as saying: 'I totally understand the arguments. I did not come into politics to punish people who want to do the right thing and save.'
In 2009-10, CGT generated £2.5bn. It was paid by a relatively small number of people (130,000 in 2008-9). The annual threshold is currently £10,100. There have been suggestions that this might be lowered.
CGT is not payable on profits from the sale of your main home, but is levied on second properties. It is also charged on profits made from the sale of stocks and shares.
Inheritance tax (IHT)
The Chancellor had pledged to increase the IHT threshold to £1m but the coalition government has conceded that this is no longer a priority. In his last Budget, the previous Chancellor, Alistair Darling, abandoned plans to increase the threshold from the current £325,000 and decided to freeze it at this until 2014. The new Government has given no indication that they intend to reverse this decision. In 2009-10, IHT generated £2.2bn but was paid by just 19,000 estates.
Autumn Spending Review
Some cuts in public spending may be announced in the Budget, but the Chancellor has indicated that the majority of these will follow the autumn Spending Review. He has said this will include savings and reforms in social security, tax credits and public service pensions.The Spending Review will set departmental budgets for 2011-12 to 2014-15.
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