After 13 years of spend, spend, spend the Age of Austerity is dawning. So what does it mean for your wallet? There will be an emergency budget on 22 June, and while there may be surprises, we do already know much of what it will contain.
First, everyone earning under £100,000 – above that there is no personal allowance – will see the amount they can earn before they pay income tax gradually rise to £10,000 (from £6,475). The first move is likely to be to £7,500 from April 2011: that could mean most people pay around £200 less in income tax. But they’ll also being paying more in national insurance (which is also an income tax), as from April next year everyone earning over £20,000 will pay yet another 1% of their income to the tax man. You can cut your bill a little by signing up to a salary sacrifice scheme with your employer, but odds are anyone watching their taxes will have done so already.
Next is capital-gains tax (CGT). Right now you pay it at a flat rate of 18% on any profits of more than £10,100 made on the sale of most investments. That’s unlikely to last: the new government intends to hike the rate in line with income tax. So if you’re a 40% taxpayer, expect to be paying 40% on your gains too. That could mean those with big gains get hit hard – particularly as there has so far been no mention of indexing the tax take to inflation (see Capital gains tax hike was inevitable – but it must be done fairly for more).
Given this, if you’re planning to sell any assets you may want to do so sooner rather than later. Remember that married couples can combine allowances and that you can offset losses against gains to cut your bill.
There’s some bad news for parents: plans are afoot to remove tax credits and taxpayer contributions to child trust funds for higher earners. We’re not yet sure who that means: the Tories seem to think it’s those on more than £40,000 a year; the Lib Dems have been going for £25,000.
There is also some good news. From April 2011 the earnings link for the basic state pension will be restored. Pensions will rise in line with either earnings, prices, or 2.5% a year, depending on which is highest – although the age at which you get the money is going to rise to 66 by 2016 for men and by 2020 for women.
But perhaps best of all it will no longer be compulsory for pensioners to buy an annuity at 75. We’ll be hoping for more pension reform over the term of this government, but if they really do remove the annuity obligation, they’ll have got off to a really good start.