Today George Osborne finally delivered the new Government’s budget. For weeks we’ve waited to see how the LibCon coalition would deliver on a promise to tackle the nation’s debt. Osborne duly delivered an emergency budget full of spending cuts. It also contained several big tax rises. So how will his big changes affect you?
Buy that freezer now
In a widely predicted move – one department store was caught reprinting price tickets weeks ago – Osborne has increased VAT from 17.5% to 20%. This will mean we all lose more money when we spend, although the traditionally exempt items such as children ‘s clothing and food will remain VAT-free.
There was a bit of good news though. The new VAT rate doesn’t come in until 4 January 2011. So if you are planning to replace or buy any large items such as freezers or televisions, do it this year. Oh and don’t forget to fill up your petrol tank on 3 January.
Watch out for rising insurance costs
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Alongside the VAT rise, insurance premium tax (IPT) will also go up on 4 January. Standard IPT, which applies to home, buildings, contents and car policies, will rise from 5% to 6%. Higher rate IPT, paid on policies sold as an add-on to other products such as travel insurance or policies covering white goods, will rise from 17.5% to 20%. But don’t let this put you off buying essential policies such as travel insurance. Find out how to cut the cost of insurance here.
The good news on capital gains tax
Another hugely anticipated move was a rise in capital gains tax (CGT). However, if you are a basic rate taxpayer your CGT rate will remain at 18%. But for higher-rate taxpayers it will rise to 28% from midnight tonight.
Remember that you get a £10,100 CGT-free allowance each year, so that’s £20,200 between a couple. Osborne left this untouched.
If you are likely to make bigger gains than that, and one partner is a basic-rate taxpayer, make sure the assets are in their name when sold.
The decision not to increase CGT for everyone is good news for long-term savers who want to cash in their assets when they retire. Once retired, most people drop into the basic tax-rate bracket, with an annual income of well under £43,875. So most should only pay CGT of 18% when selling assets, after they’ve used up their tax-free allowance.
Of course, if you make a large enough capital gain (one that results in you having a combined income and gains of more than £53,975 in a year), then that would still push you into the higher CGT bracket of 28%. And the government hasn’t re-introduced any form of taper relief or allowance for inflation, so you don’t get any benefit from having held onto an asset for longer.
Your pay packet may get a slight boost
Osborne announced in the budget that everyone’s personal income tax allowance will rise by £1,000 next April to £7,475. This is the amount you can earn before the taxman starts snaffling a chunk of your wages. It is worth an extra £200 a year for most basic rate taxpayers. Sadly a 1% increase in National Insurance contributions, which comes in at the same time, will reduce this increase.
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Child benefits are frozen
The Lib/Con axe has fallen hard on the benefit system with cuts or freezes across the board. Child benefit is to be frozen at its current rate of £20.30 a week for your eldest child, and £13.40 a week for any other children, for the next three years. That might seem harsh given the government’s own prediction of inflation at 2.7% by the end of the year. However, low-income families will be protected by tax credits (see below) and higher income families don’t need the money anyway.
The ‘Health in Pregnancy’ grant – a £190 payment to all women beyond their 25th week of pregnancy – will be abolished next April. And the £500 Sure Start Maternity Grant paid to low income mothers will be restricted to only the first child. Those are two cuts designed to help the government concentrate spending on those who most need it rather than handing out money to everyone regardless.
Changes to child tax credits
Parents aren’t out of the woods yet. Osborne also announced that families earning over £40,000 will have their tax credits reduced. This is one of the main actions in the coalition’s plan to tackle middle class benefits.
The baby element of a child tax credit is going to be abolished from next year. This is an extra credit paid to families with at least one eligible child under the age of one. In contrast the child tax credit for those still eligible will rise by £150 above inflation next April.
Pensions plans
The only definitive change to pensions announced in the Budget was that basic state pension will be earnings linked again. That is a welcome, and long-overdue change. Osborne also announced that there will be changes to the complicated pension tax relief plan, but the details are yet to be announced.
More details on pension tax relief, and where the axe will fall in the public sector will be revealed later in the year.
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