After weeks of speculation, George Osborne has finally revealed the Coalition’s “unavoidable” Budget. So what does it mean for your finances?
First, capital gains tax (CGT). There was speculation that Osborne would raise it to 40% in an effort to stop high earners dodging income tax by turning income into capital gains. But this proved unfounded. Instead, the flat rate of 18% on gains over £10,100 a year remains for basic-rate taxpayers. But anyone with combined income and capital gains of over £53,975 will pay a top CGT rate of 28% (the higher-rate income tax threshold of £43,875 plus the £10,100 allowance).
Osborne also made some important changes to income tax. Those under 65 will see their personal allowance – this is the amount you can earn before income tax is levied – rise by £1,000 to £7,475 from April 2011. This will mean basic-rate taxpayers gain up to £200 a year. However, it will make little difference to higher-rate taxpayers, as the point at which the 40% tax rate kicks in will drop from £43,875 to £42,375 next April. That band will then be frozen at £42,375 until 2014. And as inflation and wages rise, more and more people will find themselves paying the higher rate of income tax over the next four years.
The employee national insurance rise that Alistair Darling announced last year is still set to come into effect next year. So everyone will pay an extra 1% in National Insurance Contributions (NICs) from next April, taking the rate to 12% of taxable income. On top of this, the level at which the new 2% NI rate kicks in is going to be reduced, says the Treasury. Overall, these changes will mean that most higher-rate taxpayers will pay the same amount of tax and NICs next year, despite the rise in the personal allowance, says Matthew Vincent in the Financial Times.
Families have been particularly hard hit in the Budget. Changes to child benefit and tax credits loom, plus several grants have been cut. The Health in Pregnancy Grant, which gives £190 to every pregnant woman beyond their 25th week, will be axed next April. The one-off £500 Sure Start Maternity Grant for those on a low income will be limited to the first child.
Child benefit has been frozen at its current level of £20.30 a week for the eldest child and £13.40 for every subsequent child. It will stay at that level for the next three years. This isn’t a bad option, given the need to save money. There were fears that child benefit would become means-tested, but that would have been costly to implement. There are big changes to come to tax credits, though. From next April, families with a household income of over £40,000 will have their eligibility for child tax credits reduced. Also, the baby element of a child tax credit – an additional bonus that goes to any family with a child under one year of age – ends at the beginning of 2011. But basic child tax credits will remain in place and will rise by £150 above inflation next April.