George Osborne’s second budget was set against an unpromising backdrop. With inflation at a 28-month high, and public borrowing figures tight, the chancellor had little room for manoeuvre. And with the election still far off there was little reason for any big giveaways. However, he did manage to squeeze a few apparently consumer-friendly measures out of the Budget, at the expense of oil companies, banks and tax avoiders.
How does it hit my earnings?
From April, as we already knew, the tax-free allowance that most of us receive will go up by £1,000 to £7,475. However, not everyone is a winner. It will be funded by making more people pay the higher rate 40% income tax – the threshold is falling by £1,400 to £42,475.
From April 2012, another £630 will be added to the personal allowance. The only people who won’t benefit from this are those earning more than £116,210, as by that point, you have no personal allowance. Osborne also reaffirmed the government’s commitment to raising the allowance to £10,000 by the end of the parliament.
One slightly sneaky measure was that direct taxes will be linked to the consumer price index (CPI) rather than the higher retail price index (RPI) from April 2012. In effect, that means that the level at which different tax rates kick in will rise more slowly than they otherwise would have, resulting in more people ending up in higher tax brackets through ‘fiscal drag’. It may not matter just now, because wages aren’t rising as rapidly as inflation, but when the economy eventually normalises, it will probably be a stealthy little earner for the government.
The 50% top rate income tax remains in place, but high earners may be encouraged by Osborne’s insistence that it is a “temporary measure”, and his request to HMRC to find out how much money it actually raises.
Any other tax changes?
Osborne also announced that a review would be undertaken to merge NI and income tax. Any effect of this wouldn’t take place for several years but many think it would reduce the overall tax burden.
The chancellor also promised a renewed clampdown on tax avoidance – he aims to raise £1bn, citing stamp duty land tax, capital gains and lifetime loans as areas that would be reformed.
As expected, council tax has been frozen or reduced for one year in every local authority across England. The chancellor claims this will help “the average family” save around £70 per year.
As part of David Cameron’s much derided ‘Big Society’ the government also announced tax relief for charities. Gift Aid will be simplified with charities not having to report smaller donations, and there will be a 10% inheritance tax reduction for those who leave 10% of their estate to charity.
What about the property market?
Osborne is opening up yet another scheme for first-time buyers with a household income of less than £60,000 a year. It’s a £250m assisted deposit scheme which applies to new builds. The government would provide 10% of a deposit and the home builder another 10%, with the buyer then making up 5% from their savings to create a 25% deposit. This will be used to secure a 75% mortgage. The chancellor believes the scheme will help 10,000 first-time buyers.
We would argue that this looks more like a subsidy for house-builders than for first-time buyers, who may well live to regret getting on the housing ladder at a point when the market is wobbly in any case, and interest rates look set to rise.
What has he done about petrol prices?
The only real surprise of the budget came for motorists. It was expected that drivers, currently suffering from high fuel prices, would be spared further pain. And indeed, the chancellor deferred a planned 4p increase in fuel duty that was due to kick in this April.
On top of that, further rises have been scrapped until 2015. He also made a surprise 1p reduction in fuel duty that will come into affect by 6pm tonight. The move is being funded by a ‘fair fuel stabiliser’ that increases taxes on oil and gas producers when wholesale prices are high.
Another boost for drivers came from a 5p increase in the tax-free car mileage allowance to 45p per mile.
And anyone planning a foreign holiday this summer will also benefit as a planned increase in air passenger duty has been shelved. However, the super-rich will be hit by a new tax on private jets, as soon as the coalition has worked out how to impose one.