As with all Budgets, the devil is in the detail. Often a headline-grabbing tax cut will be paid for by hiking taxes elsewhere. This Budget is no different. Let’s take a look at what’s going on.
The government wants to earn popularity points for increasing the personal income tax allowance. If you earn less than £100,000, you will be able to earn £8,105 before you have to pay income tax in 2012/13. This will rise to £9,205 in 2013/14.
But here’s the catch: to help pay for this, the threshold for basic rate income tax will be reduced by £630 to £34,370 in 2012/13 and by a further £2,125 in 2013/14 to £32,245. So you will start paying 40% tax if you earn more than £42,475 in 2012/13 and £41,450 in 2013/14 – meaning that more people will be dragged into the higher tax band.
The net effect of all this? Basic rate taxpayers will gain £170 in real terms (after inflation) in 2013/14. Higher rate taxpayers will gain £42.50 in real terms.
The chancellor has also fiddled around with the child benefit rules. Instead of removing the benefit from households with one income over £40,000, this has been increased to £50,000. The benefit will be gradually removed until someone earns £60,000, rather than cut off immediately.
This will still upset many households, of course, as a couple each earning just under £50,000 will keep the benefit whereas a household with one income over £50,000 will lose out. And the adding of taper relief makes what was once a simple universal benefit a complex and presumably more expensive system to administer.
There are no changes to the tax relief on pensions. But the government is looking to stop the abuse of uncapped reliefs. These reliefs are related to activities such as business investment and philanthropy. Previously these reliefs could be used without limit to reduce tax liabilities, so that millionaires could have lower tax rates than their cleaners. To stop this there will be a limit on all uncapped income tax reliefs. For anyone seeking to claim more than £50,000 of reliefs, a cap will be set at 25% of their income. This does not affect the right to claim other capped reliefs such as tax relief on pension fund contributions.
Wealthier pensioners look to be the main losers from this Budget. The government is doing away with the age-related allowance. It will be frozen at £10,500 (£10,660 for over 75s) from April 2013, but for anyone over the age of 65 it will be reduced to the personal allowance of £9,205. The higher rate will only apply to people over 75 from April 2013.
This has already outraged Dr Ros Altmann, director general of Saga, who said: “This is an outrageous assault on decent middle-class pensioners.
“This Budget contains an enormous stealth tax for older people. Over the next five years, pensioners with an income of between £10,000 and £24,000 will be paying an extra £3bn in tax while richer pensioners are left unaffected”
In terms of other key taxes, alcohol and tobacco duty will respectively increase by 2% and 5% above the retail price index (RPI). Vehicle excise duty (VED) will increase in line with the RPI. The government is looking at introducing a direct debit system for VED so that drivers can spread their payments throughout the year.
Meanwhile, company car tax rates are going up. There will be a 1% increase in the tax levied on the list price of cars emitting more than 75g/km of CO2 up to a maximum of 35% by 2014-15. A further 2% increase, up to a maximum of 37% will come into effect in 2016-17.