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Birkett Long explains the Emergency Budget
George Osborne has just delivered his first Budget as Chancellor of the coalition Government and has certainly made his presence felt. Facing a huge deficit in the public finances, his radical and tough five-year plan features new measures which aim to tackle the country’s debt and rebuild the British economy.
Bruce Hogarth-Jones, solicitor at leading Essex law firm Birkett Long, reviews some of the key decisions, looks back at the predictions made at the end of last week and discusses whether the Government made the announcements we all expected.
Capital Gains Tax
We predicted that Capital Gains Tax would be changed so that gains are added to income and taxed at the same rate. That didn’t happen, but there are now two fixed rates, one for basic rate taxpayers and one for higher rate taxpayers. A new 28% rate has been introduced, which will be paid by people who earn more than £37,401. This change takes effect immediately – from midnight June 22. The existing 18% rate stays in place for lower and middle income earners. By increasing the rate to 28% for wealthier members of society, the chancellor expects to bring in £1bn.
This “gear change” in the middle of a tax year may give some higher rate taxpayers a headache, attempting to work out exactly how much tax they are due to pay.
The tax free allowance for capital gains was also frozen, as I forecast. So the tax-free allowance on the first £10,100 of any gains remains the same this year.
The announcement that will hit everyone’s pocket is VAT, which increases to 20% on January 4, 2011, as we predicted. It means that the things we buy on the high street, everyday items like clothes, electrical goods and even getting a haircut will become more expensive. It will be virtually impossible to avoid.
Increasing VAT could raise something like £13bn, a sizeable chunk of the deficit. At least 20% is an easy rate to calculate in your head!
The chancellor did announce that the personal allowance for income tax will increase by £1,000 in April to £7,475. This means that about 23 million basic-rate taxpayers will gain up to £170 a year, while 880,000 people in the UK will pay no income tax at all. It was a Lib Dem election promise to increase this threshold to £10,000 – so the Tories have made a step towards this target, as we predicted.
There is a bit of a sting in the tail though. To help pay for the personal allowance increase, the Government has frozen the higher rate band for income tax, so higher earners will pay more.
We heard nothing at all about inheritance tax in the speech, a cunning political move by the coalition. The Tories came under heavy criticism in the run up to the election about their plans to increase the inheritance tax threshold to £1million Instead, and as we predicted, the rate remains frozen at £325,000 - a classic bit of “Fiscal Creep” to raise more tax.
Public spending cuts – what next?
We did hear in some detail about where public sector cutbacks are going to be made. Public sector workers, for example, earning more than £21,000 will be subjected to a two-year pay freeze, while 1.7 million of those earning less than £21,000 will get a flat pay-rise of £250 in both years. But the real gritty detail about overall spending cuts will follow this autumn.
October is when we will really learn where the public sector axe is going to fall, with the Chancellor warning that a further £32bn of cutbacks will be made then.
To some degree, the cuts have already started. Government projects totalling £11.5bn have already been canned by the Treasury, such as £25m towards a visitor centre at Stonehenge and a new hospital for North Tees and Hartlepool.
Expect harsher cuts come the autumn, in terms of welfare decisions. Tuesday’s Budget saw Osborne announce a freeze for child tax credit and the introduction of new medical assessments from 2013 for those on disability living allowance. Tougher measures are on the way. The pinch has only just begun.