Emergency Budget: the firing line
Middle-income families could lose more than £2,000 a year after the upcoming Budget, while those on the national average income - of £25,000 - could gain more than £350, say experts.
Chancellor George Osborne's first Budget is expected to be brutal, as the thickly-veiled horrors that Alistair Darling kept under wraps in March are addressed.
The City awaits decisive action on the cuts, but it’s unlikely that the Budget will give rise to swathes of legislative change because the Finance Act needs to be passed by the third week of July when the House rises for the summer.
So what can we expect on the big issues? Here’s a look at what might happen Tuesday:
Capital gains tax
The government has already announced that it will raise CGT from the current rate of 18% to rates "similar or close to those applied to income, with generous exemptions for entrepreneurial activities".
A top rate of 40% looks likely according to Deloittes, which also thinks the exemptions will be wider than the current entrepreneur's relief, hopefully including employee shareholdings and unquoted shares. The accounting firm thinks the changes will take place by April 2011, but says Budget day implementation shouldn't be ruled out.
There are concerns the annual CGT exemption will be reduced from £10,100 to £2,000 and indexation remains another hot topic.
The Liberal Democrat manifesto proposed re-introducing indexation relief to reduce the impact of inflation and reducing the annual allowance. However, comments by ministers and others make it clear that the final policy will be a blend of ideas from both coalition parties.
Investment management firm, Fidelity says changing the tax-free allowance will harm existing savers with modest long-term gains. Only one in 131 taxpayers (247,000 people) paid CGT in 2007-08, but Fidelity estimates that this number could rise to millions if the tax-free allowance is reduced to £2,000.
"Our analysis shows that decreasing the tax-free allowance will result in millions of average long-term savers being dragged into a net that many believed was being set only for the rich,” says Fidelity’s head of tax planning Paul Kennedy.
"The only way to avoid triggering a CGT liability in this situation would be by switching investment from one fund to another as soon as the gain approaches £2,000. In doing this many people could start to compromise their long-term plans and investment aims simply to avoid CGT and the misery of the tax forms they will be forced to complete,” he adds.
Kennedy says if the tax-free allowance does drop then investors and savers should be allowed to carry forward any unused allowance. He points out that while the Lib Dems may consider £2,000 to be a reasonable allowance, taxpayers can only use one annual allowance when cashing-in after years of investing and saving.
Gary Shaughnessy, UK managing director at Fidelity International, says that short-term investors chasing speculative gains should pay a proportionately higher rate of CGT. In contrast, individuals who are saving prudently for the long term should be rewarded through CGT at the basic rate of tax.
Meanwhile, Virgin Money’s Investors Intentions Index shows that people will continue to invest even if CGT rises.
An increase in the rate from 17.5% to 20% could raise £11-12 billion for the Treasury – that’s more money than any other tax change could raise - except income tax - and equivalent to the rise in national insurance introduced by Alastair Darling back in March. An increase in the VAT rate to 20% would cost the average household £425 a year.
It’s not just the rate which could increase though. The scope of VAT could also be altered to include items which are currently grouped in the lower VAT band of 5% - fuel bills, mobility aids and sanitary products for example.
Most foods, children’s clothing, books and newspapers are currently exempt from VAT but bringing these into the scope of the tax would be a very unpopular move and would not deliver much cash, so the chancellor is unlikely to do so.
As for timing, Bill Dodwell, head of tax policy at Deloitte, thinks increasing VAT too soon could damage economic recovery. He would prefer to see any increase happen next year so that people are encouraged to spend more this year.
The impact on employment is also an issue. Independent analysis carried out for the British Retail Consortium shows that increasing VAT to 20% would cost 163,000 jobs over four years and reduce consumer spending by £3.6 billion over the same period.
The research concludes there is no silver bullet that will allow the government to raise large amounts of revenue without having a substantial effect on the economy. Employment, consumption and GDP would all be hit significantly by tax rises.
There is no doubt that the tax-free allowance will rise from the current £6,745 to £10,000 within five years. What’s not known is what each stage will be and when. Tax firm BDO believes the first increase will be to £7,500 or £8,000 in the 2011/12 tax year. Mike Warburton, senior tax partner of accountants Grant Thornton, expects the allowance to rise by about £700 a year.
Every £100 increase in the personal allowance should mean you are £100-a-year better off. Deloitte calculates that anyone earning up to £90,000 will see a saving from a £10,000 allowance. Higher earners are unlikely to pay less, as the Labour measure that withdraws the personal allowance for those earning £112,950 or more is set to be retained, despite Osborne previously describing it as ‘temporary’.
Meanwhile, if you’re a buy-to-let landlord then Chris Maddock, head of private clients at Vantis warns that HM Revenue & Customs is taking a closer look at those with rental income.
There are also plans to give a £150 transferable allowance to married couples where neither is a higher rate taxpayer.
This is the second highest source of revenue for the government; it raked in £94 billion in 2009/10. National insurance contributions are set to rise 1% to 12% for 10 million employees in April 2011.
The increase will affect workers who earn more than £20,000 a year, while low paid and part-time workers will benefit from the raising of the National insurance contribution threshold from £110 to £135 a week.
It’s not good news for high earners though. Currently, all earnings above £43,888 are subject to national insurance of 1% but this is to double, meaning anyone earning £50,000 a year would lose out by £288 a year from the national insurance increases.
A similar rise planned for employers by the last government has been scrapped, saving firms £3 billion a year.
And the rest.....
Corporation tax - The Treasury’s receipts of corporation tax have shrunk to £35 billion (from £50 billion in 2008) because of the recession. But softening taxes on company profits will encourage investment in the UK and so the Chancellor may cut corporation tax from 28% to 25% in phases over several years. Alternatively, there is talk of the pros and cons being debated in a discussion paper first. In Wednesday’s Prime Minister’s Questions, David Cameron promised that the Budget would “make businesses want to locate to the UK”.
Pensions - A national pension scheme called NEST (National Employment Savings Trust) is likely to be unveiled. It will provide a basic pension for those who don’t have access to a good occupational scheme and both employers and employees will contribute. Timing for the launch is unclear. Higher-rate tax relief on pensions is also hanging in the balance. This was ear-marked for abolition in the Liberal Democrat manifesto. Both the National Association of Pension Funds and the Investment Management Association is calling on the government to make pensions a priority.
Annuities - Compulsory annuity purchase at 75 will be scrapped but we don’t know when. This will give much more flexibility to pension investors, including those with self invested personal pensions, who will have the choice of keeping their pension funds invested beyond age 75, drawing an income from it, and potentially passing the remainder to their heirs. The death tax for surplus pensions currently stands at 82%, so there are calls for this to be reduced.
State Pension - Retirement age could rise to 66 for men from 2016 and for women after 2020. The basic pension will from April 2011 rise by 2.5% or in line with either wages or prices inflation if they are higher, although the timing is unknown. Pension credits may also be cut back.
Inheritance tax - Although he wanted to raise the IHT threshold to £1 million, the chancellor ended up having to horse-trade various policies with the Liberal Democrats so this won’t now happen. It means owners of property and assets worth more than the current nil rate band of £325,000 (£650,000 per married or civil partnership couple) will have to make use of existing exemptions and trusts. Alistair Darling froze the threshold until 2014 but there are no clues as to whether this will be retained by the new government. In 2009-10, IHT generated £2.2 billion but was paid by just 19,000 estates.
Fuel tax - Fuel duties went up by 1p in April and will rise by another 1p in October before a final 0.76p is added in January 2011. Of course any increase in VAT will add several pence on top. In addition, drivers can expect to pay as much as 1.5p per litre extra for both petrol and diesel after Alistair Darling scrapped a subsidy to biofuel producers from the start of April.
Airline Passenger Duty - This will become a levy on planes rather than passengers but is unlikely to take effect until next year. Travellers can expect to pick up the tab in their air fares.
Stamp Duty – no changes expected although the commercial property levy may rise to 5%.
Insurance Premium Tax - This applies to all general insurance premiums including your home, motor, travel and private medical insurance and generates £2.25 billion a year for the Treasury. Currently there are two rates: a standard rate of 5% and a higher rate of 17.5% which applies to travel cover and premiums for some vehicles and domestic appliances.
Although the lower rate has remained at 5% for a decade there are rumours it will rise this month to 10% or even in line with VAT which is currently 17.5% but expected to increase to 20% in the Budget. If the Chancellor does increase it, anyone with an insurance policy for home contents or buildings, car or health cover will find their costs rise considerably. A rise to 17.5% could add around £80 a year to an average car policy.
Small businesses - In a survey commissioned by the Federation of Small Businesses (FSB), two-thirds of respondents said that a cut in fuel duty would help growth and 36% would like to see an increase in the personal tax threshold. The Chancellor said in the recent speech that he would like to free small businesses from the “spider web of tax rules".
Child Tax Credit - It’s likely that Child Tax Credit will be scrapped for families with a combined income of £50,000 or more. Those on lower incomes could also see their child tax credits drop.
A scheme originally established in 1944 to provide protection against sickness and unemployment as well as helping fund the National Health Service (NHS) and state benefits. NI contributions are compulsory and based on a person’s earnings above a certain threshold. There are several classes of NI, but which one an individual pays depends on whether they are employed, self-employed, unemployed or an employer. Payment of Class 1 contributions by employees gives them entitlement to the basic state pension, the additional state pension, jobseeker’s allowance, employment and support allowance, maternity allowance and bereavement benefits. From April 2016, to qualify for the full state pension, individuals will need 35 years’ of NI contributions.
Private medical insurance
PMI allows you to skip the NHS waiting list and arrange treatment at a time you choose. With most PMI policies, you pay a monthly premium (the older you are, generally the higher premium) and the policy will then pay out, up to specified cover limits and after an agreed excess, for any treatment you might need. Not all conditions are covered by PMI and you get what you pay for: the more cover you want, the higher your premium will be.
Invented by a Frenchman in 1954 and ironically introduced in the UK on 1 April 1973, VAT is an indirect tax levied on the value added in the production of goods and services, from primary production to final consumption and is paid by the buyer. Its levying is complex, with a number of exemptions and exclusions. For example, in the UK, VAT is payable on chocolate-covered biscuits, but not on chocolate-covered cakes and the non-VAT status of McVitie’s Jaffa Cakes was challenged in a UK court case to determine whether Jaffa Cake was a cake or a biscuit. The judge ruled that the Jaffa Cake is a cake, McVitie’s won the case and VAT is not paid on Jaffa Cakes in the UK.
The tax levied on the total value of your estate after you die. IHT has to be paid by the beneficiaries of your estate before they can receive any of the money from it. The money can’t be taken from the value of the estate _– it has to be paid before any money can be released. There is an IHT threshold – known as the “nil-rate band” – below which no tax is levied (£325,000 in 2011/12). Any amount above the nil-rate band is subject to tax at 40%. If your estate totals £600,000, there is no tax on the first £325,000; however your estate will pay 40% tax on the remaining £275,000, a total of £110,000. Prudent tax planning can reduce your IHT liability, so always consult a specialist solicitor.
A hugely unpopular tax paid on property and share purchases. Stamp duty on property is levied at 1% for purchases over £125,000 (£250,000 for first-time buyers) which then moves up at a tiered rate. For property between £125k and £250k you pay 1%, then 3% from £250k up to £500k and then 4% from £500k to £1m and then 5% for properties over £1m. But unlike income tax, which is “tiered” and different rates kick in at different levels, stamp duty is a “slab” tax where you pay the rate on the whole purchase price of the property. On shares, stamp duty is charged at a flat rate of 0.5% on all share purchases. Figures correct as of May 2011.
The total money value of all the finished goods and services produced in an economy in one year. It includes all consumer and government consumption, government spending and borrowing, investments and exports (minus imports) and is taken as a guide to a nation’s economic health and financial well being. However, some economists feel GDP is inaccurate because it fails to measure the changes in a nation's standard of living, unpaid labour, savings and inflationary price changes (such as housing booms and stockmarket increases).
The catch-all term applied to investors who buy properties with the sole intention of letting them to tenants rather than living in them themselves, with the proceeds from the let usually used for the repayment of the mortgage. Buy-to-let investors have to take out specialised mortgages that carry higher interest rates and require a much bigger deposit than a standard mortgage. Other expenditure can include legal fees, income tax (on the rental profits you make), capital gains tax (if you sell the property) and “void” periods when the property is unlet.
Capital gains tax
If you buy an asset – shares, a second home, arts and antiques – and then sell it at a later date and make a profit, that profit could be subject to CGT. You don’t pay CGT on selling your main home (which is why MPs “flipped” theirs so regularly) or any securities sheltered in an ISA. Individuals get an annual CGT allowance (£10,600 in 2010/2011) but if you have substantial assets it’s worth paying an accountant to sort it for you.
Child tax credit
A scheme started in 2003 that sought to replace a raft of other tax credits and benefits, the payout depends on the number of dependant children in a family, and its level of income. The amount of credit is reduced as income increases. It is payable to the main carer of a child, usually the mother, and is available whether or not the recipient is working.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).