VAT to rise to 20%
VAT rates will go up from 17.5% to 20% on 4 January next year, George Osborne announced in his first Budget speech as chancellor.
While he announced that the coalition government’s aim is to reduce the bulk of the country’s deficit through spending cuts rather than heavy taxation, some tax cuts were still necessary.
The much-predicted VAT increase comes as little surprise. Luckily, food and children’s clothing, deemed everyday essentials, will continue to be exempt from VAT along with zero–rated items like newspapers and printed books.
The Treasury estimates that this one measure will generate over £13 billion extra revenue by the end of the current parliament.
However, increased VAT could reduce consumer demand according to Ian Mills, partner at James Cowper accountancy firm. He says: “If manufacturers and retailers decide to pass on these increases, the £13 billion expected to be raised over the next five years may quite quickly disappear.”
In her reply to the chancellor, Harriet Harman argued that the VAT rise will penalise the poor but tax expert and lecturer Sam Hart believes that the VAT hikes will hit retailers harder than the consumers. “Shops will need to charge consumers more. Where price is flexible, this will hit the customer, rich or poor, but where prices are tight, retailers may have to absorb some or all of the increase themselves, or pass the cost down the chain to their suppliers. If retailers, or their suppliers, are working on tight margins, this could be catastrophic for these businesses.”
Try our new VAT calculator to find out how much you will pay after the VAT rise on 4 January.
Other tax changes include:
Calling for all areas of government to keep costs down “when money is short”, Osborne promised to help local councils in return.
The coalition government has pledged to help local councils in England if they wish to freeze council tax rates for one year from next April.
The average family will be £35 better off a year from this freeze, according to the Treasury.
From January next year, the standard rate of insurance premium tax (IPT) will increase from 5% to 6%, with the higher rate going up from 17.5% to 20%. This could affect insurance premiums on anything from motor insurance, home insurance to travel and private medical insurance.
Eric Galbraith, chief executive for the British Insurance Brokers Association (BIBA), argues that consumers and businesses will be hit by increasing insurance costs and may even discourage individuals from taking out adequate cover.
“BIBA’s research last year demonstrated that businesses and consumers were reducing insurance cover as a result of the recession and we are concerned that increases to insurance premiums as a result of IPT could lead to even further underinsurance or even a lack of insurance protection. The last thing people need in a financial crisis is a higher insurance bill.”
Instead of excessively taxing businesses, Osborne argued in his speech that the government will make it cheaper for companies to employ people and help economic recovery.
From April 2011, the employers’ national insurance threshold will rise by £21 per week above indexation.
Osborne argues that “the cost of hiring people on incomes lower than £20,000 will be less than it is today,” and claims it will take 650,000 employees altogether out of this tax.
Following on from the previous government’s planned rises in the March budget, Osborne announced that there are to be no new increases on alcohol, tobacco or fuel but a report in the autumn will examine targeting alcohol duty on the products most associated with binge drinking.
The chancellor also promised to examine the sharp oil price fluctuations to see if pump prices can be stabilised and see if a rebate for remote rural areas could work.
In time to celebrate or commiserate the England football teams fortunes, Osborne also announced that the previous government’s planned 10% duty increase on cider will be revoked at the end of this month.
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.
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.
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.
A property chain is a line of buyers and sellers (the “links”) who are all simultaneously involved in linked property transactions. When one transaction falls through – for instance, someone can’t get a mortgage or simply withdraws their property from sale, the entire chain breaks and all the transactions are held up or even fail entirely.