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 public should prepare for a CGT hike, a VAT hike and changes to income tax and national insurance as Osborne looks to shore up the treasury coffers.
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.