The unavoidable Budget
Of the most consistently repeated messages given out by the Coalition Government since taking power, the first was summarised by outgoing Chief Secretary to the Treasury, Liam Byrne: “I’m afraid there is no money.” The second is George Osborne’s favorite: “We’re all in this together”.
So with the expectations management campaign helping the country brace itself – the axe within the Chancellor’s statement didn’t seem so bad when it fell.
Promises of an increase of £1,000 in the personal allowance to assist those on low incomes and a limited exemption from employer’s National Insurance for start-up businesses (at least those outside London and the South-East) helped to break up the gloom and will have been welcomed by those potentially benefiting.
It was never going to be a Budget trying to win short-term popularity. With this in mind, the coming months and the country’s economic performance will tell us if the “Unavoidable Budget” will carry unintended consequences.
Personal taxes
As announced on the eve of Budget day, the personal allowance is to increase in April by £1,000 to £7,475 as a first step towards the Liberal Democrat goal of a basic £10,000 personal allowance, but higher rate tax payers will not benefit.
A flurry of reforms to the complicated tax credit system will be made over the course of the Parliament with the aim of refocusing the scheme on lower income households. These will be coupled with an increase of £150 in the child element. Conversely, child benefit payments are to be frozen for three years.
Changes to capital gains tax (CGT) were widely expected, but with visible tensions in the coalition the nature of these has been subject to much debate. Unsurprisingly the Chancellor has opted for a compromise solution – basic and starting rate tax payers will continue to be taxed at 18%, but from midnight on Budget day the rate applying to higher tax rate payers increases to 28%. The annual allowance remains unchanged at £10,100, but Entrepreneurs’ Relief (which currently provides for a reduced rate on the first £2 million of gains) will be extended to the first £5 million of eligible gains.
Business and corporate taxes
New businesses are to receive a temporary exemption from the requirement to make employer’s National Insurance contributions in respect of their first ten employees, but controversially businesses in London and South East are excluded.
More generally, from April 2011 the threshold at which employer’s national insurance contributions become due will be increased by £21 per week.
Companies of all sizes will see a reduction in the applicable rate of corporation tax. The main rate is to fall from its current level of 28% by 1% per annum for four years from April 2011. The small companies’ rate, originally set to rise to 22% next year, will instead fall to 20%.
After the good news comes the inevitable rises, however. The proposed special relief for the video games industry has been shelved, but most of the savings to fund the Government’s business proposals come from further changes to the capital allowances system. Writing down allowances (WDAs) on most assets will drop in 2012 from 20% to 18% and on long-life assets from 10% to 8%. The annual investment allowance (AIA) which effectively provides for a 100% deduction for the first £100,000 of qualifying expenditure is being cut back to apply only to the first £25,000.
Other taxes
As widely predicted, VAT is to rise from 17.5% to 20% with effect from 4 January 2011. There will be a corresponding rise in insurance premium tax (IPT).
Proposals for a landline duty have been dropped.
No new duties are proposed on alcohol or tobacco; cider drinkers will be relieved to hear that proposed above inflation increases have been dumped.