As Chancellor George Osborne unveils a string of spending cuts and tax rises, how will the changes affect you?
The government today unveiled its emergency plan of action to tackle the nation’s enormous record deficit. We have all been anticipating tough measures with a string of tax rises and cuts in public sector spending. But how far has the Chancellor George Osborne gone? And will it be as painful as we expect?
It’s the government’s target to eliminate the current structural deficit by 2015/2016. But how will they achieve it, and how will it affect you? Let’s find out the winners and losers from today’s budget.
Basic and lower rate taxpayers
The personal allowance for anyone under 65 will rise by £1,000 from April 2011. This means you can earn £7,475 before you’ll start paying income tax, and will generate an extra £170 per year. This measure will benefit 23 million basic rate taxpayers and around 880,000 people will be taken out of income tax altogether. However, the personal allowance for higher rate taxpayers will be frozen until 2013/2014. The longer-term aim to increase the personal allowance to £10,000 remains a key objective.
Council tax payers
Council tax will be frozen for one year next year, which means the average family will be around £35 better off.
Businesses will be relieved to hear the Chancellor will not be making further cuts in capital spending in this budget. Corporation tax rates will be cut from 28% to 24% over the next four years. This will alleviate some burden on businesses, but the tax reduction isn’t as far reaching as originally hoped. Meanwhile, the corporation tax rate for small companies will be cut by 1% to 20% this year. There will also be a 1% rise in the national insurance threshold for employers, while an NI holiday will be available to employers creating jobs outside the south of England.
Smokers, drinkers and drivers
There will be no new tax increases on alcohol, tobacco and fuel as these rises were dealt with in the last budget in March. But there’s good news for cider drinkers who will see the 10% rise in duty reversed.
The Labour proposal to put a duty on landline phones to fund broadband internet across the whole of the country will be scrapped.
The monarchy escapes cuts to its budget with the Queen’s £7.9 million annual allowance staying put.
VAT will rise from 17.5% to 20% from 4 January. This is expected to generate an extra £13 billion in extra revenue per year. The Chancellor said this controversial measure was ‘unavoidable’, despite warnings that fueling inflation by increasing VAT could trigger a double dip recession. The VAT rise is also bad news for lower earners who will feel the increase more keenly than those with higher incomes.
Capital gains taxpayers
Osborne has adjusted the capital gains tax system so that the greater liability falls in the hands of those who are better off. From midnight tonight CGT will rise from 18% to 28% for higher rate and additional rate taxpayers only. On a more positive note, the 10% CGT rate for entrepreneurs will be extended to the first £5 million of qualifying gains, up from £2 million.
There’s not a lot of joy for parents in this budget as the Chancellor announces Child Benefit will be frozen for the next three years. Tax credits for families earning over £40,000 will be reduced which includes withdrawing the family element of Child Tax Credit. This was expected to apply only to families earning £50,000 or more. The baby element of Child Tax Credit will also be scrapped in 2011/2012, but the child element of child tax credit will increase by £150 above inflation next year. Meanwhile, the Health in Pregnancy grant will also be abolished in April 2011, and the Sure Start maternity grant will be restricted to the first child only. Lone parents will be expected to look for work once their youngest child has started school.
Disability living allowance won’t be reduced, but a medical assessment will be put in place for new and existing claimants and introduced in 2013. Benefits, tax credits and public service pensions will only rise in line with the consumer prices index (CPI), rather than the Retail Prices Index (RPI), but this won’t apply to the state pension and pension credit. This measure is expected to save £6 billion. Meanwhile, the total cost of housing benefit is to be reduced by £1.8 billion by the end of parliament. Housing benefit will be limited to a maximum of £400 per week for a four bedroom house.
Public sector workers
Public sector workers have also lost out in this budget. The anticipated 12-month pay freeze has been doubled to two years for those earning over £21,000 a year. This will protect the 1.7 million lowest paid workers, with those earning less than £21,000 benefitting from a flat pay rise of £250 in both of those years.
And finally the banks - a levy on banks will be introduced from January 2011. This will be imposed on UK banks and the UK operations of foreign banks. The levy will generate an extra £2 billion in revenue per year.
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