The new Chancellor made good on his party’s promise to deliver tougher measures to address the UK’s fiscal deficit than planned by the Labour government, including an extra £40bn in extra cuts and tax increases.
However, there were some silver linings among the dark clouds of the emergency Budget, even if you don’t drink cider. Basic rate taxpayers are expected to save approximately £170 per annum in income tax from April 2011 due to an increase in the personal allowance from £6475 to £7475 and did not see capital gains tax rise to 40% or even 50% as was feared. Instead higher rate tax payers and Trusts pay a new rate of 28%, but the annual exemption remains at £10,100. There was also positive news for recipients of the basic state pension who will see their income rise in line with average earnings at a minimum rate of 2.5% per annum from April 2011.
More (comparative) cheer for higher earners. Instead of gradually reducing relief on pension contributions for those earning more than £130,000 a year, the Government plans to consult on whether it would be preferable to reduce the annual allowance that can be paid into a pension tax-free. New limits apply dependent on earning levels, with anti-forestalling measures being implemented for some high earners – we will learn more this autumn.
The requirement to purchase an annuity with pension savings by age 75 will be axed next April pending new legislation and in the meantime rises to 77. However the rise in state pension age to 66 will be ‘accelerated’, perhaps by 2016.
Income tax: The 50% tax rate for income above £150,000 will stay and those earning more than £100,000 will have their personal allowances gradually reduced to zero. But amid other positive news for entrepreneurs, rates of corporation tax are set to fall – take note small traders and partnerships – this means rates among the lowest in Europe. National Insurance contributions will still rise by 1% for both employers and employees, but employers’ contributions will begin at a higher threshold.
The rise in VAT to 20% from January 4, 2011 clearly affects us all, but on the whole the consensus is that the Budget ‘could have been worse’. It may be too soon to judge whether 17th-century economist Adam Smith’s guiding principle applies:
“There is no art which one government sooner learns of another than that of draining money from the pockets of the people.” (The Wealth of Nations Book V)