The coalition blitzkrieg on government spending has begun. While a Conservative slash and burn in the 'emergency' budget was expected, the scale of the cuts is unprecedented. There were also a few surprises on tax. Let's take a look at the main changes:
Income tax and national insurance contributions
Effective 6 April 2011, the income tax personal allowance -- the part of your income you don't pay tax on -- for under 65s will increase by £1,000 from £6,475 to £7,475.
The basic rate income tax limit and the upper earnings and profits limit for national insurance contributions will both decrease, however. The exact figures will be confirmed in the autumn, but the government has revealed it expects the basic rate limit to fall by £2,500 (from £37,400 to £34,900) and the upper earnings and profits limit for national insurance contributions to fall by £1,650 (from £43,875 to £42,225).
While most middle and higher income earners are being clobbered as a result of these cuts in the band limits, there is some relief for business. The level at which they must start to pay national insurance contributions will increase by £21 per week above indexation from April 2011.
Effective 4 January 2011, the standard rate of VAT will increase 2.5% from 17.5% to 20%. This signals a big compromise by the Liberal Democrats as they promised to leave VAT at 17.5% during the election and campaigned heavily against what they called the regressive 'Tory Tax Bombshell'.
Insurance Premium Tax
Also effective 4 January 2011, the standard rate of insurance premium tax will increase 1% from 5% to 6% and the higher rate will increase 2.5% from 17.5% to 20%.
No change here. From April 2011, people owning properties worth more than £1 million will have to pay stamp duty at a rate of 5% -- an increase of 1%. This change was announced by former chancellor Alistair Darling in the April budget.
Child and Working Tax Credits
There are a number of changes to Child and Working Tax Credits, including:
- an increase in the second withdrawal rate (the amount taken off your tax credit entitlements depending on your income) from 6.67% to 41%
- a reduction in the amount of your income not taken into account when assessing eligibility for credits from £25,000 to £10,000, and then £5,000
- an increase in the rate at which tax credit awards are reduced
- removal of the one-off payment for new workers over 50 from April 2012
- no Child Tax Credit from April 2011 for families earning more than £40,000 per year
- removal of the baby element of the child tax credit from April 2011
- an increase in the child element by £150 above inflation in April 2011 and £60 above inflation in April 2012 -- no guarantees to increase even in line with inflation thereafter, however, so watch this space...
[Continued in Emergency Budget 2010: Key Tax Provisions (Part 2)]