Emergency Budget - how will it affect you?

Today’s emergency Budget contained a broad mix of spending cuts and tax rises, will the odd tax-giveaway in the name of fairness. Are you affected?.

The main announcements were as follows:

Personal

VAT

The headline VAT rate will rise from 17.5% to 20% from 4 January 2011, adding £2.13 to a £100 spend.

The standard rate of Insurance Premium Tax (IPT) will also rise at the same time from 5% to 6% (with the higher rate rising from 17.5% to 20%).

Income Tax

The annual personal allowance for under 65’s will increase by £1,000 to £7,475 from 6 April 2011. This means most basic rate taxpayers will be £200 a year better off. For an average earner on £25,000 a year it’s equivalent to a cut in the basic rate of income tax from 20% to 18.9%.

However, the higher rate tax threshold will be reduced (by around £2,500) to stop higher rate taxpayers (based on current tax bands) from benefiting.

National Insurance

Class 1 and 4 NICs are still due to increase by 1% from next April, potentially wiping out some or all of the income tax concession above. An employee earning £25,000 will pay around an extra £50 a year, although those earning below £20,000 will be protected from the rise by an allowance increase.

Capital Gains Tax

The annual allowance remains £10,100 and basic rate taxpayers will still pay 18%. But higher and top rate taxpayers will pay 28% tax effective from tomorrow (23 June 2010).

This means a higher rate taxpayer realising gains of £30,000 will pay an extra £1,990 of capital gains tax following this rise (assuming they can use their £10,100 allowance in full).

Pension Tax Relief

Although a firm announcement is not expected until shortly before Parliament’s summer recess, it looks likely Labour’s proposals to cut pension contribution tax relief for high earners will be scrapped in favour of a lower annual contribution allowance, expected to be in the region of £30,000 to £45,000.

State Pensions

The annual state pension increase will, from next year, benefit from a triple guarantee – increasing by the higher of earnings, inflation and 2.5%.

However, the Chancellor also said the Government will accelerate the increase in state pension age to 66, more details to follow. The increase is currently due to 2026.

Child Benefit

Child benefit will be frozen at current levels until April 2014. That is £20.30 per week for the eldest child and £13.40 for each other child.

Tax Credits

Families earning over £40,000 a year will see their tax credits dwindle from next April (the current threshold is £50,000). The baby element will be scrapped although the child element will increase by £150 above inflation.

Benefits in general

Future annual benefit rises (except the state pension) will be linked to the Consumer Price Index (CPI) rather than the Retail Price Index (RPI). CPI tens to be lower as it doesn’t include housing costs such as council tax and mortgage interest.

Housing benefit will also be capped, at £280 per week for a one bedroom property rising to £400 per week for a four bedroom property or larger.

Alcohol

Cider duty will fall from 30 June, reducing the price by around 9p per bottle. Otherwise, no changes to alcohol, tobacco and fuel duties.

Business

Corporation Tax

The main rate of corporation tax will fall from its current 28% level by 1% in each of the next four years, reaching 24% by April 2014. The rate on profits below £300,000 will fall from 21% to 20% next April, rather than the previous government’s planned 1% increase.

National Insurance

The planned 1% increase in employer class 1 contributions (the so-called ‘jobs tax’) will still go ahead next April. However, the level at which employers start paying contributions will increase by £21 above inflation (the current level is £110 per week) – estimated to reduce the cost of employing someone earning less than £20,000.

Employers in certain regions could also be exempt from the first £5,000 of National Insurance Contributions for each of their first 10 employees during the first year of business. The scheme is intended to last three years.

Annual Investment Allowance

The Annual Investment Allowance will be cut from £100,000 to £25,000 from April 2012. This is a valuable tax benefit for small businesses and the self-employed as it allows most capital expenditures within the allowance to be offset against tax in the year of purchase. As least there’s still time to use the existing allowance.

Entrepreneurs Relief

The amount of lifetime gains on which entrepreneurs can enjoy a 10% capital gains tax rate when selling their businesses will increase from £2million to £5 million from tomorrow. Wishful thinking...

Read this article at http://www.candidmoney.com/articles/article121.aspx