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On 22 June 2010 the new Chancellor, George Osborne, presented the first Budget from the Coalition. A few of the announcements were expected by many of the knowledgeable pundits (yours truly included!) but many others came right out of left field.
Spending review
The spending review will be presented on 20 October so many of the details will remain unknown until then at least. At the moment we know that, on average, unprotected government departments would suffer reductions of 25% in spending over 4 years. Public sector pay and pensions come in for some severe restrictions with pay being frozen for 2 years for all those employees earning over £21,000. A full review of public sector pay is being undertaken along with a review of public sector pensions. The age at which state pension will be paid is to be increased to 66 faster than anticipated.
The Chancellor also announced reductions in welfare spending including changes in tax credits, freezing of child benefit, restrictions in housing benefit, and medical reviews for those on disability living allowance.
Business tax
The main rate of corporation tax is to be reduced to 27% from next April reducing by a further 1% in each of the following three years. The small companies rate goes down to 20% from April 2011. These tax reductions are partially offset by changes in capital allowances with writing down allowance being reduced from 20% to 18% from next April and annual investment allowance restricted to £25,000 from 2012.
Everyone expected a rise in VAT, the question was how much and when? The answer is 20% from 4 January 2011. Insurance premium tax also rises with the standard rate becoming 6% instead of the current 5%. There are no increases in alcohol, tobacco, or fuel duty although alcohol duty in relation to certain types of drink are to be reviewed.
A bank balance sheet levy is to be introduced from January 2011.
Personal tax
Personal allowances are to increase by £1,000 from April 2011 but the basic rate threshold will be restricted so that higher rate taxpayers do not benefit. The rate of capital gains tax will remain unchanged for basic rate taxpayers but rises from 18% to 28% for higher rate taxpayers from 23 June. Relief available for entrepreneurs currently restricted to the first £2m of gains will now apply to the first £5m.
It appears that the increases of 1% to both employee and employer national insurance are to go ahead as planned but the threshold for employers will be increased by £21 per week above indexation to reduce the impact on employment costs for all but the highest paid staff.
Other matters
A scheme to assist new businesses in areas of the country other than London and the South East will be introduced. This will exempt new businesses from up to £5,000 of national insurance on up to 10 new employees. Other regional employment incentives are to be brought forward in due course.
The beneficial rules relating to furnished holiday lets which were due to be revoked are now to remain for the foreseeable future.
Proposals to restrict tax relief on pension contributions may be abandoned but only if the expected revenue can be generated from pensions in some other way. Discussions will take place with interested parties to determine if an alternative can be identified.
The Chancellor also announced the restoration of the pensions link to earnings from April 2011. Pensions will increase in line with earnings, prices or 2.5% whichever is the highest.
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