Perhaps unsurprisingly, this year’s Budget focussed heavily on the need to grow the economy, rather than thinking about the usual round of giveaways. In fact the Budget was tax neutral and the only real giveaway – on fuel duty – is being paid for by the oil companies, provided it’s not reflected in future pump prices.
With GDP likely to fall to 1.7% this year, compared with previous estimates of 2.1%, and unemployment rising, the Chancellor aimed to help the private sector grow without affecting the need to reduce spending. Importantly, steps already taken are expected by the Office for Budget Responsibility to reduce public sector net borrowing, which is forecast to be £146bn this year, falling to £122bn next year, £101bn the year after, £70bn in 2013/14, then £46bn before coming down to £29bn in time for 2015/16.
This is vitally important to UK plc, because only by reducing borrowing can the interest rate we have to pay on sovereign debt remain low. The market interest rates we pay have fallen to 3.6%; by contrast those paid by Greece are 12.5%, Ireland almost 10%, and Portugal and Spain, 7% and 5%, respectively. If our interest repayments were to be forced up, this would dramatically reduce the rate of economic recovery, as the budget deficit would start to rise again without even more drastic – and potentially recessionary – action.
Key points – individuals
The main points in the Budget affecting individuals were as follows, many of which had already been announced:
- Personal allowance increased by £1,000 to £7,475 this year and a further £630 to £8,105 from April 2012 – the level at which higher rate tax cuts in is correspondingly reduced to £35,000 for 2011/12;
- ISA limit increased to £10,680 for 2011/12 (previously £10,200) and will increase in line with the Consumer Prices Index in future, as will other thresholds, with the exception of inheritance tax, which remains static until April 2015 before increasing – this will result in an element of fiscal drag, as long as RPI inflation is higher than CPI inflation;
- The 50% income tax rate remains in place, but will be temporary;
- The annual exemption for capital gains tax is increased to £10,600 (from £10,100) and Entrepreneurs’ Relief is increased to lifetime gains of £10 million;
- Annual pension contribution limit will be a maximum of £50,000 from 6th April 2011 for everyone
- The lifetime allowance will fall to £1.5 million from 6th April 2012 (currently £1.8 million);
- Fuel duty escalator is abolished and 1p per litre cut from existing fuel duty – paid for by a new tax on oil companies;
- Business car mileage allowance increased to 45p (previously 40p);
- Inheritance tax will be reduced by 4 percentage points (from 40% to 36%) where 10% of the estate is left to charity; and
- The state retirement age may in future be raised beyond its current target of 67, based on increasing life expectancy – this will help pay for the aspiration to replace the existing state pensions with a single non-means-tested amount of (about) £140 a week.
Key points – businesses
The main points in the Budget affecting businesses were as follows:
- Corporation tax reduces by 2%, rather than 1%, to 26% from 2011/12 and will fall by a further 1% a year until it reaches 23%, far lower than in competitor countries such as the US and France;
- 21 new enterprise zones are being created which will offer businesses tax benefits, including relief from business rates for up to five years;
The small business business rate relief scheme is extended for a further year from 1st October 2011;
- Business regulation is to be further simplified with the removal of more than 100 pages of code, saving businesses an estimated £350 million annually;
- VAT threshold for registration increased by £3,000 to £73,000 and the deregistration limit by a similar amount to £68,000; and
- The planning system is to be revised, in order to support sustainable development.
Other Budget provisions include reducing the time required for clinical trials and a simplification of the money laundering rules. Export promotion will be assisted with £100 million to be invested in Science funded by an enhanced bank levy, while smaller businesses are also to be helped with the R&D tax credit increased to 200% from April.
The construction sector will also be helped by the higher bank levy, as the government has given a £250 million commitment to use part of this to help 10,000 first-time buyers of new homes get on the housing ladder. The mortgage interest scheme is also to be extended for another year from January 2012.
The Government announced last October that it would introduce new tax-advantaged accounts for saving for children, called Junior ISAs. All UK resident children aged under 18 who do not have a Child Trust Fund will be eligible, and the accounts are expected to be available from autumn 2011.
The Government proposes to abolish some reliefs, after 2012, and will consult on removing life assurance premium relief; and relief on life assurance premiums paid by employers under employer-financed retirement benefit schemes.
The ability of defined benefit pension schemes to contract-out of the Second State Pension (formerly SERPS) is to be scrapped as part of the move to a single tier state pension.
There will be a consultation on merging income tax and National Insurance to simplify the system for employers. There are likely to be issues relating to such matters as the tax relief available on pension contributions, because they cannot be set against NI; however, we are told that pension payments and other income will not be brought into the ambit of the NI element of any new combined structure.
All the foregoing comments will depend on passage of the Finance Bill through parliament and may be subject to change. No action should be taken without further advice being sought.
Getting professional help
Your pension and investment plans are important to you, so it is essential to seek professional advice before making any decision in respect of your personal or business finances. Please consult your usual financial adviser.
Nothing contained in the article should be considered as giving individual financial advice. The value of investments is not guaranteed and will fluctuate. You may get back less than you invest. Please note that there may be variations for those living in Scotland and Northern Ireland.
Sources: HM Treasury for Budget information