Review of the June 2010 Budget

22/06/2010

Chancellor George Osborne announced a string of tax rises and spending cuts in his June 22 Budget aimed at cutting Britain's growing deficit, which is estimated to be 70% of GDP by 2013/14.

This is one of the most significant Budgets in a generation and the first big test for the coalition. However, the stakes are high. At its heart is the debate on whether you need to cut fast and deep to reassure the sovereign debt markets and protect Britain's AAA rating or whether, as President Obama suggested, the world economy is too fragile for too many countries to cut at once. Osborne is betting on the former, with Labour suggesting that they had it right on the latter all along.

In Mr Osborne's address, he has announced that he anticipated that 77% of savings will come through spending cuts rather than higher taxation.

Let's take a closer look at the Chancellor's major announcements...

Personal taxation

• The personal allowance for under 65s will be increased by £1,000 from April 2011. The higher rate threshold will be frozen up to and including 2013/14 to ensure higher rate taxpayers pay the same amount of tax. The government will aim to increase the personal allowance towards £10,000 over its term.
• From 23 June Capital Gains Tax will increase to 28% for higher rate taxpayers, but will remain at 18% for basic rate taxpayers. A taper will not be introduced. The £10,100 allowance will remain and will increase with inflation. Entrepreneurs' lifetime allowance will increase from £2m to £5m.
• On pension income tax relief, the government will work with the industry to consider alternatives to the restriction for those earning over £150,000 including a lower annual allowance of between £30,000 and £45,000. The government is firm that any change must raise at least the £3.5 billion planned in the previous government's proposals.
• On 4 January 2011 VAT will increase from 17.5% to 20%. There are no changes to zero-rated or reduced-rate products.
• The government will review the taxation of non-domiciles.
• The 50% additional top rate of income tax will remain "for the time being".
• The government will work in partnership with local authorities in England to implement a council tax freeze in 2011/12.
• Insurance Premium Tax will increase from 5% to 6% at the standard rate (applied to most GI products including health insurance) and from 17.5% to 20% at the higher rate (applied to travel insurance and warranties).

Personal retirement planning

• The government will shortly consult on removing the effective obligation to buy an annuity at age 75.
• In the interim, the Finance Bill 2010 will increase the age at which a pension scheme member has to secure a retirement income to 77 from 23 June 2010.
• On pension income tax relief, the government will work with the industry to consider alternatives to the restriction for those earning over £150,000 - including a lower annual allowance of between £30,000 and £45,000. They will also consider interaction with the lifetime allowance, the impact on defined benefit schemes, the impact on basic rate taxpayers, unusual income changes and regulatory compliance.

Savings

• The government will reduce and then stop government contributions to the Child Trust Fund.
• The government confirms that it will index-link the annual ISA limit to RPI from 2011/12. The new rates will be announced at least four months before the start of each tax year. The cash limit will remain as half the stocks and shares limit.
• The Savings Gateway (matched saving account) will be scrapped.

Business taxation

• The government has set out a five-year plan for business taxation. Corporation tax will reduce 1% to 27% in 2011 and reduce by 1% for each of the next three years. This will be funded by restrictions to capital allowances and other reliefs.
• Work on an international bank levy will continue, but from 1 January 2011 the government will introduce a balance sheet levy raising £2 billion. This does not appear to include insurers.
• The effect of the increase in employer National Insurance will largely be reversed by increasing the threshold by £21 a week above indexation.

State pension

• The state pension will be increase in line with earnings. This is seen as a way of reducing the impact of means testing on saving.
• The government will publish a consultation later this week on accelerating the increase in the state pension age to 66.

Economy

• The Office of Budget Responsibility (OBR) has revised its projected growth figures (issued the week prior to the June Budget) as a result of the fiscal changes in the Budget. 2010 growth falls from 1.3% to 1.2% and 2011 growth falls from 2.6% to 2.3%. However, projected growth figures in later years have been increased.
• Consumer price inflation is expected to be 2.7% by the end of 2010, before returning to target of 2% in the medium-term. Unemployment is expected to peak at 8.1% in 2010, and the OBR has again projected a small increase here as a result of the Budget.
• Unemployment is forecast to peak this year at 8.1% and then fall for each of the next four years, to reach 6.1% in 2015.