The budget was described by George Osborne as “tough but fair” as the coalition government set out their 5 year plan to reduce the budget deficit.
The budget contained a large number of tax and spending initiatives expected to deliver an additional fiscal gain of approximately £40 billion by 2014/15 above the measures included in the March Budget. The emphasis is largely based on spending cuts rather than tax rises. The net tax rise will be around £8 billion by 2014/15. Reductions of £32 billion in public expenditure by 2014/15 were also announced.
The highlights of the main tax changes can be summarised as follows:
Income Tax Allowance
From 6 April 2011 the personal allowance (for individuals aged under 65) will increase from £6,475 to £7,475.
Unsurprisingly, the basic rate limit will be reduced so that higher rate taxpayers will not benefit.
Inheritance Tax (IHT)
The £325,000 Nil Rate Band threshold remains frozen until 5 April 2015. The IHT over and above this figure remains at 40%.
More and more people will have IHT to pay on the death of a loved one. Early tax planning is the key with the use of Gifts, Trusts and tax efficient investments.
Capital Gains Tax Rate
From 23 June 2010, the CGT rate will increase from 18% to 28% for higher rate tax payers. This means that the CGT rate will remain at 18% where a taxpayer’s total income (including gains) does not exceed the upper limit of the income tax basic rate band.
The government managed expectations well in this respect as a much larger increase was anticipated. However, there may well be further increases in the next budget so tax planning remains key.
Where appropriate, make use of your annual exemption and your spouse’s (or business partners) for each tax year. The annual exemption level of £10,100 remains the same.
The CGT rate for personal representatives and trustees will be 28%.
Entrepreneurs will be boosted by the announcement that Entrepreneurs Relief is to be increased to a lifetime gains limit from £2 million to £5 million effective from midnight on Budget day.
£5 million of qualifying gains will be taxed at 10% thereby creating a potential saving to the entrepreneur of £900,000.
Mr Osborne announced that he is to review the higher earners pension tax regime due to come into effect in April 2011 and look to replace it with a reduced annual allowance limit.
This should simplify the much criticised and complex regime.
The standard rate of VAT is to be increased from 17.5% to 20% from 4 January 2011.
Anti-forestalling legislation will have effect from 22 June 2010 to ensure the 17.5% rate is not applied to goods and services which are to be delivered or performed after 4 January 2011.
The main corporation tax rate for large companies is to be reduced from 28% to 27% from 1 April 2011. The rate will then be reduced by 1% per annum to 24% by 1 April 2014.
However, this will be balanced out by a reduction in the rate of relief for capital expenditure and, from 1 April 2012, a reduction in the Annual Investment Allowance from £100,000 to £25,000.
The small profits corporation tax rate will be reduced from 21% to 20% from 1 April 2011.
From 1 January 2011 there will be a levy on the banks based on their balance sheets. Details of the levy will be announced following a consultation.
This is likely to be a popular measure to the vast majority of the electorate.
Most commentators see the budget as a credible plan to reduce the deficit within 5 years. However, some concerns remain that the proposals will stunt growth in the short term.