Budget 2010 Headlines

The main points from today's emergency budget are:

• VAT to rise from 17.5% to 20%
• Capital Gains Tax increase for higher rate taxpayers from 18% to 28%
• The basic State Pension will be linked to earnings, this will be from April 2011
• Alcohol, tobacco and fuel have all escaped increases in duty
• Increase in personal allowances of £1000
• Tax Relief on Pensions

VAT to rise from 17.5% to 20%

From the 4th January 2011 VAT will increase from 17.5% to 20%, the increase is expected to yield some £13billion a year in additional revenue. George Osborne stated “That is £13bn we don’t have to find from extra spending cuts or income tax rises”.

Labour reacted angrily to the VAT increase as backbenchers argue that such a rise will hit the poorest people the hardest.

However, items such as food and children’s clothes and other zero rated items such as books and newspapers will continue to be exempt from VAT.

As the increase will not take effect until 4 January 2011 it could drive people to make large purchases such as electrical items and cars before the increase takes effect. Economists think that as well as consumers spending less once the 20% rate hits, it will also lead to inflationary pressures.

Capital Gains Tax (CGT) Changes in the Emergency Budget

Although many expected an increase in Capital Gains Tax no one expected it to be so high or indeed to take effect so quickly. The new Capital Gains Tax rate for higher rate taxpayers takes effect from mid-night 22nd June.

Although it is primarily aimed at higher rate taxpayers it will in fact hit basic rate tax payers too. This is because when an individual’s income is calculated you also have to include the gain. Which means that individuals with second homes or properties which they let out could find themselves facing a Capital Gains tax rate of 28% simply because when the gain is added to their income it takes into the higher rate threshold.

Entrepreneur’s relief has been increased to £5 million; this takes effect from mid-night 22 June. This is disastrous for anyone who has completed on a sale of their business today as the amount of Entrepreneurs relief today is £1 million. So anyone selling a business for more than £1million will be paying substantially more capital gains tax then they would have done if the completion had taken place tomorrow.

The annual exemption remains at £10,100 for 2010/11.

State Pension Changes following Emergency Budget

Some good news for Pensioners as the State Pension is set to rise in line with earnings or a minimum 2.5% which ever is the greatest.

Alcohol, Tobacco and Fuel

There was a sigh of relief from publicans as George Osborne announced there were to be no increase in alcohol and tobacco duties. Good news for motorists too as there was no increase in fuel duty. Of course all of this may change come the autumn and the pre-budget report.

Personal Allowances

From the 6th April 2011 personal allowances will increase from £6475 to £7475 it is expected that the increase will remove almost 900,000 workers from paying tax on PAYE income.

Tax Relief on Pensions

There was some good news on pensions today, it was announced that the very complex plans Labour introduced to restrict tax relief on pensions for the highest earners is to be likely to be scrapped. The Government are going to review the current plans in detail but it is widely expected that a cap on the amount you can pay in to a pension will be introduced, it could be in the region of £30,000 to £45,000 a year and no tax relief will be available for any contributions to a pension over the limit. Such a move would dramatically simplify the massively over complex plans Labour introduced.