This piece first appeared in Saga Magazine in August 2010
The text here may not be identical to the published text  

Winners and losers

The June Budget

TAX
Personal tax allowances
The amount of income people under 65 can have before tax has to be paid will rise by £1,000 to £7,475 from next April. That will mean less tax to pay for an estimated 23 million basic rate taxpayers and the Treasury estimates it will take 800,000 out of paying tax altogether. Many of those who benefit will be women aged 60-64 who do not get the higher tax allowances for the over 65s.

The £200 saving will be taken back from anyone who pays tax at the higher rate of 40% by reducing the level at which that rate starts – currently on incomes over about £44,000. That will mean a lot more people pay 40% tax. The coalition government has said it hopes eventually to increase the personal allowance for those under 65 to £10,000 and that will bring down the starting point for 40% tax still further.

No change was announced in the higher tax allowances for those over 65 and over 75. However, the Treasury told Saga it expects the over 65s allowance to rise with inflation to £9,900 in 2011/12. The over 75s allowance will rise to £10,000 for those over 75 following a commitment given by Gordon Brown in March 2007. But if the over 75s allowance was raised from its current £9,640 by the 4.2% inflation expected in September it would in fact be £10,050 in 2011/12. The actual rates will be announced in the autumn pre-Budget or the spring Budget.

Capital Gains Tax
Capital Gains Tax is charged on the profit made when assets such as shares or a second home are sold. The coalition government had said it would raise the rate to from 18% to something closer to 40%. In the event a higher rate of CGT at 28% was introduced from 23 June. The profit on assets sold before that day will be taxed at 18%. The profit on assets sold from that date will be added to income and the part below the higher rate threshold will be taxed at 18% and the rest will be taxed at 28%. No other changes were made. There is still an annual exemption on gains up to £10,100 this tax year. That will rise with inflation.

Tax on spending
VAT will rise from 17.5% to 20% on 4 January 2011. That will put up the price of VATable goods by just over 2%. It doesn’t sound much – but it will raise a whopping £13.5 billion a year. The cost of insuring your home, your car, your pets and your travel will also rise as insurance premium tax goes up from 5% to 6% from the same date. That will cost us another half a billion pounds.

Hated taxes
Council tax will be frozen in England in 2011 – but only if each council agrees to do so and the freeze may not apply to levies by the police and others. And the new landline tax – £6 a year on fixed line phones – which was intended to raise £175 million from October to pay for extending broadband to every home has been cancelled before it began.

Altogether there are nearly £21 billion of tax rises and just over £12 billion of tax cuts. Leaving a net gain to the Treasury of slightly more than £8 billion a year by 2014/15.

WELFARE CUTS
The Government will save more than that by cutting £11 billion off the £200 billion a year cost of welfare payments – everything from maternity grants to state pensions.

The biggest saving – more than half the total – will come by changing the way that benefits are increased each April. Normally they rise in line with prices and for 30 years that has been measured using the Retail Prices Index (RPI). But from April 2011 the Consumer Prices Index (CPI) will be used instead. The CPI nearly always shows a lower rise in prices than the RPI and figures provided in the Budget papers show that over the next five years the change in index will cut the increase in benefits by nearly 8.5%. For example, someone with maximum Disability Living Allowance – currently £119.40 a week – will see that benefit rise in line with CPI to £136.35 by 2016. But using RPI that rise would have been £10.05 a week more at £146.40. That will cost disabled people more than £522 each in 2016/17.

State pension
The CPI will also be used for uprating the state pension each year. That may surprise you as the Government has made much of its ‘triple lock’ which guarantees that the basic state pension will rise by earnings, prices or 2.5% whichever is higher. That guarantee applies only to the basic state pension – the bit paid on your National Insurance contributions. SERPS and any other extras will only go up by the CPI in future. And the triple lock is not quite what it seems. For example, in September 2011 CPI is predicted to be 2.6% and earnings are expected to be rising by 2.1%. That would mean a pension increase in line with CPI of 2.6%. But the RPI is expected to be 3.4% then. On those figures the increase in the basic state pension in 2012 will be less under the ‘triple lock’ than it would be under the present system. A similar problem would occur in April 2011. But the Government has said that the basic state pension will rise by RPI next April if it is – as predicted – higher than the other measures. From 2013 the triple lock will mean higher rises in the pension as earnings grow. The lock will not apply to pension credit. In 2011 that will go up by the same cash sum as the rise in the basic state pension.

Housing
Help with rent will be cut by £1.76 billion by 2014. The changes mainly affect housing benefit paid to private landlords. The biggest change will cut the level of rent that will be allowed (the Local Housing Allowance) when the benefit is calculated. It will be set well below the average rent in each area. There will also be an upper limit on the rent ranging from £250 for a one bedroom property to £400 for a 4-bed home. It will be very hard to find any rented property eligible for housing benefit in some areas. After one year anyone who is of working age and able to work will have their benefit cut by 10%. And from 2013 even social housing tenants will have their benefit cut if they live in a bigger home than they need. It is a very tough package. Help with mortgage payments for people on means-tested benefits including pension credit will also be cut. From October the assumed interest rate will fall from 6.08% to the average reported by the Bank of England – currently 3.7%.

ANNUITIES
The Government will change the rule that makes people use their pension savings to provide an income at the age of 75. While it decides what to do it is raising the age when that rule applies from 75 to 77.

 


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