UK Tax Changes
Ahead of today's budget, John Whiting, tax policy director of the Chartered Institute of Taxation, previews the likely ups and downs in George Osborne's red box for Channel 4 News.
For many budget-watchers, Tuesday's speech will feel strange - a Conservative chancellor speaking for the first time since 1996, and on behalf of a coalition government.
If spending cuts will be a feature, what of the tax changes in George Osborne's speech? Come to that, will he use the traditional budget box?
The known unknowns
We know the outline of some of the looming measures from the coalition agreement. However, what was said on tax in the agreement was a little enigmatic, so we will have to listen carefully to pick up more of the detail - including, especially, when changes will take effect. So listen out for:
- Income tax - there will be a "significant step" towards the promised £10,000 personal allowance (i.e. the yearly amount of income an individual can have before income tax bites). Currently £6,475, an increase of £1,000 from next April (worth £200 to basic rate taxpayers) is on the cards.
- National insurance - the 1 per cent rise in all rates announced by the previous government will go ahead; there is a promise of help for employers through an adjustment to the point at which employers start to pay NICs on their employees' pay, but it seems that employees and self-employed will see part of that income tax benefit clawed back through increased NICs.
- Capital Gains Tax (CGT) - the current 18 per cent tax rate will increase to something "closer to income tax rates", with "generous relief for entrepreneurs". This seems likely to mean a 40 per cent rate for higher rate taxpayers, 20 per cent for basic rate payers (but gains may push them into the higher rate bracket). Key issues are: from when (hopefully not before April next year); what gets the "generous reliefs" (undoubtedly own businesses, but what about shares in employers?); and what about relief for inflation?
- Benefits - expect some more details of how tax credits are going to be restricted for higher earners, possibly by scrapping the £545pa "family element". Curtailment of child trust funds will probably be confirmed as well.
- Stamp duty - the coalition have said they would like to make permanent the current temporary relief for house purchases up to £250,000 by first-time buyers. This runs until March 2012 so it's more likely to be a subject for next year.
- Business taxes - cuts in the main rate of corporation tax from the current 28 per cent have been promised, but the plan to pay for them with cuts in capital allowances and reliefs has upset those (manufacturers especially), who would lose out, so may go out for further consultation.
- Simpler taxes - the Queen's speech contained proposals for a new Office of Tax Simplification, so further detail on that may emerge.
Budget: getting the bad news out of the way
George Osborne has just returned from his audience with the Queen, a traditional eve of budget catch-up. Did Her Majesty drop her tea-cup? We may never know, writes political editor Gary Gibbon.
The IFS has been predicting the government will announce it wants to eliminate all the structural deficit in one parliament and that has now become the expectation.
That would be an £85bn repair job on the economy which the last IFS figures, post OBR report, said could mean cuts in unprotected departmental spending of one third.
The government will be emphasising "fairness" until it is blue (and coalition yellow) in the face and has run its figures through all sorts of programmes to prove that this is progressive repair work and that everyone has a share in the suffering.
Somewhere in the clatter of crashing public sector projects and payments they hope you'll hear a growth strategy and pick up a direction of travel on taxation.
The government wants this to be a budget that gets a huge chunk of the bad news out of the way. They don't want to keep revisiting this. Though of course if growth doesn't pan out, Europe slumps back...well, those of us who are not the reigning monarch get a jumbo dose of economic cod liver oil at 12.30.
There has also been mention of changing corporation tax to a more "territorial" basis, further action on non-domiciled taxation, changes to air passenger duty to a "per plane" basis and a review of the controversial "IR35" rules, though these are likely to be reviews rather than immediate changes.
A couple of loose ends from the March budget - the 50p "broadband levy" and the taxation of furnished holiday lettings - should get mentions.
The unknown unknowns
- Income tax part 2 - that likely increase in personal allowances raises the issue of whether higher rate taxpayers will benefit in full (expect an adjustment so that it's only worth 20 per cent, not 40 per cent) and whether those aged 65+ will get a parallel increase (it's likely their higher allowance, currently £9,490, will see the differential erode over time to move towards the promised standard £10,000 allowance).
- CGT part 2 - look out also for a cut in the annual exempt amount (currently £10,100); the Lib Dems had suggested a cut to as little as £2,000. It's also possible we will see some tightening of the rules around houses (can't think what provoked that....) and private equity.
- Excise duties - the "sin taxes" (i.e. alcohol, tobacco and petrol/diesel) could see further rises - the first two, in particular, are rumoured to be on the chancellor's agenda. Cider drinkers should listen carefully to see what will happen to their duty increase.
- Benefits part 2 - it's possible that child benefit could be in the firing line: restricting or even taxing it.
Chop or Not?
With the UK deficit running at £156bn, there are tough choices to be made on what to cut and what to tax.
We'll get the Chancellor's decision on Tuesday but here's your change to decide what to Chop or Not.
And Krishnan Guru-Murthy will present Dispatches on Monday at 8pm on Channel 4 with a team of experts who believe their proposals could get Britain's budget back in shape.
But all this has avoided mentioning (just like the coalition agreement) the elephant in the room... VAT. Will the rate go up? It's hard to see how the UK can get its books into balance without an increase, so a rise to 20 per cent must be on the cards, probably from 1 January.
That seems more likely than adjusting what is subject to VAT - none of the zero-rated items would be easy to move into the tax net (New houses? Books and newspapers?? Children's clothes??? Food????) though one could just about see some small tweaks to move a few minor things into the little-used 5 per cent rate.
Budget: The Challenge for George Osborne
"It is said that the Tories hid George Osborne away during the election campaign because they feared he would frighten the children. He plans to get his own back by frightening the grown ups", writes broadcaster Peter McHugh.
Where's the good news?
This is going to be a tough budget, with spending cuts featuring heavily. There may be some additions to tax credits for the lower paid to help compensate for any VAT increase.
But good news is likely to be limited to that personal allowance increase, which at least will help cushion lower and average earners.
And many people will be watching out for better news the following day, hoping that a good England result will take minds off the budget pain...though England's football team doesn't always deliver pain relief.