In a Budget that claimed to “raise the living standards of families”, George Osborne, chancellor, announced help for lower-earners, motorists and first-time buyers – and some tax incentives for higher earners who will be adversely affected by income tax, national insurance and pension changes from April 6.
The tax-free personal allowance for under-65s will increase by £630 to £8,105 in April 2012, cutting individual tax bills by up to £126.
There will be an equivalent £630 narrowing of the basic-rate tax band, leaving the threshold at which individuals start paying 40 per cent at £42,475 – the same level as in the upcoming 2011/12 tax year.
The Treasury said the 2012/13 allowance change will reduce the tax paid by 25m people by an average of £48, and take 260,000 more low-income individuals out of the tax net altogether.
The Chancellor also said that this year’s Budget would not draw more middle earners into the higher-rate band.
By contrast, an estimated 750,000 middle earners are due to pay 40 per cent tax for the first time in 2011/12 as a result of so-called “fiscal drag”, while the previously announced one percentage point increase in national insurance contributions (Nics) is also going ahead from next month.
The Chancellor also announced that the default measure for increasing direct tax thresholds and bands will change to the consumer prices index (CPI) from 2012, rather than the currently higher retail prices index (RPI). This switch to CPI would tend to draw more people into higher tax bands. However, to ensure older people do not lose out, the Treasury said that age-related personal allowances will continue to be uprated in line with RPI for the duration of this parliament.
The government will also consult on options for integrating the operation of income tax and national insurance contributions into one personal tax system.
The government has provided first-time buyers with a boost by announcing the launch of a new shared equity scheme – called First Buy Direct – that aims to help 10,000 families onto the property ladder.
The scheme, which replaces the former Home Buy Direct initiative that ended last Autumn, will see first-time buyers put down a 5 per cent deposit, with the government putting in 10 per cent and the housebuilder another 10 per cent.
First Buy is only available to first-time buyers that purchase a new-build property and are below a certain income threshold. Experts have pointed out that the new scheme is less attractive than the old Home Buy Direct initiative.
The chancellor also announced that it will be extending the Support for Mortgage Interest Scheme – which provides borrowers with help towards their mortgage interest payments – for another year.
This means that the current £200,000 limit on the size of the mortgage and the 13-week waiting period – down from 39 weeks – will now remain in place until January 2013.
Motorists benefited from a more generous cut in fuel duty than expected. From 6pm on Wednesday (the day of the Budget) fuel duty will be cut by 1p per litre.
A fuel duty escalator due to push up fuel costs was cancelled and the inflation-linked rise in fuel duty due next week has been delayed until next year. The inflation rise planned for April 2012 willbe delayed until the following summer.
The cost of fuel was due to rise by 1p plus inflation, which would have raised prices by around 4p. The money will be paid for from the extra tax on oil companies announced.
Holidaymakers will also benefit from a freeze on the planned increase in air passenger duty. Air passenger charges currently range from around £12 for a short trip in economy class up to £170 for business class flights to long haul destinations such as Australia.
But a move to charge duty per plane rather than per passenger, championed by green campaigners, has been abandoned for now.
And households in the south west of England will receive state help to bring down water bills. Residents of Cornwall, Devon, parts of Dorset and Somerset, who are all customers of South West Water, have some of the highest bills in Britain.
Customers pay for the upkeep of nearly one third of England’s coastline, despite making up only 3 per cent of the population.
Enterprise Investment Schemes
Higher earners will have the chance to offset the fall in their maximum pension contributions from £255,000 to £50,000 in April by taking advantage of generous new tax breaks for investing in small companies.
As part of a package of measures to stimulate growth businesses, the chancellor announced a widening of scope of the Enterprise Investment Scheme (EIS). As of next month, upfront income tax relief for private investors will rise from 20 per cent to 30 per cent – bringing the scheme in line with the relief available in contributions into venture capital trusts.
But, at the same time, the amount that any individual can invest through the EIS will double from £500,000 to £1m a year, and the size of company that can qualify for investment will be increased. At present it is limited to companies with gross assets of no more than £7m and fewer than 50 employees.
Julie Morrison, tax partner in Ernst & Young’s advising fast growth businesses, said the measures would “further encourage private investors to fund private enterprise”.
Inheritance tax (IHT) will come down in some circumstances – but it will not leave beneficiaries better off. The chancellor said that IHT, currently levied at 40 per cent on estates valued above £325,000, would come down by 10 per cent to 36 per cent if a person donates 10 per cent or more of their estate to charity. Mr Osborne said he wanted “to make giving 10 per cent of your legacy to charity the new norm in our country.”
Charities will also be allowed to give people gifts worth more to say thank you for donations. At present, gifts such as lifetime membership or free tickets to an event are limited to a value of £500 but this will rise to £2,500.
A new single tier pension worth about £140 per week is to be introduced – but no date has been set. This would be based on contributions and be flat-rate”. It will not apply to current pensions and will “take years fully to come into effect”.
The government proposed a new, more automatic mechanism for future increases in the State Pension Age based on regular, independent reviews of longevity.
Stamp duty land tax
In a move to strengthen investment into residential property, the government has announced plans to reform the stamp duty land tax rules applied to bulk purchases for residential properties.
A buyer can decide to have the rate of stamp duty on purchases of multiple residential properties determined by the mean value of the dwellings purchased – subject to a minimum rate of 1 per cent – rather than their aggregate value as is currently the case.
This is likely to encourage more professional landlords and larger institutional investors to build up their portfolios, increasing the supply of private rented houses.
In other stamp duty announcements, the government said it will announce in the autumn the outcome of its review of the stamp duty relief for first-time buyers. The current relief – available for properties that cost £250,000 or less - ends next March.
The government has confirmed further measures as part of its crackdown on tax avoidance schemes. It announced that these included new measures to address the abuse of stamp duty land tax rules – which come into effect from Thursday – and said it will be closing down three forms of stamp duty land tax avoidance schemes.
Reporting by Tanya Powley, Matthew Vincent, Alice Ross, Steve Lodge, Elaine Moore