Budget 2010: how much will taxes rise?

Taxes are certain to go up in next week’s emergency Budget as the Government gets to grip with Britain’s vast pile of debt. The question is, which taxes will rise, and by how much?

In some cases we already have a good idea – the Coalition is going ahead with rises in employees’ National Insurance, for example. But given the size of the deficit, the Chancellor, George Osborne, is certain to have other rises in mind.

We asked tax experts at some of the country’s leading accountancy firms to predict the measures that Mr Osborne will include in his first Budget.

George Osborne, the Chancellor, is expected to raise the rate of capital gains tax in the emergency Budget

George Osborne, the Chancellor, is expected to raise the rate of capital gains tax in the emergency Budget


Consensus prediction: substantial rises next year

We already know that CGT is due to increase, said Grant Thornton, although we don’t know what new rate or rates will be. “We do know that it will be more in line with income tax, so it could go up to 40pc, but the option of taxing up to the highest rate of 50pc has not been ruled out,” the firm said, adding that the measure was “likely to go down like a lead balloon” with investors with share portfolios and anyone with a second home.

PwC expects the Chancellor to introduce differential tax rates depending on whether an asset has been owned for the short or long term. Higher rates, which could apply to assets held for less than two years, would be intended to discourage speculative activity, it said. A long-term rate of about 30pc could be applied to assets held for more than two years. A restoration of “indexation” to allow for inflation is also possible.

“While the Coalition has confirmed that rises will apply only to ‘non-business’ activities, there is likely to be some wrangling on what is deemed ‘business’ and ‘non-business’,” Grant Thornton added. There has been talk of “generous” relief for entrepreneurs and the Chancellor is likely to announce details.

PwC said the definition of business asset could be extended to include shareholdings by employees in their employers. The CGT rate on such assets would be set at between 10pc and 20pc, it predicted, while the lifetime entrepreneur’s relief (currently limited to £2m for shareholdings of 5pc and above) could be extended.

No one knows when higher rates of CGT would come into force. But the consensus among accountants is that April 2011 is the likely date – Smith & Williamson said there was “no precedent” for changing the rate part-way through the tax year. However, if the short-term rate predicted by PwC came about, it could take effect immediately, the firm said.

There has been speculation that the annual tax-free allowance for CGT will be reduced from its current level of £10,100 to a much lower figure, possibly £2,000. PwC said this was unlikely, however. “We would not expect any change, as it would raise relatively small sums relative to the extra resources that would be required to collect it,” the firm said.

The emergency Budget could introduce changes to the rules that enable people to sell their main home free of CGT, according to Grant Thornton. “The Chancellor may look to tighten up the definition of a ‘main residence’ and reduce the opportunities to allow those with more than one property to vary what counts as their main residence, therefore exposing them to a greater chance of a CGT charge,” it said.


Consensus prediction: a rise to 20pc

The Chancellor may face an “irresistible temptation” to increase the rate of VAT to 20pc now that he has had the opportunity to review the country’s books, said Grant Thornton. The standard rate of 17.5pc is relatively low relative to other EU countries and many economists predict a rise to 20pc, which would cost someone on average earnings about £150 a year.

The Chancellor’s dilemma is when to make the increase, the firm added. “The rate of inflation is more than 1 percentage point above the inflation target and the Bank of England may soon come under pressure to increase rates to stave off further inflationary pressure. The difficulty for the Government is that while a VAT rise would make inroads into the deficit and send a clear message to the financial markets, it would also be inherently inflationary.”

The Chancellor may therefore decide to defer the increase, perhaps until early next year, Grant Thornton predicted. PricewaterhouseCoopers agreed, expecting any change to take effect in April. “Another option for the Chancellor is to review the scope of the VAT zero and reduced rates and tax certain items at a higher rate than at present,” PwC added.

Increasing the standard rate of VAT to 20pc would cost someone on average earnings about £150 a year, Deloitte estimated.

The Liberal Democrat have pledged to address the differing VAT treatment of new build properties and property repairs, Grant Thornton pointed out.


Consensus prediction: a rise in the personal allowance of £700–£1,000

The biggest change is likely to be a substantial rise in the personal allowance – but not everyone will benefit. Income tax rates themselves are likely to stay as they are.

The Coalition has confirmed that it will raise the personal tax-free allowance (currently £6,475) to £10,000 over the lifetime of this parliament. As a first step, the allowance is likely to rise to £7,150 from April next year, but restricted in some way to those with incomes of less than about £30,000, S&W predicted. Deloitte said the rise could be £1,000, making basic-rate taxpayers £200 a year better off.

The firm added that the 50pc top rate of tax was likely to stay in place to contribute to the cost of increasing the personal allowance for lower earners.

National Insurance rates for employers, employees and the self-employed are likely to go up by 1 percentage point, while the thresholds are expected to rise by £570 for employees (the Labour Government plan) and £1,092 for employers (the Conservative plan), Deloitte said.

“This should mean that employers would actually see a reduction in National Insurance contributions for employees earning up to £21,000, and employees earning up to £20,000 would benefit as well. Those earning above these thresholds would pay more,” it added.

PwC said the Chancellor might announce a wider review of the interaction of the tax and National Insurance systems, with a view to smoothing changes to marginal rates of tax as income levels rise.

A “wild card” prediction, Smith & Williamson said the Chancellor might bring in a new 45pc rate for incomes of more than, say, £75,000, to go between the current higher rate of 40pc and the new top rate of 45pc. Other options could involve lowering the current threshold of £37,400 for the higher rate or increasing the 40pc rate to say 42pc.

Taking together the effect of a personal allowance increase of about £1,000, the National Insurance changes and a VAT rise to 20pc, those on typical earnings of about £23,000 or below would be no worse off and those on more modest incomes could be about £200 a year better off, Deloitte said. The top half of the earnings spectrum would pay more in tax overall.


Consensus prediction: higher rate tax relief under threat

Grant Thornton said further pension reliefs could be taken away from high earners, perhaps lowering the proposed threshold for the tapering of higher-rate relief, which is set at £150,000 of income and is due to apply from next April.

The Government could also remove the requirement to buy an annuity at the age of 75. Pension providers, including the Pru, have noticed an increase in lump sum investment from people fearing that the axe will fall on higher rate relief.

The Government has agreed to restore the link between the basic state pension and earnings. It could also look at increasing the state retirement age for men and women.

Meanwhile, PwC said there was a small chance that the dividend tax credit for pension funds would be reinstated over time, which “would bring some relief to a pensions industry in which employer motivation to provide defined benefit pensions has all but disappeared”.


Consensus prediction: no change in threshold

Any change to the current inheritance tax threshold of £325,000 is unlikely but some of the rules could be tightened. The current rules bring a non-dom under the IHT net if they have been resident in Britain for the past 17 out of 20 years. This could be shortened to the last seven out of nine years, according to Grant Thornton.

There is an outside chance that IHT relief on donations to political parties could be withdrawn, the firm said.


Consensus prediction: rises in alcohol duty

The Chancellor may not be able to resist increasing taxes on “unhealthy” purchases to pay for ring-fenced spending on the NHS, PwC said.

Mike Warburton of Grant Thornton added: “It may be tempting for the Chancellor to raise betting duty along with the other sin taxes, alcohol and tobacco. But I would be astounded if we had an increase in cider duty, the Conservatives having opposed it vigorously and the Lib Dems with having such a strong representation in cider country in the South West.”

source: telegraph.co.uk

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