The Government insists that their recent budget announcements are not about raising tax but are about reforming the economy in order to enable future growth. The impact of the budget, however, will be felt by individual UK households with some gaining and some losing, and with a number of fundamental reforms set to take place, the impact will continue to be felt over the next few years.
Longer-term changes that the Government intends to make include a complete overhaul of the UK’s tax system with a view to simplification. The consultation will start on merging the income tax and national insurance systems which are currently run as separate entities. The way that direct taxes are calculated is intended to change too, with indexation moving to the lower Consumer Price Index (CPI) rather than the Retail Price Index (RPI). This will have an impact on many, particularly those claiming benefits and pensions.
Savers, however, are in line to benefit with an increase in the Individual Savings Account (ISA) limits which increase from $10,200 to $10,680 in the 2011-12 year. New savings accounts with tax advantages for children called Junior ISAs are also to be launched in 2011, replacing the Child Trust Fund. Those looking for information about savings products can read more here.
In the shorter term, the changes made in the budget will result in clear winners and losers. This includes changes to the personal tax system. The lowest paid will feel the benefit of increases to the personal tax allowance, from $7,475 in the 2011-12 tax year to $8,105 in 2012. More individuals, however, will find that they are higher rate taxpayers as the threshold drops from $35,000 to $34,270 in 2012.
The impact will be felt by those claiming benefits and tax credits too. Low income families will benefit from an increase of Child Tax Credit by $255 with entitlement to tax relief for childcare remaining the same. Tax relief for those on higher and additional tax bands, however, will see a reduction in the amount that they can claim for childcare. Housing benefit claimants will also be affected with reductions in the amount that can be claimed.
There is good news in the budget for some. Vehicle owners will breathe a sigh of relief, albeit temporary, with a 1p per litre cut in fuel duty and delay of the planned inflation-linking of fuel duty to 2012. Council tax payers will also be relieved as council tax is frozen in every council in England. There is good news for first time buyers too with the introduction of a new-build shared equity scheme; aimed at helping some 10,000 families, it will be funded by proceeds from the bank levy.
Smokers will feel the pinch as tobacco duty rises 2% above inflation. Drinkers will also be affected. Beer, wine and spirits prices will rise by a 2% above inflation increase. This will mean 4p on a pint of beer, 15p on a bottle of wine and 54p on a bottle of spirits.
Overall, the impact of the budget on UK households will depend on personal circumstances. What is certain, however, in these difficult economic times, is that there are no resounding victors.