UK Emergency Budget: Severe Cuts And Taxes Up

24.06.10

Please note that this article is over six months old. While Blevins Franks takes care to make sure that information is accurate on the date of publication, some content may change over time. You should not rely on the accuracy of legislation and tax information in this article; take professional advice for your circumstances.

Just under seven weeks after being elected, the new coalition government in the UK has delivered an emergency Budget designed to cut the massive government deficit of ?156 billion. The Budget foll

Just under seven weeks after being elected, the new coalition government in the UK has delivered an emergency Budget designed to cut the massive government deficit of ?156 billion. The Budget follows the pattern of similar austerity budgets across Europe and involves a mixture of 77% spending cuts and 23% higher taxation.

The Chancellor of the Exchequer, George Osborne, said that the Budget ?deals decisively with our country?s record debts?, describing the Budget as ?unavoidable? and ?tough but also fair?. Osborne said that the UK?s deficit was ?the largest budget deficit of any economy in Europe with the single exception of Ireland?.

Osborne outlined severe cuts and increased taxation to slash ?30 billion a year off spending by 2015/16. He expected the deficit to fall from its current level of 10.1% to 1.1% of gross domestic product by 2014-15. The economy will grow just 1.2% this year, 2.3% for 2011 and 2.8% in 2012.

Public sector net borrowing will be ?149 billion this year, ?116 billion next year, ?89 billion in 2012-13, ?60 billion in 2013-14, ?37 billion in 2014-15 and ?20 billion in 2015-16.

Capital gains tax (CGT)

The Chancellor announced a hike from 18% to 28% for earners falling in the higher rate bands (with the rate remaining at 18% for those whose combined income and gains remain within the basic rate band), but the 10% rate on qualifying gains for entrepreneurs would be extended to the first ?5 million from ?2 million. The CGT tax free allowance remains at ?10,100.

Income tax

The tax free threshold for higher income taxpayers is frozen until 2013, while the income tax free allowance for low income earners increases by ?1,000 to ?7,475. Public sector pay will be frozen for two years for those earning over ?21,000 and those on less than ?21,000 will receive a ?250 pay rise for two years.

VAT

From 4th January 2011 VAT will rise from 17.5% to 20% bringing the rate in line with many other European countries and generating more than ?13 billion a year by the end of this parliament. Zero rated items will remain exempt.

Bank levy

A bank levy will be introduced from January 2011, applying to the liabilities of UK banks and building societies and to the UK operations of foreign banks. There will be deductions for Tier one capital and insured retail deposits, and a lower rate for longer maturity funding. Osborne said that that the ?French and Germans have joined the UK today in committing to introduce a bank balance sheet levy. In a joint statement, our three governments have pledged to ensure our banks make a fair contribution to reflect the risks they pose.?

Pensions

The Chancellor said that he would look at the tax relief for people on high incomes on the contributions to their pension funds which was to be reduced under the previous government from next year. Osborne said that many businesses are alarmed at the complexity this will introduce. He said that he would work with industry on alternative ways of raising the same revenue, potentially by reducing the annual allowance while also protecting the ?3.5 billion in revenue this policy was set to raise from high income people.

From April 2011 the basic state pension will be linked with earnings and will increase by the highest of earnings, inflation or 2.5%. The government will accelerate the increase in state pension age to 66.

Furnished holiday lettings

Osborne said that he is reinstating the favourable tax rules for furnished holiday lettings, which the previous government had planned to repeal, a benefit to those who have properties abroad which they let out on a short-term basis.

Cuts

There were tax credit cuts for families earning over ?40,000 and a crackdown on child, welfare and housing benefits.

Taxes in Spain

Spain has proposed raising the highest rate of income tax for those with a ?high economic capacity?. Speculation indicated a tax rate of 48% for those earning over ?150,000. Tax bands could also potentially be narrowed.

Tax on all savings including capital gains has already been increased, rising from 18% to 19% on the first ?6,000 and 21% on the excess from 1st January 2010. There have also been suggestions that wealth tax is to be reintroduced for those with significant assets.

VAT has also been increased from 16% to 18%, starting from 1st July 2010.

Taxes in Portugal

In Portugal income tax is due to increase by between 1% and 1.5 % and there are plans to establish a new 45% tax rate for incomes over ?150,000. There is a proposal to levy a 20% tax on stockmarket capital gains.

VAT will rise to 21% from 20%.

If you are a British expatriate the latest tax measures announced by the UK government could affect you, especially if you return to the UK to live in the next few years. Even if not, there are tax rises planned or in the process of being introduced in most countries at present. This may be a good time to review your tax planning arrangements to ensure that they are effectively lowering the amount of tax you need to pay and to safeguard your future wealth.

A tax and wealth management specialist such as Blevins Franks can advise you on legitimate tax mitigation vehicles most suited to your circumstances, both for your country of residence and should you return to the UK.

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.

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