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Budget 2012 - how will it affect individuals?

Tax | Income Tax

By Justin Modray, published 21 March 2012.
Helpful? 21

How will today's Budget affect you?

Today's Budget was largely more of the same: cut business taxes to try and stimulate growth, put a brake on spending, grab some more tax in places and try to keep the majority of voters as happy (or maybe the least unhappy) as possible in difficult circumstances.

Income tax announcements look generally good news, except the increased age allowance will effectively be scrapped for those hitting 65 from 2013 and the allowances won't rise any further for those already enjoying them. There'll be a lot of noise about the top 50% rate falling to 45% from April 2013, but in my view it's pretty inconsequential. Of more concern for many will be the planned changes to child tax credits, which will see families on even modest incomes losing several hundred pounds a year.

The flat state pension of around £140 per week looks set to go ahead in 2016, but still no news of how those with decent existing SERPS/S2P pots (giving them a pension above £140) will be affected.

Let's take a look at the main changes affecting individuals (changes affecting business to follow).

Income Tax

As previously announced, the personal allowance will increase by £630 to £8,105 from 6 April 2012. The threshold for higher rate tax will fall from £35,000 to £34,370, meaning the income limit for 40% tax is unchanged at £42,475 (for those with the normal personal allowance). This means basic and most rate taxpayers should be around £126 a year better off.

Annual IncomeIncome Tax 2011/12Income Tax 2012/13Saving
£25,000 £3,505 £3,379 £126
£50,000 £10,010 £9,884 £126
Change in income tax bill from 6 April 2012.

The 50% tax rate for those earning above £150,000, introduced in April 2010, will fall to 45% from April 2013.

The personal allowance is still set to rise to £9,205 from April 2013 but the higher rate tax threshold will fall by £2,125 to £32,245, reducing the benefit for those on higher incomes.

The higher 'age-related' personal allowance given to those aged 65 and over will increase to £10,500 (£10,660 for those 75 and over) from April 2012, but remain at this level thereafter with no annual increases. It will also effectively be scrapped for those turning 65 after 5 April 2013, with these individuals receiving just the standard personal allowance, due to be £9,205.

National Insurance

Largely unchanged except for a small increase in the threshold when NICs become due.

Annual IncomeNI 2011/12NI 2012/13Change
£25,000 £2,133 £2,089 £44
£50,000 £4,381 £4,337 £44
Change in employee Class 1 NIC from 6 April 2012.

VAT

No change to the rate, but from 1 November 2011 the limit for VAT-free imports from outside the EU will fall from £18 to £15 - which might have a small impact on some of the Jersey/Guernsey based internet shopping sites.

Capital Gains Tax

Rates and annual allowance will remain unchanged at 18%, 28% and £10,600 respectively.

Inheritance tax

No change to the rate or nil rate band, but from 6 April 2012 the rate will fall from 40% to 36% where 10% or more of a net estate is left to charity.

Flat state pension

The chancellor confirmed his intention to introduce a flat state pension of around £140 a week, probably in 2016. However, still no detail of how those with existing SERPS/S2P benefits in excess of this will be treated.

In light of this, the ability to contract out of S2P using a money purchase pension will be scrapped from 6 April 2012, but it will remain for final salary schemes, for now... (the latter will be a challenge, as scrapping would mean employees effectively having to pay the 1.4% in National Insurance that is currently waived when they contract out via a final salary pension scheme).

Child benefit

Will continue to remain frozen at £20.30 per week for the eldest child and £13.40 for each other child until April 2014.

If a parent has income exceeding £50,000 they will face a charge equal to 1% of the total child benefit received per £100 of income between £50,000 and £60,000, i.e. a parent earning £60,000 will end up receiving no child benefit. Where both parents earn above £50,000, the highest earner is subject to this charge.

Child tax credit

As per previous announcements, child tax credits will continue to increase from 6 April 2012 for families with incomes of around £25,000 or less, but fall for everyone else.

Annual Household IncomeNI 2011/12 Child Tax CreditNI 2012/13 Child Tax CreditChange
£25,000 £2,145 £2,560 +£415
£35,000 £545 £0 -£545

See full details in my previous article.

Fuel

The delayed January 2012 3.02p per litre rise in fuel duty will happen this August, while the planned August inflationary increase will be scrapped this year.

Alcohol

Alcohol duty rates will increase by 2% above inflation (a 5% rise - based on actual RPI 6 months before Budget and estimated RPI 6 months after) on 28 March 2012.

Beer (pint)Wine (bottle)Champagne (bottle)Spirits (bottle)
Typical Change +3p +11p +14p +41p
Typical increase in price from 28 March 2012.

Cigarettes

From 6pm tonight tobacco duty will rise by 5% above inflation, typically increasing the cost of a packet of 20 cigarettes by 37p.

Vehicle Duty

To increase by inflation for vehicles in VED band D an above, adding between £5 and £15 to the cost of a standard annual tax disc.

Company car fuel benefit charge

If you receive a company car and free fuel you'll pay some tax on the fuel benefit. The £18,800 multiplier figure currently used to calculate this will increase to £20,200 from 6 April 2012. What difference will it make? Probably an extra £100 of tax per year for basic rate taxpayers and £200 for higher rate based on a typical 2 litre diesel car.

Air Passenger Duty

Increase between £1 and £14 depending on distance and class of travel.

EIS/VCT

Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCT) will benefit from being able to invest in larger companies (changing from maximum of 50 employees and less than £7m of gross assets before investment to 250 employees and £15m of gross assets) and make bigger investments per company (changing from £2 million to £5 million) from 6 April 2012.

The annual amount individuals can invest into an EIS will double to £1 million from 6 April 2012, while the current £500 minimum will be scrapped.

The £1 million limit on investment by a VCT in a single company will be lifted on 1 April 2012.

Stamp duty on property purchases

A new 7% rate will be introduced on 22 March 2012 for residential property purchases of £2 million and above - rising to 15% when purchased via companies in order to try and avoid tax.

Qualifying policies e.g. endowments

From April 2013 the maximum annual contribution for new policies (or existing where term is extended) will be limited to £3,600.

Overall limit for uncapped income tax relief

An overall limit the greater of £50,000 and 25% of income will apply to income tax reliefs that are not subject to an annual limit - this could include charitable donations, loss relief and qualifying loan interest.

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Readers' Comments (3) - To post a comment please register or login .


Comment by rafferty at 9:28pm on 22 Mar 2012:

The £140 a week pension was announced over a year ago in March 2011 and seems to be confusing some existing pensioners who of course won't get it.

It's "estimated" that it will be £140 but they also say it won't cost any more than the existing arrangements. So if there are any winners there will also have to be losers.

If it disappoints the optimists, introducing it after the election rather than before may be politically wise. Popular new schemes are usually introduced before an election.

The removal of the age allowance for pensioners has been very cleverly spun.

Before April 2011, the differential between the standard personal allowance at £6475 and the over 65s allowance at £9490 was £3015 (or £3165 for over 74s) so was worth £603 a year for a 20% tax payer then. They've managed to make the actual change when the higher allowance goes completely look very much less and apparently counted on senile oldies not noticing.

The reduction of the 50p rate to 45p may not make much difference in the scheme of things depending on how much it would have raised in a full year going forward. Which of course we will now never know. Somewhere between £100 million and £3 billion give or take a billion or so I heard. There were some very broad grins from some of the highest earners who will in some cases gain eye-watering sums.

As for those "closing of tax loop holes", the IFS have said the number of loop-hole closing changes in this budget was well below the norm for previous budgets. If there's an unwillingness to prevent avoidance of the 50p rate, I'd be surprised to see a substantially renewed zeal to stop any other avoidance, including of the 45p rate, when the need for that figleaf is forgotten.

The claim of raising 5 times as much tax as from the 50p tax might be more convincing if we could see the fag-paper they did the sums on.

Good to see you around again. Hope your baby daughter is allowing you a bit more slee


Comment by webwiz at 5:59pm on 27 Apr 2012:

The cap of £50,000 on tax relief on charity donations has created a lot of hot air, but I think the relief should have been scrapped altogether. As I understand it for every pound that a 40% tax payer donates the charity claims 25p and the taxpayer also claims 25p from the government. Is that right, Justin? So effectively when he makes that donation to a charity that he has chosen he also forces other taxpayers as a group to donate a sum equal to two thirds of what he donated, to the same cause. Well why should we? Can't we choose our own good cause for our own money?


Comment by justin at 10:09pm on 02 May 2012:

Hi webwiz, yes, if a higher rate taxpayer donates £100 to a charity, the charity can reclaim 20% tax (via Gift Aid) that it's assumed the taxpayer has already paid, equal to £25 (£100/0.8 * 20%). The higher rate taxpayer can also reclaim the additional 20% difference between basic and higher rate tax (on the gross contribution (i.e. 100/0.8), also equal to £25.