The emergency Budget – just good news for holidaymakers?

In among the cutbacks and tax increases , there was sunshine for some in George Osborne's Budget.

Two-thirds of people feel worse off after hearing the details of George Osborne's emergency Budget. That's according to a poll published by the comparison site Uswitch.com yesterday, which revealed that 67 per cent of consumers say that the Budget has left them worse off than before.

Despite their perceptions – largely fuelled by the rise in VAT – the effect of Osborne's measures won't hit many people's pockets and purses immediately. The headline VAT increase won't actually start hurting until 4 January next year, giving all of us plenty of time to ensure we buy the big-ticket items we need before then to avoid paying an extra 2.5p for every pound we spend.

Meanwhile the freeze on the higher-rate 40 per cent tax level won't hit people until the next tax year, along with the many other measures announced on Tuesday – such as benefit cutbacks – which won't take effect until 6 April 2011. However, it's worth bearing in mind that the main twig of the coalition's financial plans – the spending cuts – will be announced in the autumn. So there's still plenty of bad news to come.

But there was plenty of bad news from George Osborne on Tuesday, says Azad Zangana, European economist at the investment company Schroders. "The increases in taxation were broadly what we expected, but the bold deficit-cutting targets indicate harsh spending cuts to follow," he says.

"The new Chancellor almost took pride as he went through Gordon Brown's previous trophy policies, tearing them down one at a time – resembling the way statues of Communist leaders were taken down after the collapse of the Soviet Union in Eastern Europe. And like the introduction of capitalism, austere times will follow as the country learns that it can no longer rely on the state propping up economic growth in the unsustainable way it has done," Zangana warns.

The one big change that has already happened, since midnight on Tuesday in fact, is the increase in capital gains tax to 28 per cent. CGT was previously charged at 18 per cent.

"Overall the change is not as dramatic as many predicted, and with careful planning, most people should be no worse off," says Arabella Saker, partner with the lawyers Maurice Turnor Gardner. "Those most affected will include those with rental properties or holiday homes, who may realise a large gain after holding for many years."

She points out that all gains made before the 10 per cent increase in CGT on 23 June are taxed at 18 per cent. "For gains after that date, the taxpayer adds together their total income and gains for the year (not including pre-23 June gains). If that is less than £43,000, gains are taxed at 18 per cent. Above that, gains are taxed at 28 per cent," Saker explains. "Taxpayers can set losses against the gains of their choice, and still have their annual allowance so the first £10,100 of gains are tax-free."

However, capital gains tax could be increased further by the start of the next tax year, warns Anne Lewis, tax adviser at the lawyers Cripps Harries Hall. "It is the detail behind this Budget and beyond the headlines that is more telling and should not be ignored," she says.

"The Government's notes on capital gains tax leave the door very much open for the Chancellor to increase rates from April 2011. We fully expect to see a further rise in CGT next year now that the Chancellor has softened the expected blow by with an initial rise of 10 per cent," Lewis predicts.

How will the Budget hit shares? "Although a number of the details need to be clarified, the Budget appears positive for UK business and a number of stocks within the FTSE," says Tom Ewing, manager of Fidelity International's UK Growth fund. "Obvious winners include the banks, where the levy to reflect assistance provided during the financial crisis proved smaller than the City was expecting. Further, most of its negative impact will be compensated for by lower corporate profits tax. This tax cut is designed to make the UK one of the most attractive places to invest in the OECD and will be beneficial for any stocks with significant domestic operations."

Ewing says high-added-value service companies and outsourcers are particularly well-placed to benefit, and they will also get a boost from the efficiency savings needed to achieve 25 per cent cuts in departmental budgets. He says that builders and construction companies should take heart that capital spending plans have not been slashed further, and the lower-than-expected CGT rise should be less disruptive to the housing market.

"There will always be relative losers from the Budget," says Ewing. "This appears to be the household sector on this occasion, and reduction in consumer spending going forward engendered by personal income tax rises and benefit cuts will be exacerbated by the VAT increase. It provides another headwind for retailers, already facing higher input costs from Asia," he says.

In short, he plans to look more closely at outsourcers and beaten-up construction companies while avoiding the worst-hit retailers.

However, for many people, the main message from Tuesday's Budget is that VAT will climb to 20 per cent. But what effect will the increase have? It will make many families cut back, according to research from Kelkoo.

The shopping comparison site estimates that annual spend on retail goods will decrease by an average of £324 per person from a total £1,788 to £1,464. People will mainly cut back on dining out, travel and computing and electronic devices. Despite that, the increase in VAT will cost each household in the country £496, or £212 a year for every man, woman and child in the UK, according to Kelkoo.

"The hike in VAT has left a bitter taste among the British public," says Bruce Fair, managing director of Kelkoo UK. "It will have serious repercussions for consumers, who will be left facing an increase in the price of everyday goods at a time when salaries are generally being frozen and the overall tax burden is increasing."

When VAT climbs in January it will also immediately push up the rate of inflation, points out John Greenwood, chief economist at the investment company Invesco. "The 2.5 per cent hike in VAT will unavoidably impact headline inflation from January 2011," he says. "Most forecasters had previously expected CPI inflation to drop below 3 per cent in November and stabilise around or below 2 per cent during 2011. However, the VAT change will temporarily raise inflation again to 2.7- 3.2 per cent."

The rise in the cost of living allied with the freeze on child benefits and restrictions in housing benefits will take their toll on families, warns Martin Chapman of the Debt Advisory Line, a paid-for Manchester-based consumer debt advice firm. "People are very concerned about changes to benefits and how this will affect the money in their pockets, as well as the rise in VAT which makes everyday living that much more expensive," he says. "Many simply don't have the disposable income for this kind of change and even small changes can have a devastating effect on family finances."

Andy Davie, spokesperson for the non-profit forum IVA.co.uk, also warned that the VAT rise could have a disastrous impact on struggling families. "The average household will lose £400 per year because of the VAT increase, or £33 per month."

Davie calculates that it currently takes someone with £10,000 of credit card debt, paying off the minimum 2 per cent balance plus an extra £33 per month, 15 years to repay their debt, on an average credit card APR of 18.8 per cent.

"If that person decreases their payment by the amount taken away in the VAT increase, £33 per month, the time span for their repayment would increase to 74 years," he warns. "That graphically demonstrates the effect of the Budget on some of the UK's most vulnerable people."

However, one unplanned knock-on effect of the Budget could be a boost to holidaymakers. After Tuesday's speech the pound set off on an upward spiral, hitting an 18-month high of 1.22 against the euro by Thursday. That's a 12 per cent increase in sterling since the pound hit its lowest point of the year in March. It means Brits heading to Europe will get an extra €45 or a saving of £38 when ordering £500-worth of currency compared to the same amount just over three months ago.

The currency exchange broker Jeremy Cook of World First says the pound will strengthen even further. He predicts it will climb to 1.24 against the euro in the next three months. "Mr Osborne has given the pound a backbone once again," he says.

Feeling the pinch: How the budget affects taxes, NI and benefits

* The standard rate of VAT will be increased to 20 per cent from Tuesday 4 January 2011.

* The personal allowance will rise by £1,000 to £7,475 in 2011/12, but higher-rate taxpayers will not benefit because the basic rate limit will be cut. It's expected to fall by around £2,500 from its current level of £37,400 but will be set according to September's retail prices index figures.

* On 23 June 2010, the rate of capital gains tax increased to 28 per cent for higher and additional rate taxpayers, but it remains at 18 per cent for basic rate taxpayers.

* The emergency Budget made no changes to the main national insurance contribution rates, which will rise by 1 per cent in 2011/12, as previously announced.

* No changes were made to the annual ISA investment limit which, from the next tax year, will increase each year in line with inflation, based on the RPI increase to the previous September and rounded to a multiple of £120.

* A £11bn welfare cut included a cap on housing benefit, a three-year freeze on child benefit, and index-linking of benefits to the lower consumer prices index rather than the RPI.

* From April 2011, the income threshold for the withdrawal of the family element of child tax credit will be reduced from £50,000 to £40,000. The baby element of CTC will be scrapped altogether.

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

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