What was Osborne's budget goal?
Simon Read examines the small print hidden in George Osborne's 2012 Budget announcements.
Can it be a coincidence that the unsettled Manchester City striker Carlos Tevez made his first appearance for the club in months just hours after George Osborne unveiled his 2012 Budget on Wednesday? The wantaway Argentinian has been angling for a move abroad for ages, yet he made a killer pass that night to help clinch victory in a crucial match against Chelsea.
What had changed? There was one key announcement in this year's Budget that will have pleased Tevez. The cut in the top rate of tax from 50 per cent to 45 per cent will, at a stroke, increase his take home pay by roughly £10,000 a week.
Other millionaires will have been equally pleased. But what about the rest of us? Was there any good news in the Budget? Are there any financial changes we need to act upon now?
There was no announcement about allowances in tax-free individual savings accounts (ISAs) on Wednesday as the increase in limits for next tax year had already been announced.
In fact, until further notice, the annual ISA limit will increase each year in line with inflation, taking the previous year's CPI figure for September as the inflation snapshot to base the increase upon. The change in the process has actually benefited savers. With inflation then hitting 5.2 per cent – last month it fell to 3.4 per cent, in comparison – the ISA limit will consequently climb to £11,280 from 6 April. Its current level is £10,680. For cash ISAs, the allowance is half that, meaning it climbs from £5,340 to £5,640 from next month.
Child benefit will be withdrawn from households containing people who earn more than £50,000 on a sliding scale from 7 January 2013.
But you could keep the allowance by reducing your income back to £50,000, said James Sumpter of Bestinvest. "Depending on the clarification of the rules, you could do this by making a pension contribution through salary sacrifice."
Retirement savings schemes – or pensions, as they are generally called – suffered from what Mr Osborne claimed was "simplification" in his Budget on Wednesday.
Despite widespread concerns, he didn't attack pension tax relief, which makes contributions to a pensions scheme so attractive. Instead he announced an automatic review of the state pension age, linking it to future life expectancy. While on the face of it that sounds sensible, critics warn it will create uncertainty about retirement planning. In short, depending on your age, you won't know when you will be eligible to receive your state pension.
The Government has already increased the age when people can get the pension and the latest review could mean those currently aged 20 to 30 could be forced to wait until they reach 70 or older. Indeed one estimate this week suggested that a child born in 2012 will have to wait until they reach 80!
Adrian Walker, pension expert at Skandia, said: "It will now be more difficult to plan how much people need to save privately to achieve their desired level of retirement income at the age they want to enjoy it.
"The age is likely to increase over the years, and younger people, if they want to enjoy a meaningful retirement, should build up their savings as early as possible through tax wrappers such as ISAs and pensions."
The Chancellor's "simplification" of pensions will hit existing pensioners the most. Specifically the move to freeze age-related tax allowances will hit some 4.4 million less wealthy retired people, which quickly led to it becoming known as a "granny tax".
Over the next five years, those pensioners with an income of between £10,000 and £24,000 will end up paying an extra £3bn in tax as a result of the change, reckons Ros Altmann, director general of Saga.
"The Government says this is a measure to 'simplify' the tax system – and it is true that the age allowance is very complicated – but the reality is that this is really just a revenue-raising exercise," she said.
Figures published by Treasury show that, come next April, some 4.41 million pensioners will be worse off in real terms, with an average loss of £83, as a result of the freezing of the age-related income tax personal allowance.
Within that figure, some 360,000 people aged 65 will lose an average £285 each, while 230,000 people will be brought into income tax.
The age-related tax allowance is currently set at £9,940 a year for everyone aged 65 or more, rising to £10,090 for people aged 75 and over. The allowance will be scrapped altogether for future pensioners, in other words anyone reaching 65 after April 2013. "People reaching age 65 in the next couple of years will be £4 a week worse off as a result of this," said Ms Altmann.
There was some good news in the announcement that the standard personal allowance will be increased to £9,105 next year. From 6 April 2012 it climbs to £8,105. The further increase will put an extra £220 a year into the pockets of 24 million taxpayers, according to Mr Osborne.
However that has to be tempered by the fact that an estimated 678,000 people will become higher-rate taxpayers next year for the first time when the starting point for the 40 per cent rate tax falls to £41,450 from its current level of £42,475.
Struggling folk also won't benefit so much from the hike in the personal allowance, as already-announced benefit cuts will leave the average person only £33 better off, according to the charity Citizens Advice. Gillian Guy, chief executive at Citizens Advice, said: "Raising the personal tax allowance is an empty gesture to struggling families on low wages. Poorer working families who get housing and council tax benefits will not get all of the money in their pocket – because as their income goes up, their benefits will go down."
Looking at how an average family will benefit from the rise in personal allowance next year, Patrick Foley, chief economist at Lloyds TSB, said: "Combined with the child benefit measures, the improvement in working family incomes is likely to be around just 0.5 per cent of average incomes."
The new 7 per cent stamp duty band on properties sold for £2m or more may appear to be just a tax on wealthy homeowners, but it could have a knockdown effect – but only on people planning to move home within London and the South-east. Estate agents in the capital have reported the collapse of some sales of high-value properties because of the increase in tax which came into effect on Wednesday night. But there were also suggestions that it would hitpeople further down in the property chain.
If true, the effect is likely only to be an annoying delay as homeowners have to start hunting again for their next move. Other than that, the higher rate of stamp duty should make little difference to most home movers.
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
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