What's the Chancellor planning to take away in a 'reverse Christmas' Budget?

Alison Shepherd and Julian Knight look at what George Osborne may do on Tuesday, and how you can cushion the blow

Any way it is spun, the £156bn annual public-sector deficit is a mind-boggling figure, and it's Chancellor George Osborne's job this Tuesday to set out his first steps for bringing it under control.

Mr Osborne wants up to 80 per cent of the black hole to be closed through spending cuts, but experts are predicting big changes to VAT, capital gains tax, income tax and tax credits to account for the remaining 20 per cent.

"It's like a reverse Christmas – we don't quite know what's going to be taken away from us. But the Government might want to get the pain over quickly, better to introduce it all now at the beginning of its term rather than near the end," says Anne Redston, professor of tax law at King's College London.

Nearly all experts, including Professor Redston, predict that VAT will rise, probably to 20 per cent, although there is a difference of opinion as to whether the change will happen in the autumn, on 1 January or next April. Shops and suppliers need time to adjust pricing to protect their margins, and a delay in introduction could have the beneficial effect of persuading people to spend now, before the rise is introduced.

"VAT has the aura of affecting the less well-off disproportionately and is one of the paths the Government will do all it can to avoid, " says Chas Roy-Chowdhury, head of tax at the Association of Chartered Certified Accountants. But with a possible £12bn to be made from a 2.5 per cent rise, most feel it is unlikely the Government will resist. There is also a majority consensus that the Chancellor will not alter the zero VAT rate, on such things as food, books and transport. As Professor Redston says: "It would be a waste of time to tinker with the exemptions. It is likely to cause very strong, targeted anger. It would make them look very mean to add it to children's clothes."

Stephen Coleclough, a partner specialising in indirect taxes, at PricewaterhouseCoopers, who predicts a rise to 20 per cent next April, wonders if Mr Osborne may not follow his 1973 predecessor, Anthony Barber, and introduce a 10 per cent VAT rate on sweets, ice-cream, salted peanuts, crisps and soft drinks. Another possible VAT addition, says Mr Roy-Chowdhury, would also echo the then Chancellor, Kenneth Clarke, who in 1997 was thought to want VAT on gas and electricity to rise to 17.5 per cent.

Capital gains tax is nailed on for change on Tuesday. The most common assumption is that the current rate of 18 per cent will be changed in line with an individual's tax rate – 10, 20, 40 or 50 per cent.

"Inevitably," says a confident Mr Roy-Chowdhury, "We will see a rise in CGT from 18 per cent to the marginal rate of tax. But I doubt it will come in one fell swoop, so as not to penalise prudent savers. I also think that with inflation above 5 per cent in April and May, inflationary indexation will be introduced, and there will be a long-term taper relief [allowing people to pay a reduced rate the longer they have held the asset]. In fact, it will be reinventing the old system."

Gary Shaughnessy, the UK managing director at Fidelity International, who estimates that an individual who invested £100,000 in a second property in 1985 to fund their retirement would currently face a tax bill of £68,493, based on the value of their property having risen to £490,617. But if CGT were raised to an income tax rate of 40 per cent, the tax bill would rise to £152,207 – more than their original investment. "We support the case for raising CGT to the marginal rate for individuals who are seeking short-term speculative gains," he says. "However, we believe that all individuals who are saving prudently for the long term should be rewarded, and this can be achieved by applying CGT at the basic rate of tax."

But John Whiting, president of the Chartered Institute of Taxation, hopes that Mr Osborne will resist tampering with CGT. "I really hope that they will not introduce anything new on CGT but take their time to get it right."

Whatever changes, if any, are introduced, the timing with CGT is important if the Government is to avoid what Professor Redston calls a "massive closing-down sale". "It will just be too chaotic to give a warning that rates will change in a year, so they will probably date any changes from Tuesday."

Along with other experts, Professor Redston expects employee shares to continue to be protected from CGT, but that second or rental homes will not be. The £10,100 tax-free threshold is also expected to remain, despite Lib Dem calls for it to be lowered.

Pensions, and the tax relief they attract, is another area that has been subject to pre-Budget speculation. The coalition has already agreed to restore the earnings link to basic state pensions, but it may also removefurther pension reliefs, due next April, from high-income earners, and perhaps lower the proposed threshold for tapering of higher-rate relief, which is set at £150,000.

But Professor Redston hopes that the Budget will not reveal anything definite. "I would like to see them suspend pension changes and set up some sort of group to look at tax relief. It's too generous for the rich and too complicated.

"I would also like him to freeze Nest [the National Employment Savings Trust] pensions for the low-paid. They are burdensome, and those they are designed for should be paying off debt, not saving for a pension. Pensions have got in a real mess. Save money and make it simple."

On income tax, the Chancellor is expected to phase in an increase in the personal allowance,currently £6,475, to a £10,000 threshold, from next April, which many experts see as being part of a package that will reduce reliance on tax credits and ben efits. The family element of tax credits is most likely to be targeted by the Chancellor, as it can be claimed by families with an income in excess of £50,000.

"I expect to see dramatic cuts of tax credits for anyone over the average income level," says Mr Roy-Chowdhury. "It is seen as too generous. Streamline and reduce them for all but the poorest of the poor. All benefits are probably up for grabs, with child benefit possibly being linked to tax rates, or means-tested."

So called "sin taxes" on alcohol and tobacco are expected to be raised, although there is a body of opinion that the rise in VAT will be enough. Professor Redston also suspects there may be duty added to "sinful" foods, such as high-fat snacks.

Most of our experts expect residential stamp duty to remain as it is, with the higher rate of 5 per cent introduced in Labour's last Budget to stay, and the "holiday" for first-time buyers to be made permanent. And, on air travel, most predict the duty levied on passengers will be switched to the aircraft, linked to how much fuel is used.

Whatever the Chancellor announces on Tuesday, there is little that most consumers can do but wait and see what the impact on the money in their pocket will be. But for those who have investments that may be subject to CGT, who have overseas properties, or even holidays planned, there could be action you can take tomorrow to lessen the burden.

Carl McColgan, regional director of Ashcourt Rowan Financial Planning, says that until Mr Osborne's timetable for introducing CGT changes is announced, he has advised clients to plan on the basis of four options: all alterations will come into force on Tuesday; next April; phased in between those two dates; or be made retrospective to April 2010.

"Those with large gains on shares or investments may want to consider selling now, before the rates rise," he says. "Equally, those who have, for example, seen their BP shares fall may want to consider selling, to off-set the loss against gains elsewhere. Or, they could sell to rebuy and place the shares in a long-term Sipp plan."

Mr McColgan adds that all is not lost if investors miss the cut-off for any rate rises, particularly if the link with income tax is introduced.

He is advising clients to reinvest their gains into an Enterprise Investment Scheme, under which CGT can be deferred, possibly until the investor has retired and is paying basic rate tax, rather than a possible 40 or 50 per cent.

Experts' Views

Anne Redston, professor of tax law at King's College London

"Trying to tackle a deficit while paying tax credits is like running a bath with the plug out. The level of fraud and error is so huge that the National Audit Office can't sign off HMRC accounts. Changes may not be for this Budget, but should be put in Frank Field's remit." (He is David Cameron's adviser on poverty.)

John Whiting, president of the Chartered Institute of Taxation

"I hope George Osborne starts as he says he means to go on, and does not pull any rabbits out of the hat. Surprise us with no surprises. We want a steady, consultative way to balance the books."

Mike Warburton, tax director at accountants Grant Thornton

"That the personal allowance will go up by £1,000 is a very good thing. It's crazy that someone can work for minimum wage and still get caught by tax. Personal allowances have fallen a long way from where they should be."

David Kerns, from foreign exchange broker Moneycorp

"It is important to stress just how critical this Budget is for the UK. It is very important for the credit standing and the status of the country. Everyone is expecting real hardship from Tuesday, but it is necessary that the Chancellor is very robust from the go."

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

Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    SThree: Experienced Recruitment Consultant

    £20000 - £40000 per annum + OTE + Incentives + Benefits: SThree: Established f...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE 40/45k + INCENTIVES + BENEFITS: SThree: The su...

    Recruitment Genius: Collections Agent

    £14000 - £16000 per annum: Recruitment Genius: This company was established in...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE 40k: SThree: SThree are a global FTSE 250 busi...

    Day In a Page

    Refugee crisis: David Cameron lowered the flag for the dead king of Saudi Arabia - will he do the same honour for little Aylan Kurdi?

    Cameron lowered the flag for the dead king of Saudi Arabia...

    But will he do the same honour for little Aylan Kurdi, asks Robert Fisk
    Our leaders lack courage in this refugee crisis. We are shamed by our European neighbours

    Our leaders lack courage in this refugee crisis. We are shamed by our European neighbours

    Humanity must be at the heart of politics, says Jeremy Corbyn
    Joe Biden's 'tease tour': Could the US Vice-President be testing the water for a presidential run?

    Joe Biden's 'tease tour'

    Could the US Vice-President be testing the water for a presidential run?
    Britain's 24-hour culture: With the 'leisured society' a distant dream we're working longer and less regular hours than ever

    Britain's 24-hour culture

    With the 'leisured society' a distant dream we're working longer and less regular hours than ever
    Diplomacy board game: Treachery is the way to win - which makes it just like the real thing

    The addictive nature of Diplomacy

    Bullying, betrayal, aggression – it may be just a board game, but the family that plays Diplomacy may never look at each other in the same way again
    Lady Chatterley's Lover: Racy underwear for fans of DH Lawrence's equally racy tome

    Fashion: Ooh, Lady Chatterley!

    Take inspiration from DH Lawrence's racy tome with equally racy underwear
    8 best children's clocks

    Tick-tock: 8 best children's clocks

    Whether you’re teaching them to tell the time or putting the finishing touches to a nursery, there’s a ticker for that
    Charlie Austin: Queens Park Rangers striker says ‘If the move is not right, I’m not going’

    Charlie Austin: ‘If the move is not right, I’m not going’

    After hitting 18 goals in the Premier League last season, the QPR striker was the great non-deal of transfer deadline day. But he says he'd preferred another shot at promotion
    Isis profits from destruction of antiquities by selling relics to dealers - and then blowing up the buildings they come from to conceal the evidence of looting

    How Isis profits from destruction of antiquities

    Robert Fisk on the terrorist group's manipulation of the market to increase the price of artefacts
    Labour leadership: Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea

    'If we lose touch we’ll end up with two decades of the Tories'

    In an exclusive interview, Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea
    Tunisia fears its Arab Spring could be reversed as the new regime becomes as intolerant of dissent as its predecessor

    The Arab Spring reversed

    Tunisian protesters fear that a new law will whitewash corrupt businessmen and officials, but they are finding that the new regime is becoming as intolerant of dissent as its predecessor
    King Arthur: Legendary figure was real and lived most of his life in Strathclyde, academic claims

    Academic claims King Arthur was real - and reveals where he lived

    Dr Andrew Breeze says the legendary figure did exist – but was a general, not a king
    Who is Oliver Bonas and how has he captured middle-class hearts?

    Who is Oliver Bonas?

    It's the first high-street store to pay its staff the living wage, and it saw out the recession in style
    Earth has 'lost more than half its trees' since humans first started cutting them down

    Axe-wielding Man fells half the world’s trees – leaving us just 422 each

    However, the number of trees may be eight times higher than previously thought
    60 years of Scalextric: Model cars are now stuffed with as much tech as real ones

    60 years of Scalextric

    Model cars are now stuffed with as much tech as real ones