The 2011 Budget aimed at delivering reform and economic growth will simplify the UK’s complicated tax system and lead to the introduction of a flat rate state pension.
The Chancellor came under fire from Labour following his 2011 Budget speech for presiding over economic slowdown when the economy should be recovering.
George Osborne told Parliament the Budget was about reform and recovery to provide jobs and growth in the future but downgraded previous forecasts for economic growth in 2011.
The independent Office for Budget Responsibility expects the UK economy to grow by 1.7 per cent in 2011, lower than forecast last June, with 2.5 per cent growth in 2012, peaking at 2.9 per cent in 2013.
The expectations for sluggish economic development will be a central concern for the Bank of England Monetary Policy Committee as they decide what action to take on interest rates.
The OBR also expect inflation to remain between four and five per cent this year, before falling back down nearer the target in 2012 – not good news for savers looking for inflation beating returns.
Pensions and tax
As the Chancellor said himself, there were no tax giveaways in the Budget but there were moves to simplify the tax regime, announcing a consultation on merging national insurance and income tax but reassuring the public that this would not mean extending national insurance contributions (NICs) to individuals above state pension age or to other forms of income, such savings or share dividends.
In an effort to simplify the state pension the government will consult on a single tier, flat rate state pension estimated to be worth £140, for future pensioners. It will not affect people currently receiving the state pension.
The Budget document said: “The state pension system is complex. It is not clear to working-age individuals what they might receive from the state, in particular from the State Second Pension, making it difficult to plan retirement saving.”
Head of pensions at Fair Investment Company, George Ladds, said a simpler system with a flat rate state pension would make it easier for people to ‘plan their own savings to fund their retirement’ and help encourage people to take individual responsibility for pension saving.
Director of policy at the Tax Incentivised Savings Association (TISA), Malcolm Small, said: “The confirmation of a move towards a new single tier pension at a flat rate and currently worth around £140 per week is...good news. The sooner this is implemented the better.”
The personal tax allowance – the amount you can earn before being charged income tax – will increase. From April it will increase for under-65s by £1,000 to £7,475. In 2012/13 it will increase by a further £630, expected to benefit 25million people.
Consumer Prices Index
Direct tax indexation, linking of tax changes to inflation, will move from using the Retail Prices Index (RPI) to the Consumer Prices Index (CPI). CPI is normally lower than RPI.
The director general of TISA Tony Vine-Lott said moving the default measure for increasing the ISA allowance to CPI was ‘disappointing’. The increase in the ISA allowance for the 2011/12 tax year (£10,680 for stocks and shares ISAs and £5,340 for cash ISAs) was in line with the RPI inflation measure.
Charities and inheritance tax
A boost for charities, facing significant challenges from government spending cuts, will be proposals to encourage donations by offering a 10 per cent cut in the inheritance tax rate for people who donate 10 per cent of their estate to charity.
Gift Aid is also being reformed to create a small donations scheme; this will allow charities to claim Gift Aid (a tax rebate) on up to £5,000 of small donations per year without the need for paperwork to be filled out.
Fuelling the economy
The Budget was pitched as a ‘plan for growth’ with changes to the planning system, enterprise zones and a gradual lowering of corporation tax until it is the lowest amongst the G7 group of countries.
Director of global strategy at F&C Investments, Ted Scott, said promoting the Budget as pro-growth was disingenuous as it is taking place against a backdrop of large spending cuts.
Scott said the holding back of tax increases on petrol – through a Fair Fuel Stabiliser – and a 1p cut in fuel duty as of the end of the day (23 April) to help the beleaguered consumer would grab the headlines as would the cut in corporation tax.
“However, the essence of the Budget is how the Chancellor was able to maintain his forecasts for reducing the deficit in the face of deteriorating growth and some minor giveaways,” he said.
Scott said the government has avoided changing tack on the spending cuts announced last year, despite the downgrading of economic growth forecasts.
“If economic growth does falter more than expected it is important that the coalition government has a plan B that it can implement,” he added.
© Fair Investment Company Ltd