The 2010 Emergency Budget 09/07/2010

Our new Chancellor took only 47 days to produce his Emergency Budget.  It signalled a radical change in the approach to public finances, business and personal taxation against a backdrop of a burgeoning fiscal deficit and the Government’s pledge to reduce the national deficit sooner rather than later.

As always there will be winners and losers from the tax changes announced.  The increase in the personal allowance by £1000 from April 2011 will benefit all basic rate taxpayers by around £200 and could take some lower earners out of the income tax net all together.  However, like many of the measures announced, there is a corresponding adjustment to the threshold where the 40% rate tax kicks in meaning that for higher rate tax payers there is no benefit.  Similar squeezes on the thresholds for Child Tax Credits and a freezing of the Child Benefit rates will reduce disposable income for many middle-income families.

The widely predicted increase in VAT from 17.5% to 20% was confirmed and this will take effect from 4 January 2011.

Capital Gains Tax rates increased the day after the budget from 18% to 28% for higher rate taxpayers.  Primarily this will affect disposals of sizeable non-business assets such as second homes and shares.  Entrepreneurs selling businesses continue to benefit from a discounted rate and there was an increase in the lifetime allowance for this relief.

As promised Labour’s planned increase in employer’s National Insurance contributions has been abandoned.  There are also plans to give a contributions holiday to new businesses whereby the first £5000 of employer’s contributions for the first ten employees does not have to be paid.

For businesses there are reductions to both the main rate and the small companies’ rate of corporation tax.  These reductions have to be paid for and the Chancellor announced reductions in the capital allowances rates from April 2012.  As well as lower writing down allowances the limit for annual investment allowance will reduce from £100,000 to £25,000.  Businesses will therefore want to manage their expenditure on plant and machinery to ensure that they take advantage of the current rates while they last.  Your engagement partner or our tax department can give you advice on measures you can take to save tax.

In his attempts to address the deficit the Chancellor announced sweeping cuts to public expenditure.  Recent articles suggest that some Government Departments will have their funding cut by up to 40%.  An attack on public waste is to be welcomed, however we should get used to public services being delivered in a different way as current levels of services are unlikely to be sustainable.  This will perhaps be the lasting legacy of this budget as we approach an age of austerity!