On Wednesday afternoon, George Osborne stood up in the House of Commons and announced his latest budget. Given that most of it had been leaked in advance, there were few surprises, though the so-called 'granny tax' came as a bolt from the blue for many, myself included.
Having returned from Edinburgh, where I've been helping to run Spring 2012, I've now caught up on Budget-related news and analysed some of the key policies contained within it for your reading pleasure. If you want to read the full document yourself, you can find it on the website of HM Treasury.
Once again, an increase in the personal allowance was announced, this time raising it to £9,205 from April 2013. This will please the Lib Dems, as one of their key manifesto commitments was to raise the allowance to £10,000 by 2015. The increase will be helpful to anyone on 'middle' earnings, although those earning less than the current allowance will not benefit, and neither will people in circumstances such as those providing full-time care to relatives. It is also the most expensive item announced in the budget, reducing revenues by approximately £3.5bn. In the past I have argued against increasing the allowance, given the costs involved, so I can only hope that my fears were misguided and the extra net income is used to boost economic growth.
Reduction in corporation tax
A further percentage point reduction in corporation tax was announced, taking the rate down to 24% from April 2012. Whilst I can understand the argument for reducing corporate taxation as a means of encouraging investment, I would prefer to see some form of tax credit based on investment or increased employee count. Cutting corporation tax also risks a 'race to the bottom' with other jurisdictions, such as other EU countries. The reduction only applies to companies with taxable profits in excess of £1.5m, though marginal relief is available for profits of £300k-1.5m, and so is of little help to the SMEs which supposedly employ the majority of workers in the private sector.
Stamp duty on expensive properties
The introduction of a new Stamp Duty Land Tax (SDLT) band of 7% on properties worth £2m or more is a good way of raising extra cash with minimal controversy or backlash. Measures to prevent avoidance of SDLT, including a charge of 15% on those selling companies which own properties instead of the property itself, are both overdue and welcome. The extra band is not really a 'mansion tax', but seems to have mollified the Lib Dems. Personally I would have liked to have seen a reform of SDLT to make it a marginal tax, with rates adjusted to ensure no loss of revenue, but for now I am satisfied with the introduction of an additional band.
Top rate tax cut
As expected, the top rate of tax has been cut, from 50% to 45%, though not abolished entirely as some people expected. Osborne has followed both of my suggested compromises by cutting the rate but delaying its implementation. The delay of one year seems odd though, as one could understand a delay until the end of the current Parliament or the elimination of the structural deficit. I expect there will be a large-scale holding back of income to avoid the 50% rate in 2012/13, and the OBR agrees.
The 'granny tax'
The freezing of the age-related allowance to gradually bring it in line with the personal allowance for those under 65 is, in principle at least, a sensible measure which is long overdue, and should save a substantial amount of money over time. However, Osborne may have scored something of an own goal politically, with the freeze being branded a 'granny tax' by Labour and the press - especially the Daily Mail and the Telegraph. Pensioners are also seen as a core supporter group for the Conservatives, often referred to as the 'grey vote', and backbench MPs have already expressed concerns as to how this decision might have an impact at the next election.
Despite the political problems, I'm not convinced that pensioners have a right to complain too much, for several reasons. First, this is a measure to reduce the rate by which an allowance is increased, and whilst it will represent a cut in real terms they are still escaping the nominal cuts which are affecting the rest of the population. Secondly, those over state pension age do not pay national insurance contributions, so they are still taxed at a lower rate than an employee with an equivalent income. Finally, pensioners have already received a huge benefit from the 'triple guarantee' on the state pension, which includes restoring the link with earnings.
On the subject of tax cuts and rises for individuals, I think this quote from Thursday's Financial Times sums up the situation better than anything else I've read:
Mr Osborne is simply continuing a long and ignoble tradition of cutting income tax whilst increasing other taxes [VAT, National Insurance etc.]. It applied as much in Labour years as now.
Overall, middle earners will benefit from the personal allowance, whilst perhaps suffering slightly from increasing duties. Those towards the end of a successful career, perhaps earning £50-70k, will be hit hard by the reduction in child benefit and the lowering of the 40% tax band. Anyone earning enough to be liable the highest rate of tax (including most Cabinet Ministers), even if they manage to avoid paying it, will probably not notice much difference to their take-home pay. 'We're all in this together'? I don't think we ever were, and this Budget has not changed my opinion on that particular claim.