Wednesday 21st March 2007

THE BUDGET 2007

Budget Day:

At 12pm on Wednesday Gordon Brown, Chancellor of the Exchequer, presented his final budget to Parliament. The 2007-2008 Budget increases spending on health and education, contains a raft of incentives to encourage consumers to go green and cuts the basic rate of income tax from 22% to 20%. However, don’t rush out to spend your extra income all at once. Overall, taxes have neither fallen nor risen, rather they have been shuffled around so slightly different people are paying slightly different amounts. So whether you will be paying more or less tax depends on your individual financial circumstances.

Budget 2007: The Big Picture

Overall the Chancellor forecast that the economy would grow at between 2.5 – 3 % over the next two years while inflation would fall to 2% by the end of this year. This is good news, generally meaning that there should be plenty of opportunity for business to generate good profits and a good selection of jobs available, while at the same time the cost of living will only increase at 2% per year.

The Government will invest an extra 2.5% in Education each year, increasing the budget for the Department of Skills and Education to £74bn by 2010. The NHS will also receive an extra £10bn this year.

And Britain remains a good place to do business, with the tax on business profits cut to 28p in the pound, although owners of small businesses will be hit with slightly higher tax rates (up from 20p to 22p in the pound).

Unless you’re in the gambling business that is, in which case you will have to pay a flat 15% tax on any profits, while the big casinos face a steep 50% tax rate on profits.

Budget 2007: Implications for the Individual

The big story of this budget has been the drop in the basic tax rate from 22p to 20p in the pound. However, this change is misleading if looked at in isolation. Formerly, the first £2,150 of income was taxed at 10%. However, the budget abolishes this 10% band, meaning that all income up to around £34,000 will be taxed at 20%. Together with increases made to national insurance payments, this means that some people (approximately 1 in 5 households) will be worse off as a result of the new rules. Low earners (those earning less than around £18,600 per year) are particularly likely to be worse off.

However, if this is you, then don’t despair. You might well be able to offset any extra tax paid under these new rules by claiming some of the extra £1bn of tax credits available. To find out whether you might be able to claim tax credits, visit www.direct.gov.uk.

Moreover, Capital Gains Allowance has increased from £8,800 to £9,200 this year, meaning that the first £9,200 of income gained from an increase in the value of your assets (i.e. selling shares that have risen in price since you bought them) will be tax free. Less of your assets will also go to the taxman on death, as the inheritance tax threshold has been increased to £350,000.

You can also squirrel more of your money each year away from the taxman, as the limit on Cash ISAs has increased from £3000 to £3,600 a year. This means you can put up to £3600 each year in a Cash ISA account, and any interest earned on that money will be tax free. The maximum you could save in a stocks and shares ISA has also increased to £7,200 per year. However note that the total for both forms of ISA (i.e. the maximum you could save tax free) cannot itself be more than £7,200 per year.

2008 looks set to be the year to go green, with a whole host of incentives designed to encourage consumers towards environmentally friendly behaviour. Although tax on petrol will stay frozen until October, it will then increase by 2p a litre and by another 1.8p per litre in 2009. However, drivers of cars using biofuels will be able to claim a discount on any fuel tax paid. Meanwhile the tax payable on fuel efficient cars has been cut from £50 to £35 whilst the tax payable by owners of “gas guzzling” cars looks set to increase to up to £400 per year.

Moreover, until 2012, buyers of new “zero carbon” homes worth up to £500,000 will not have to pay stamp tax, and the VAT on environmentally friendly products for the home has been cut from the standard rate (17.5%) to 5%.

There is also good news for those of us more advanced in years, with an increase in the financial assistance available to pensioners in companies that went bankrupt from £2bn to £8bn and grants of £330 and £4000 soon to be available for pensioners to insulate their homes and install central heating respectively. Moreover, key home improvements should be less expensive, thanks to a cut in VAT on housing alterations commonly needed by the elderly.

Good news for G&T’s, with tax on spirits remaining frozen, but bad news for beer drinkers, with an extra 1p of tax on every pint.

And finally, there may never have been a better time to give up smoking. The price of a 20 pack of cigarettes will increase by an extra 11p, but a cut in VAT from 17.5% to 5% means that nicotine patches will be cheaper.

Prepared by Adela Read for MoneyBasics