Introduction to Newsletter 20.05.10Thursday, May 20th, 2010
So, the new date in our diary (other than 7 May 2015, the next General election, maybe) is Tuesday, 22 June, the day when the new coalition government will present its first Budget.
What is the second Budget of 2010 likely to include? There is much media speculation but the only (more-or-less) certain changes were set out in the Coalition Agreement, as follows:
- stopping Labour’s proposed jobs tax – The immediate inference is that the 1% increase in all NICs rates, announced by the previous government for the 2011/12 tax year, will not occur. However, point 5 below suggests otherwise.
- the personal allowance for income tax should be increased in order to help lower and middle income earners – The automatic annual increase is currently tied in legislation to the RPI each September.
- a substantial increase in the personal allowance from April 2011 and a longer term policy objective of further increasing the personal allowance to £10,000, making further real terms steps each year towards this objective – If the RPI in September 2010 is, say, 3.5%, the personal allowance would have to increase to £6,705 in April 2011. However, to reach £10,000 in four steps by April 2014, it would have to go up to at least £7,355. Or, if it takes five steps, with the last in April 2015, the increase would have to be to at least £7,185.
- this [i.e. the increase in the personal allowance] will be funded with the money that would have been used to pay for the increase in Employee National Insurance thresholds proposed by the Conservatives, as well as revenues from increases in Capital Gains Tax rates for non-business assets…at rates similar or close to those applied to income – Understanding this involves a comparison between the Labour government’s plans, which were to increase the primary NICs threshold by around £10 per week to a level that would ensure employees earning £20,000 pa would pay less in NICs despite the 1% increase in NICs rates, and the Conservative’s election promise to raise the primary threshold by £24 per week and the upper earnings limit by £29 per week. The inference, therefore, is that these threshold increases will not happen and the focus will be on increasing the personal tax allowance instead. There are no automatic statutory increases to NICs rates, so there may be no increase in April 2011 to NICs thresholds, or perhaps just an RPI-linked increase.
- the increase in Employer National Insurance thresholds proposed by the Conservatives will go ahead in order to stop Labour’s jobs tax – Reference to the “jobs tax” is to the Labour government’s intention to raise secondary NICs by 1% from April 2011. The Conservative’s election promise was to increase the secondary threshold by £21 per week, reducing “the cost of Labour’s tax rise on employers by more than half.” It seems, therefore, that the intention is to keep the 1% increase in NICs rates for both employers and employees, but to offset partially the employers’ increase by a substantial increase in the secondary NICs threshold, and to offset the employees’ increase by a substantial increase in the personal allowance.
- to introduce transferable tax allowances for married couples – This reference was in the context of allowing Liberal Democrat MPs, who are opposed to this measure, to abstain on Budget resolutions. The Conservative’s election commitment was to “a partially transferable personal allowance for 4 million married couples and civil partnerships. One member of an eligible couple will be able to transfer £750 of their tax free personal allowance to their partner in order to reduce their partner’s income tax bill. This will be limited to basic rate taxpayers and is therefore worth up to £150 a year per couple at the 20% rate of tax”.
- restore the earnings link for the basic state pension from April 2011 with a “triple guarantee” that pensions are raised by the higher of earnings, prices or 2.5%, as proposed by the Liberal Democrats – This brings forward by a year the Labour government’s plan to link the level of the basic State Pension with earnings, with additional guarantees.
- phase out the default retirement age –This was under review by the Labour government but there is now a commitment towards removing employers’ ability to enforce retirement at 65.
- hold a review to set the date at which the state pension age starts to rise to 66, although it will not be sooner than 2016 for men and 2020 for women – The phased increase in the State Pension age for women to 65 has already commenced and is not due to complete until 2020. The increase in the State Pension age for both men and women to 66 is currently set in legislation to occur between 2024 and 2026.
The following relevant measures are also Conservative policy but were not referred to in the Coalition Agreement:
- introduce a new system of flexible parental leave so parents can share maternity leave between them or both take time off simultaneously
- extend the right to request flexible working to every parent with a child under the age of eighteen, and ensure that the government leads from the front by extending the right to request flexible working to all those in the public sector, recognising that this may need to be done in stages
- exempt all new businesses starting in the first two years of a Conservative Government from Employers’ National Insurance on the first ten employees they hire in the first year
- create an independent Office of Tax Simplification to review and suggest reforms to the tax system and its effect on small business, including IR35
- retain the 50p tax rate but not permanently – “we will not abolish it for the rich while at the same time asking many of our public sector workers to accept a pay freeze”
- give small and medium businesses a £2,000 bonus for every new apprentice they hire.
Other subjects that have been mentioned in speeches and announcements include:
- a review of the Agency Workers Regulations 2010, although this implements an EU Directive
- introducing pension auto-enrolment earlier than 2012 and reducing the phasing period for pension personal accounts
- scrapping ID cards for British citizens.
It would be good to see clarification of all of these issues in the Budget on 22 June rather than waiting until the Pre-Budget Report at the end of the year for specific information on, for example, next year’s NICs rates and thresholds. Whatever the Budget announcements, we will bring you a detailed analysis in our newsletter at the time.
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