In this article published in The IRS Report in July 2010, Chris Gilchrist gives his views on the June 2010 Budget...

The budget - sharp teeth, but no claws

The coalition government's emergency budget had been pre-spun as hard labour in the salt mines, so the reality produced sighs of relief despite the gigantic scale of the impending spending cuts. This, though, is a false dawn. On October 20th the government will announce how most departmental budgets will be cut by 25% over the next five years. In expectation of this, I would be long of sackcloth and ashes, especially in Northern cities where one in two work for the government.

In the meantime, the tax rises are by no means as harsh as they might have been - rightly, to prevent derailing the recovery. And the biggest revenue comes from a 2.5% rise to 20% in the hardest-to-avoid tax, VAT.

The £1,000 rise in the personal allowance next April will shield moderate earners from the increases in National Insurance and VAT. But higher rate taxpayers will be several hundred pounds a year at least worse off since the higher rate tax threshold will be reduced.

The new capital gains tax system, effective from June 23rd, is a hybrid between its two predecessors. The current rate of 18% will apply provided your gains added to the £10,100 annual allowance and your taxable income do not exceed the higher rate tax threshold. Any part of the gain above that will be taxed at 28%. Basic rate taxpayers selling lumpy assets like second homes will end up being liable to 28% on most of their gains. Since pension contributions reduce taxable income, there will be scope for some tax avoidance.

It looks almost certain that the complex rules restricting tax relief on pension contributions for high earners will be scrapped and replaced by a restriction in the maximum annual contributions to between £30,000 and £45,000, and a reduction in the lifetime allowance. This would be a better and fairer result and much simpler than the previous government's proposals. It also opens a window of opportunity for those earning under £130,000 (higher earners are still subject to anti-forestalling rules restricting their contributions) to make lump sum contributions at whatever level they can afford before the end of this taz year.

Compulsory annuitisation of pension funds will be ended next year, and interim rules raise the compulsory age to 77.

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Chris is the editor of The IRS Report every month

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