FOOL'S EYE VIEW

Has The Budget Made You Richer?

By Cliff D'Arcy
March 28, 2006

On Wednesday, 22 March, Chancellor of the Exchequer Gordon Brown presented his tenth Budget (the first chancellor to present ten in a row since Nicholas Vansittart, 1st Baron Bexley, who held this office from 1812 to 1823).

In common with many people, my first reaction at Budget time is WIIFM: "What's in it for Me?" The good news is that many people stand to be slightly better off from 6 April, although you could lose out substantially if you drink and smoke heavily and drive an environmentally unfriendly car!

However, a few groups will be worse off, according to accountants KPMG. In particular, a single person earning £35,000 who has no children or one child will be worse off by £25 a year, as will a childless couple who are both working and earning a similar wage. On the other hand, this government boasts about directing help towards families with children, so it's no surprise that this group stands to benefit most. Consequently, best off will be a couple who are both working, earning £15,000 a year apiece, with two children: they gain over £400 a year.

Of course, when it comes to taxation, the Devil's in the detail, so your personal circumstances largely dictate how much better or worse off you'll be from the start of next tax year. Furthermore, Mr Brown loves to tinker with the tax system, rather than introduce radical changes, so it's fiendishly complicated to figure out exactly where we stand. Nevertheless, here's a rough guide to the winners and losers come 6 April:

ALL ADULTS

Tax allowances

Income tax allowances and bands are to increase by around 3%, as will the limits for National Insurance contributions, broadly in line with inflation. Here are the tax-free allowances for the 2006/07 tax year:

Personal allowance: up £140 to £5,035

Personal allowance (65-74): up £190 to £7,280

Personal allowance (75+): up £200 to £7,420

Married couples' allowance: up £160 to £6,065 (for those born before 6 April 1935)

Married couples' allowance (75+): up £160 to £6,135

Want to pay less tax? Then read Tax Tricks For 2006!

Tax returns

Also, the government plans to tighten the deadline for submitting self-assessment tax returns. From 2008, instead of having until 31 January to file your paper return, the deadline will be brought forward four months to 30 September. For online returns, the deadline will be brought forward two months to 30 November. Boo!

WORKERS

Pensions

A brave new world of pensions arrives on 6 April, known as Pensions A-Day, as I explained in Ten Things To Know About Pensions.

Fancy a more comfortable retirement? Then visit our Pensions centre!

Home computing initiative

Oddly, the government appears to be killing off one of its previous schemes by abolishing the tax relief on computers loaned by companies to employees. From this date, new loans will be taxed at a fifth (20%) of the cost of the computer. Hence, an employee given a computer worth £1,500 would have £300 added to his/her taxable income, which could mean a tax bill of up to 40%, or £120. Oops!

FAMILIES WITH CHILDREN

The chancellor has given families with children three boosts to their budgets:

1) Children with Child Trust Funds (CTFs) -- those born after 31 August 2002 -- will get an extra £250 (£500 for low-income families) at age seven.

2) The child element of the Child Tax Credit is to rise by a seventh (14%) over the next three years.

3) The weekly limit for childcare vouchers is to increase by £5 to £55. This translates to a £107-a-year tax saving for an employee who pays higher-rate tax and claims CCVs from his/her employer.

Learn more about CTFs here and then check out the deals in our Saving for Children centre!

MOTORISTS

In a nod in the direction of the environment, the least polluting cars will be exempt from Vehicle Excise Duty ("road tax"), while the biggest polluters, such as 4x4 drivers, face a higher charge of £210. In addition, the annual inflationary hike in fuel duty has been delayed until September.

PENSIONERS

Gordon Brown didn't give pensioners a £200 rebate towards their Council Tax this year, making last year's rebate nothing more than a pre-election bribe! However, pensioners will get a £200 winter fuel payment (£300 for the over-80s), while the basic State pension will rise by £2.20 for a single person and £3.55 for a married couple. Also, from April 2008, there will be free off-peak bus travel throughout the UK for pensioners and disabled people.

HOMEBUYERS

Mr Brown raised the 0% band for Stamp Duty Land Tax (SDLT) by £5,000 to £125,000. On the surface, this appears to be a break for first-time buyers, but, thanks to the "threshold effect", many sellers will just hike their sale price by £5,000. At the end of the day, this move will leave many buyers worse off. D'oh!

Slash the cost of your home loan with a visit to our Mortgage centre!

SAVERS

Although the UK is facing a savings crisis (ten years ago, we saved twice as much of our disposable income as we do now), there was no good news for savers from Mr Brown. Oh well, if you want to become a better saver, read Your Ultimate Guide To Saving.

Earn tip-top rates of interest in our Savings centre!

INVESTORS AND INHERITORS

The annual Capital Gains Tax allowance is to increase by £300 to £8,500 in 2006/07, which could save investors up to £3,520 in tax. Then again, why not avoid CGT altogether by using a tax-free ISA wrapper?

Real Estate Investment Trusts (REITs)

REITS tax-efficient vehicles which enable individual investors to back big property developments should be in place by the start of next year. You can learn more about these here.

Venture Capital Trusts (VCTs)

As expected, the chancellor reduced the tax breaks given to investors in high-risk Venture Capital Trusts (VCT), which invest in small and unquoted companies. From 6 April, the tax relief has been cut to 30% from 40%, and investors must hold VCT shares five years (instead of three) in order to enjoy tax-free income and gains. Hence, we can expect a wave of hot money to pour into VCTs until 5 April!

Inheritance tax

Currently, the threshold for Inheritance Tax (IHT) is £275,000, but it will rise to £285,000 in 2006/07, £300,000 in 2007/08, £312,000 in 2008/09 and £325,000 in 2009/10. Anything above these thresholds (outside of various exemptions, such as transfers between spouses or civil partners) will be taxed at 40%, even if the deceased never paid higher-rate tax in his/her life. Ouch!

Alas, the chancellor giveth and the chancellor taketh away; as expert trust and estate practitioner draftsmann explained in this post, "accumulation and maintenance" and "interest in possession" trusts face harsh new tax charges, penalising hundreds of thousands of prudent people in the process.

Don't lose a tax allowance worth up to £7,000 check out this cheap, simple, tax-free investment!

SINNERS

There's an extra 9p on a pack of twenty cigarettes; 4p on a bottle of wine and 1p on a pint of beer, with no increases for cider, sparkling wine and spirits, so no inflation-busting increases here.

To be honest, after all that, I'm still not sure whether I'm going to be worse or better off come 6 April. All the same, I'll keep investing in tax-efficient ways in order to keep greedy Gordon's hands off my stash, and I recommend that you do the same!

More: Find better brokers, ISAs, mortgages, pensions, savings accounts and savings for children today!