George Osborne has outlined the toughest package of tax increases and spending cuts in a generation during his first Budget speech since becoming Chancellor.
While almost a million low-earners will be taken out of the tax system, there were big increases to capital gains tax and VAT and widespread reductions to state benefits.
Here, we explain how the announcements affect you and your family.
Will VAT increase?
Yes. VAT will increase from 17.5 per cent to 20 per cent from January 4, 2010 adding about £400 a year to the average family’s annual spending bill. However, current exemptions to VAT, such as food, children’s clothing, energy and books, will remain. Mr Osborne is hoping to encourage spending and stimulate the economy before the increase kicks in.
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What has happened to capital gains tax?
The rate of capital gains tax (CGT) will increase from 18 per cent to 28 per cent from midnight this evening for all higher rate taxpayers. This will affect thousands of investors, second home owners and buy-to-let landlords.
Basic rate taxpayers will continue to pay capital gains tax at 18 per cent. All investors will continue to cash in gains of up to £10,100 every year without paying the tax.
The current entrepreneurs relief, which allows a capital gains tax rate of 10 per cent for the first £2 million gains over a lifetime, will be extended to £5 million.
I am a low earner – will I stop paying tax?
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Anyone earning less than £7,475 will no longer pay income tax. From April 2011 the personal allowance - the point at which people start paying income tax - will rise by £1,000 to £7,475, taking nearly 900,000 people out of the tax system. It also means 23 million basic-rate taxpayers will take home up to an additional £170 a year.
Mr Osborne says he still wants to increase the personal allowance to £10,000, but this will be done gradually over the course of the parliament.
Any news for public sector workers?
Yes. Public sector workers face a two-year pay freeze, although 1.7 million of those earning less than £21,000 will get a flat pay-rise worth £250 in both years.
Will my family receive the same tax credits?
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Families earning more than £40,000 a year will receive less help. The family element of the Child Tax Credit will be withdrawn at £40,000, instead of £50,000.
However, the child element of the Child Tax Credit will increase by £150, costing the Government £2 billion a year.
Child benefit will remain universal but the rate will be frozen at £20.30 a week for your eldest child and £13.40 a week for other children over the next three years.
The Health in Pregnancy Grant – the one-off, tax-free payment of £190 if you’re at least 25 weeks pregnant – will be scrapped from April 2011.
Any help for pensioners?
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As promised Mr Osborne says he will restore the link between the state pension and earnings from April 2011, guaranteeing that the state pension will always rise by at least 2.5 per cent. The state pension currently rises in line with the Retail Prices Index. This means that pensioners can expect to see more generous annual increases to their income.
Labour’s planned ‘broadband tax’ – which would have cost anyone with a landline 50 pence per month – will be scrapped. This will be welcomed by age charities, as 60 per cent of pensioners do not use the internet.
The government will also help low-spending councils in England to freeze council tax for one year from April 2011.
Can I expect my benefits to be cut?
Yes. Benefits are currently increased according to the Retail Prices Index (RPI), but from 2011 all benefits except the state pension and pension credit will increase by the Consumer Prices Index, which is generally the lower measure of inflation. This will save the Government £6 billion a year.
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The Chancellor has also promised radical reform of housing benefit, setting maximum limits of £280 a week for a one bedroom property and £400 per week for a four bedroom house.
From 2013 anyone wanting to claim disability living allowance will have a medical assessment.
I own a small business. Will I still have to pay the increased ‘tax on jobs’?
Labour had planned to increase employer, employee and self-employed National Insurance by 1 per cent from April 2011. Today Mr Osborne announced that from April 2011, the threshold at which employers start to pay National Insurance will rise by £21 a week. This means that employers will no longer have to pay the tax for 650,000 employees.
Any other help for businesses?
Yes. Corporation tax will be reduced over the next four years from 28 per cent to 24 per cent, the lowest-ever rate in the UK.
Labour had planned to increase the small companies rate to 22 per cent, but Mr Osborne says he will instead reduce this rate to 20 per cent
What about ‘sin taxes’?
Surprisingly, the Chancellor did not announce any duty increases for alcohol, tobacco or petrol. In fact, he has decided to reverse Labour’s planned increase on cider duty.