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March 23, 2012 / politicsbitesize

The Budget 2012

The second day of spring brought with it some disquieting news: a much opposed Health and Social Care Bill was passed and the Chancellor, George Osborne, revealed his Budget plans. Below is an outline of the main aspects of his Budget speech.

On the tax system
A tax system for a modern world will be introduced by radically changing the rate of tax for small and medium sized businesses. The Chancellor plans to address loopholes in the VAT system and streamline the tax system for pensioners. He will implement the latter by getting rid of ‘age related tax allowances’ and upping the basic state pension by £3.50 a week for those that have ‘worked hard and saved hard all their lives’. Yet what this change, already dubbed the ‘granny tax’, actually means is a tax allowance freeze for those aged 65 or over.

In the current system the personal tax allowance for someone aged over 65 is £10,500, rising to £10,660 for those aged over 75 compared to the current £8,105 allowance (to be brought in this April) for other taxpayers. Osborne’s changes mean that from next April there will be a freeze in pensioners’ tax allowance whilst other taxpayers’ allowances will rise by £1,100 to £9,205. The freeze will continue until the allowance comes into line with the rest of the tax paying population and eventually pensioners will receive the same allowance. In effect, the Chancellor is calling for a ‘single personal allowance regardless of age’.

On helping businesses
An underlying theme of the whole Budget was typically Conservative in that it outlined measures designed to promote business growth and ‘help the private sector to grow’. To this end, Osborne announced that there is to be a cut in tax rates for small and medium sized businesses. Corporation Tax will drop from 28% to 24% by April 2012, with two further cuts planned over the next two years, so that by 2014 it will be down to 22%. The bank levy is to be increased by a staggering 0.105% so that the new Corporation Tax cuts do not benefit the banks. In addition, this will raise the £2.5bn that the Coalition Government promised to claw back from the banks. All of these measures are designed to encourage businesses to come to Britain.

On tax evasion and avoidance
During his speech George Osborne described the practices of tax evasion and tax avoidance as ‘morally repugnant’ and vowed to tackle the problem by increasing the number of staff in HMRC working on it. He also mentioned an agreement that the British government have made with Switzerland, which plans to stop UK residents avoiding tax by moving assets to Switzerland. This ‘general anti-avoidance rule’ will be properly announced in next year’s finance bill.

In order to reduce the instances of wealthy people not paying stamp duty on properties worth over £2m by purchasing them through corporations based in other countries, the Chancellor is to raise stamp duty to 15%. However, this higher rate only applies if the property has been bought using a company (otherwise known as corporate envelopes) and that property is classed as residential. Furthermore, stamp duty and land duty on properties over £2m has been put up to 7% as of midnight on Wednesday 20th March.

On personal taxation
From April 2013, no one earning under £9,205 a year will pay tax, which means over two million people on low wages will no longer pay income tax. The Liberal Democrats are keen to ensure that this section of the Budget is attributed to them, but some in the Party fear that the policy is already being hijacked by the Conservatives. Osborne states that the change to the ‘tax system, where the lowest paid are lifted out of tax altogether’ will be implemented by raising ‘more [taxes] from the rich’.

Yet in a controversial move the Chancellor has reduced the top rate of tax from 50p to 45p. His reason for this particular change to the tax system is because currently Britain’s top rate of tax is the highest in the G20. This, he claims, is damaging the British economy because many people whose earnings fall into the top rate of tax are using loopholes in the system to avoid paying the correct amount of tax. However, he doesn’t want to reduce it too much whilst public sector workers are being asked to accept a pay freeze, so he has found a ‘compromise’ by reducing it to 45p. This new tax rate will only apply to those earning over £150,000 a year, but the 40p tax rate will continue to apply to those on £42,000.

On child benefit
The proposed removal of child benefit from those earning over £42,000 a year has been a political nightmare for the Chancellor. A chorus of protests, led by some Tory MPs before the Budget, highlighted the difficulty in cutting the universal benefit. Those on middle incomes – otherwise known as the ‘squeezed middle’ – would find their incomes reduced by £1,000 per year for parents with one child or £1,700 for those with two. The main objection to the cut came from households who earned over £42,000 where one parent stayed at home to look after the children while the other worked. They claimed it would not be fair that their benefit was cut entirely, whilst a couple that both worked but earned £41,999 each could be allowed to keep theirs. So, in order to avoid this ‘cliff edge’ problem the Chancellor announced that the government would not be withdrawing child benefit all at once. The new system of payment will be staggered: 1% of child benefit will be taken from households for every £100 over £50,000 they earn and those earning over £60,000 will lose it completely.

On alcohol and cigarettes
These so-called ‘sin taxes’ are to rise by 5% above inflation for cigarettes and 2% above inflation for alcohol. What this means, in real terms, is that people purchasing a packet of 20 cigarettes will see an increase of 37p per packet and those purchasing beer a rise of 3p per pint, 11p per bottle of wine and 41p on a 70cl bottle of spirits.


The 2012 Budget is a traditionally Conservation one in that it appears to be helping the wealthy and promoting private businesses, yet there are a number of measures that give lip service to preventing the rich from getting richer by closing loopholes in the system in order to prevent tax avoidance. Time will tell how much they can achieve before the next election, but for now here are a few responses to the Budget that were posted live on the Independent’s website:

Paul Kenny, general secretary of the GMB, said: ‘The different treatment of people at either end of the income scale is stark. Ordinary families are losing their tax credits and child allowances and suffering pay freezes while people on top salaries of £150,000 to £1 million a year are getting cash hand-outs.’

Rail union leader Bob Crow said the tax changes meant that a banker on half a million pounds will receive a ‘kick back’ of £17,500, money ‘robbed’ from public services and the neediest in society.

Ed Miliband’s immediate reaction was to highlight the fact that 29.7m out of 30m taxpayers will not helped out by the 50p cut. He then went on to claim that a person on a £5m salary would save £240,000 a year in tax thanks to Osborne’s ‘Budget for millionaires’.



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