First-time buyers will be handed up to £6,000 in free money. Taxes on savings will be all but axed. Pensioners trapped in hated annuities will be freed. Taxpayers will be released from filing onerous returns. Low-income workers will be lifted away from income tax. Fewer people will be dragged into the higher rate tax band. The Conservative political narrative is clear: George Osborne is the chancellor who gives you freedom, while the two Eds will raid your pensions, savings and inheritance.
But irrespective of the looming election, the first question asked when the chancellor sits down is: “Am I a winner or a loser?”
First-time buyers will perhaps be most cheered – before they sober up and realise how Britain’s property market is permanently stacked against them. The new help-to-buy Isa will let individuals over the age of 16 put in up to £12,000, with the government chipping in £3,000. For a couple, it is a £6,000 giveaway. But given Britain’s chronic record on housebuilding, the giveaway will evaporate into higher house prices.
The Treasury says the tax giveaway from the help-to-buy Isa will cost nearly £3.5bn between now and 2019-20, but much of that will now leak into property price inflation. David Orr, chief executive of the National Housing Federation, said: “The help-to-buy Isa will help people scrape together deposits, but it fails to address the root cause of unaffordability: the chronic undersupply of homes, which has driven up prices.
“It also does very little for those languishing on social housing waiting lists and in temporary accommodation and the homeless, who are victims of an undersupply of affordable housing.”
But while the help-to-buy Isa will capture the headlines, the biggest category of winners from this budget are savers. Industry commentators immediately dubbed Wednesday’s plans as a “savings revolution”, which will allow people to shelter as much as £70,000 from tax – and means that Britain now has among the most generous tax breaks for savings in the developed world.
Make no mistake about who the chief beneficiaries are. The government’s own analysis of Isas shows that by far the biggest savers are the over-65s. The under-25s, despite the fall in unemployment, are the group that have least participated in the economic upswing, and even those on incomes above £30,000 struggle to save a penny.
Under the current tax regime savers pay 20% tax on their deposits, but banks and building societies will stop deducting this at source from 2016. Someone who has £20,000 in savings, earning a 2% rate, will receive £400 in interest. The tax on that, for a basic rate taxpayer, is £80. But from April 2016 basic-rate taxpayers will be able to earn up to £1,000 in interest without having to pay any tax. Higher-rate taxpayers will get the same tax break, but only on the first £500 of interest earned. Around 17 million people are expected to benefit, with the Treasury estimating that it will lose just over £1bn in tax revenue from the move in 2016-17.
The personal allowance rises from £10,600 in the coming tax year to £10,800 in April 2016 and then £11,000 from April 2017. Early calculations suggest that a lower rate tax payer (in the 20% band) will pay £132 less income tax in 2015-16 compared with 2014-15, while a higher-rate taxpayer will be around £180 better off.
Susan Spash of accountants Blick Rothenberg said: “This has a positive impact on many middle earners. For example, a single person with no children and an earned income of £45,000 will be £180 better off in 2015-16 when compared with 2014-15.”
Osborne also put another “downpayment” on his promise to lift the higher rate tax threshold to £50,000. It will rise from £42,385 in 2015-16 to £42,700 in 2016-17, and to £43,300 by 2017-18.
But of course it was Osborne who dragged so many middle-income households into the higher tax band in the first place. At the start of his chancellorship, 3.3 million people paid 40% tax, but this has now jumped to around 4.6 million – and even lifting the starting point to £50,000 won’t reduce that by much, critics say, arguing that inflation and pay rises will continue to drag more households into the upper band.
The promised “digitisation” of tax returns is another crowd-pleaser for the millions who detest the January ritual of filing their papers. But the critics are already out in force, warning that major government IT projects regularly fail. Kay Ingram of financial planners LEBC said: “The proposal to scrap the annual tax return may appear to be welcome news, but it could leave taxpayers worse off. At present, over 25% of tax codes are incorrect. Without a mechanism for taxpayers to report their actual income and gains and to claim reliefs due, many taxpayers could end up paying more in tax than is due.”
Last year’s “pension freedom” reforms – abolishing any requirement to buy an annuity – have proved hugely popular. The magic of the reforms is that it wins votes while at the same time providing extra revenue to the Treasury – £1.2bn a year over the next few years, although it goes into reverse after that. Extending the reform to existing annuitants “trapped” in poor-value products is a political no-brainer.
From 6 April 2016, Osborne said, 5 million pensioners will be able to sell their annuities for cash – but the budget documents reveal that it will be tax-positive for the Treasury, which will rake in just over £1bn between now and 2018.
The absent guest in the budget was inheritance tax. The miracle of a cut in IHT is that it hands cash to core Conservative supporters – the top 5% of earners in the country – while being, somewhat unaccountably, immensely popular among a general population who have virtually zero chance of paying IHT even under the existing thresholds. Osborne and David Cameron know that IHT promises could be an election weapon against which Labour has little defence, no matter how morally and fiscally dubious they may be. We will have to wait a few more weeks, perhaps, before we hear about that part of the Conservatives’ budget plans.
