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Emergency Budget likely to see significant tax changes

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The government has announced that the emergency Budget will be delivered on Tuesday 22 June.

The Conservative-Liberal Democrat government had promised an early Budget in an effort to tackle the UK’s deficit.

The parties’ joint statement, following the deal to form a coalition administration, pinpointed a number of tax, pension, employment and business areas where they planned significant changes. It is expected many of these will form part of the June Budget.

The economy

There will be an accelerated reduction in the budget deficit, with £6 billion coming this year (although the commitment contains a proviso that the level of the cuts will be subject to advice from the Treasury and the Bank of England). The main burden of the cuts will be felt in reduced government spending rather than tax increases.

An independent Office for Budgetary Responsibility will be established to produce new growth and borrowing forecasts.

A full spending review is to be held in the autumn, following a consultative process involving all tiers of government and the private sector.

The coalition has ruled out joining the euro for the duration of the next Parliament.


Income tax

The personal allowance for income tax is to be increased, the first stage of which is to take effect from April 2011. There is to be a long-term policy of raising the threshold to £10,000, graduated across a number of years.

Inheritance tax

This will take precedence over Conservative plans to raise the inheritance tax threshold to £1 million from its present £325,000. Liberal Democrat proposals for a ‘mansion tax’ on properties worth £2 million or more is to be scrapped.

National insurance contributions

The funds required for an increase in the income tax personal allowance will come from the dropping of Conservative proposals to raise employees’ national insurance contribution thresholds. The increase in employers’ national contribution thresholds, however, will go ahead.

Married allowances

Another Conservative manifesto commitment to introduce transferable tax allowances for married couples stays in place, although Liberal Democrat MPs will be allowed to abstain in the Commons vote on the measure.

Capital gains tax

Capital gains tax on non-business assets will, at some point, rise to a rate similar to that of income tax; perhaps 40 per cent or 50 per cent. Exemptions, though, will be made for entrepreneurial business activities.

At present, CGT is only payable on gains over £10,100 in any tax year, chargeable at a rate of 18 per cent.

Corporation tax

The government has committed itself to a “long-term” plan to reduce the headline rate of corporation tax, possibly from 28 per cent to 25 per cent.


No pre-Budget announcements on VAT have so far been made.

However, speculation is rife that the Chancellor will give serious consideration to some sort of graduated increase, perhaps to as much as 20 per cent (the current level is 17.5 per cent, 2.5 per cent below the European average).

On the plus side, a rise in VAT has immediacy in producing a regular revenue. The downside for the government is that any increase could dampen consumer spending or fuel inflation.

Leading think-tank, the Institute for Fiscal Studies (IFS) has already suggested that VAT may the most viable choice of tax increase.

A rise in VAT to 20 per cent would generate an extra £11.5 billion of government income but would add an average of £425 to each household bill, a new report by Kelkoo, the shopping comparison website, has calculated.

Other tax measures

A switch to per-plane rather than per-passenger duty will be implemented.

The two parties have agreed to reduce the availability of child trust funds and tax credits for higher earners, those households, perhaps, on more than £50,000 a year.

A banking levy is also to be introduced.


The government is to focus on improving the flow of credit to smaller firms. This will include the possibility of establishing a loan guarantee scheme to replace the Enterprise Finance Guarantee programme and the use of net lending targets for nationalised banks.

Some backdated demands for business rates will be cancelled.


The default retirement age is to be phased out, and a review will be held to establish the dates at which the state pension retirement age begins to rise to 66. There is a commitment that, in the case of men, this will not be before 2016 and, in the case of women, not before 2020.

Rules requiring mandatory annuitisation at 75 are to be dropped. At the moment, people who establish a pension savings fund must use the money to purchase an annuity, or an annual income for life, when they reach the age of 75, preventing them from passing on the capital to their heirs.

The link between the basic state pension and earnings will be restored from April 2011 with a guarantee that pensions are raised by the higher of earnings, prices or 2.5 per cent, as proposed by the Liberal Democrats.

Thus far, the government has not offered a policy on pensions tax relief. The Liberal Democrats had been in support of abolishing all higher tax rate relief, capping relief at the basic rate of income tax.


All existing welfare-to-work programmes are to end and are to be replaced by a single welfare-to-work programme.

Those Jobseekers’ Allowance claimants who must deal with the most significant barriers to work will be referred to new welfare-to-work scheme at once rather than after 12 months. In the case of those Jobseekers’ Allowance claimants aged under 25, they will be referred to the programme after six months.

The EU

There will be no further transfer of sovereignty or powers to the EU over the course of the next Parliament.

The government will work to make sure that the application of the Working Time Directive in the UK is limited.

Any future European treaty that involves the transfer of power will be subject to a referendum.

The environment

A green investment bank will be set up.

The government is to press ahead with a high-speed rail network but will reject plans for additional runways at Gatwick and Stansted.

A national planning statement will be drawn up to allow a process for replacing existing nuclear power stations with new ones, although Liberal Democrat MPs will be allowed to abstain on any vote on the plans.