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Emergency?

Continuing our theme of extraordinary political circumstances balanced with a precarious economic situation we now await Chancellor George Osborne’s emergency budget. We are warned almost daily about the public spending cuts and how far-reaching the actions geared towards tackling the budget deficit are likely to be.

Continuing our theme of extraordinary political circumstances balanced with a precarious economic situation we now await Chancellor George Osborne’s emergency budget. We are warned almost daily about the public spending cuts and how far-reaching the actions geared towards tackling the budget deficit are likely to be.

There have been a raft of legislative changes since the Conservatives last produced a budget. For example the Tories vehemently opposed the introduction of the minimum wage back in 1999. We are due an increase of 2.2% in 2010/11. This is a strong issue for their coalition partners the Liberal Democrats and it remains to be seen how much influence they will exert on any plans the Tories may have.

I suspect this may be a theme that runs through this emergency budget. We are in a situation which means that the chancellor has to make swingeing cuts. However in these fragile early days of this coalition there will doubtless be compromises. I thought I would use this opportunity to speculate about what we may see on 22nd June.

1. National Insurance and Income Tax
This looks like a win for the Lib-Dems as the government have promised to increase the personal allowance to £10,000 over the lifetime of this government. We can expect to see a modest increase in this budget. The proposed national insurance increase for individuals will go ahead but the rise for employers has been shelved.

2. Capital Gains Tax Increase
It has been widely mooted that Capital Gains Tax (CGT) will increase but we don’t yet to what extent. This may be in line with income tax so don’t be surprised to see a rate of 40% although a rate of 50% has not been ruled out. This will be unpopular with investors and second home owners.

3. VAT Increase
We are seeing increasing speculation that the George Osborn will increase the standard rate of VAT. We pay relatively low levels of VAT compared the rest of Europe it may the temptation will be to raise VAT to 20%. The problem will be when to make this increase. Inflation is running higher than expected and an increase in VAT will be inherently inflationary. Another option will be a review of zero-rated VAT items. Whatever the case things will be more expensive after this budget then they were.

4. Pensions
This coalition government has agreed to restore the link between pensions and earnings so we can expect to hear an announcement about that. We may see announcements about increases to the state retirement age and one of Tories long held ideas is the removal of compulsory annuitisation at age 75.

All in all this will be a far reaching budget and will probably have more impact on individuals than any budget for a generation. At Retirement and Investment Solutions we will be monitoring this very closely to see what impacts and opportunities this will bring to our clients.

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