How will the predicted budget cuts affect the UK population?

Regular BQ contributor George Hardey, associate and head of tax at Waltons Clark Whitehill, gives us some insight into the forthcoming budget cuts and how they will affect our lives.

Five years on from the Conservative’s re-election to power in 2010, Wednesday  will be the first time we see an all Tory Budget without a Liberal Democrat influence, and the first time a solo Conservative Budget will have been implemented since 1996. Chancellor of the Exchequer, George Osborne will be outlining plans including a promised £12 billion worth of cuts from government spending.

As it is being dubbed by many as the ‘Budget for the working people’, we can seek to make positive predictions about the forthcoming economic plans. However, £12 billion worth of cuts does induce fear in much of the UK population, but could the cuts work in favour of the future of Britain’s economic standing? 

The Northern Powerhouse initiative is centred on bridging the economic gap between the north and the south, this Budget should aim to decrease this gap further. Although some may think the Northern Powerhouse idea is without substance, Mr Osborne claims he will try to promote the agenda with the upcoming Budget. He looks to reassure northern business leaders of economic growth despite the cuts.

Below are some of my summer Budget predictions and how they will affect everyone across Great Britain.

Prediction one: Cuts to pension tax relief

The annual amount of pension tax relief is likely to be amended in the upcoming Budget, the Conservative Government looks set to cut the tax relief dramatically. Currently it costs the treasury £34billion per year, the drastic decrease could mean the UK’s top earners see their tax allowance cut by three quarters from £40,000 to £10,000 per year.  

Now people are living longer, the elderly population is growing and the annual allowance is becoming simply unsustainable, according to George Osborne. It is almost certain that some sort of cuts to pension tax relief will take place on the 8th July; it is predicted the lifetime allowance will be cut from £1.25 to £1 million. The Chancellor has stated the potential cuts will affect less than 4% of the population.

Prediction two: Increase in the nil rate band of Inheritance Tax

Mr Osborne is expected to announce a rather substantial increase in the nil rate band of Inheritance Tax (IHT) for estates which including the family home. Currently the IHT allowance is set at £325,000 but if predictions are correct it will rise to £1million per couple or £500,000 per person, when the estate includes the deceased’s home.

So, what does this mean for an estate of more than £325,000?

This is quite a generous leap for the IHT with an increase of over £350,000 in the amount of inheritance that will be tax free. If this is introduced in the Budget it will mean more of an estate is passed to families and loved ones rather than into the state.

Prediction three: Increase in tax bracket rates

Perhaps influenced by its former partners the Liberal Democrats, the Conservative Party is expected to once again make an increase in the tax bracket rates. Previously a rise to £10,600 in the personal allowance was introduced, however, Mr Osborne is predicted to possibly go even further and increase the threshold at which 40% tax must be paid.  

Prior to the election the Conservatives promised, as part of their manifesto, a rise in the personal allowance to £12,500, which means no tax will be paid on earnings up to that amount. The party also stated they planned to raise the 40% tax bracket up to £50,000, meaning more and more people will be able to take home a larger amount of their salaries. However, with pressure from fellow Tories to reduce the 45% tax rate it will be interesting to see what happens to the UK Income Tax.

Overall if the predictions are correct it does seem that the Chancellor of the Exchequer will be seen by many to have delivered on his promise of a ‘Budget for the working people’ particularly with an increase in the tax brackets. Hard working people will get more of their salaries, leading to a higher disposable income, depending on a smaller increase in the cost of living. However, there is sure to be many critics of the potential proposal of a decrease in the allowance of pension tax relief, critics may state a flat-rate of a certain percentage of tax allowance regarding pensions would work a lot better for workers and the UK economy.

We will find out on Wednesday.