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VAO Briefing Paper
No 2
The Budget June 2010
Voluntary Action Oldham
12 Manchester Chambers
West Street
Oldham
OL1 1LF
0161 633 6222
1
Budget June 2010
The budget is the government’s annual financial statement and review of levels
of taxation. It also includes the government’s future financial strategy and
economic forecast. The Chancellor of the Exchequer delivers the Budget speech
in the House of Commons.
The speech usually has two parts:
 A summary of the economic situation
 A more detailed account of specific measures the government has or
intends to introduce to raise money to finance spending
It is usually in this second part that tax changes that affect individuals’ income
and spending are announced.
One of the key features of tax law is that changes announced in the budget can
take effect before the Finance Bill is passed. Also budget rules mean that
changes on excise duties, for example, taxes on alcohol and petrol, often take
effect from 6pm on Budget day.
Chancellor George Osborne delivered his Budget speech on the 22nd June 2010.
It was billed as a ‘tough but fair’ budget. He set out the government’s target of
bringing the structural deficit into balance by 2016. However, the newly created
Office for Budget Responsibility has revised its forecasts for economic growth in
the short term, cutting them from 1.3% to 1.2% for 2010 and from 2.6% to 2.3%
in 2011. Public Sector net borrowing is expected to be £149 billion this year,
falling to £60 billion in 2013/14.
The Chancellor announced a combination of tax rises and spending cuts. Here
are the key points:
Tax changes
VAT – the standard rate of VAT (Value Added Tax) will rise from 17.5% to 20%
from 4th January 2011. There is no change to the items on which you don’t pay
any VAT, such as food, children’s clothes and books. There is also no change to
the 5 per cent reduced rate for items such as domestic fuel and power.
Personal Allowance – the personal allowance for people aged under 65 will
increase by £1000 in April 2011 – this means the point at which you start paying
tax will rise £6,475 to £7,475 for the year 2011-12. This increase will benefit 23
million taxpayers, and remove hundreds of thousands of people from income tax
altogether.
Capital Gains Tax – CGT will increase from 18% to 28% for higher rate and top
rate income taxpayers (basic rate taxpayers rate to remain at 18%). There is no
change to the annual exempt amount of £10,100. The 10 per cent rate for
2
entrepreneurial business activities will be extended from the first £2 million to the
first £5 million of qualifying gains made over a lifetime.
Inheritance Tax – The IHT threshold is frozen at £325,000 from 2010/11 to
2014/15. The rate of IHT remains at 20% for lifetime transfers and 40% for death
estates
Insurance Premium Tax - The standard rate of Insurance Premium Tax will
increase from 5 per cent to 6 per cent from 4 January 2011. The standard rate
applies to most general insurance premiums, such as home insurance.
The higher rate will increase from 17.5 per cent to 20 per cent. The higher rate
applies to travel insurance and some insurance for vehicles and domestic
appliances
Council Tax - The government will work with local authorities in England to
freeze council tax in 2011-12.
Corporation Tax - Legislation will be introduced to cut the main rate of
Corporation Tax to 27 per cent for the financial year starting 1 April 2011. There
will be further cuts in the main rate in future years: 26 per cent in 2012-13, 25 per
cent in 2013-14, 24 per cent in 2014-15.
The small profits rate of Corporation Tax for the financial year 2011-12 will be 20
per cent.
Other Taxes - Landline duty will not be implemented. A 50p-a-month tax on
fixed telephone lines would have been introduced on 1 October 2010, to help
fund ‘next generation’ broadband.
Cider duty the rates will be reduced from 30 June 2010
Benefits and Tax Credits Changes
Child Benefit - From April 2011, Child Benefit rates will stay the same for three
years.
Child Tax Credit and Working Tax Credits: There are a number of changes to
these benefits all of which are listed below:

raising the withdrawal rate (the amount taken off your tax credit
entitlements depending on your income) to 41 per cent from 6.67 per
cent

lowering the amount of your income not taken into account (income
disregard) from £25,000 to £10,000 in 2011-12, and then to £5,000 from
2013-14

increasing the rate at which tax credits are withdrawn as your household
income goes up

removing the one-off payment for new workers over 50 from April 2012

introducing an income disregard of £2,500 for falls in income from April
2012

reducing the backdating of new claims and changes of circumstances
from three months to one month from 2012-13
3

no Child Tax Credit from April 2011 for families earning more than
£40,000 per year

aligning the income levels (thresholds) for the child and family elements

removing the baby element( which is a one off payment) from April 2011

not introducing the £4 supplement for one and two year olds from April
2012 (as announced at the March 2010 Budget)

increasing the child element by £150 above inflation in April 2011 and
£60 above inflation in April 2012

qualifying people aged 60 and over for Working Tax Credit from April
2011 if they work at least 16 hours a week (this was announced at the
March 2010 Budget)
Parents Benefits - The government will stop issuing the Health in Pregnancy
Grant from 1 January 2011. Women who reach the 25th week of pregnancy
before 1 January 2011 will still be entitled to the grant, providing they meet the
other conditions.
You will get the Sure Start Maternity Grant for your first child only (or children if
you have a multiple birth).
From October 2011 lone parents will be moved onto Jobseekers Allowance
rather than Income Support when their child goes to school. If you’re a lone
parent currently getting Income Support, and your children are all at school, you’ll
transfer from April 2012.
As announced on 24 May 2010, the government will reduce and then stop
government contributions to Child Trust Funds.
Disability Living Allowance - The government will introduce a medical test to
claim Disability Living Allowance from 2013. You’ll have to take the test whether
you’re a new or existing claimant. The test will replace the current application
forms.
Housing Benefit - Budget 2010 announced a package of reforms to Housing
Benefit, including:

changing the way Local Housing Allowances are worked out from
October 2011

uprating Local Housing Allowances from 2013-14 using the Consumer
Price Index (CPI)

setting a maximum Local Housing Allowance amount for each property
size

from October 2010 Support for Mortgage Interest payments will use an
interest rate equal to the Bank of England’s published monthly Average
Mortgage Rate

maximum limits on Housing Benefit (from £250 a week for a onebedroom property to £400 a week for a four-bedroom or larger)

from April 2013, the size of houses for working age people in the social
sector will reflect family size
4

reversing the freeze since 2001-02 in deductions for non-dependents –
these will be uprated in April 2011 based on the Consumer Price Index
(CPI)

from April 2013 reducing Housing Benefit to 90 per cent after 12 months
of getting Jobseekers Allowance

increasing the budget for hardship cases (Discretionary Housing
Payments) by £40 million

covering the cost of an extra room for disabled claimants who need a
carer
Pension Changes
State Pension - From April 2011, there will be a ‘triple guarantee’ so the basic
State Pension will rise by either: earnings – the average increase in UK wages
that year, prices – how much the cost of living increases that year, 2.5 per cent.
The basic State Pension will rise each year by whichever gives the highest
amount.
Public Sector Pension – a commission has been set up to investigate the cost
of public sector pensions – early findings will contribute to the spending review
on 20th October 2010, with a full report in time for next year’s budget.
State Pension Age - The government wants to review when the State Pension
age will rise to 66 years. This change was set to be introduced between April
2024 and April 2026
Pension Credit - In April 2011 Pension Credit will increase by the cash rise in
the full basic State Pension
Retirement and Working Age - The government is going to consult on how
quickly it can phase out the default retirement age from April 2011. The default
retirement age gives employers the right to make people retire at 65.Scrapping
the default retirement age would allow people to work for longer if they wished.
Annuities - The government will end the rule that means you have to buy an
annuity with your pension savings when you reach the age of 75.
An annuity is an insurance policy that pays you a regular income for life.
This change will be introduced from April 2011.
The government will also introduce measures for people who will turn 75 before
April 2011 who haven’t yet bought an annuity
Pensions Tax Relief - From April 2011 the government plans to reduce the
annual allowance for tax relief on pension contributions.
There are already plans in place to reduce tax relief on that date for people who
earn more than £130,000.
The government is going to look at these plans in detail. Instead one option
would be to reduce the amount people can save into a pension to between
£30,000 and £45,000 each year.
Other benefits for Pensioners - The government has committed to protect key
benefits for older people, including: Winter Fuel Payments, free television
licenses’ for those aged over 75, free off-peak local bus travel, eye tests and
prescriptions for men and women aged over the female State Pension age. The
5
female State Pension age is 60 for women born on or before 5 April 1950. For
women born on or after 6 April 1950 this will increase to 65 between 2010 and
2020
The Public Sector and Public Sector Spending
The Budget announced that a long-lasting economic recovery must have its
foundations in the private sector, not the public sector, and that businesses
across all regions need the right conditions to be able to grow.
Public Sector Borrowing - As a result of the measures announced, public
sector net borrowing will be:

£149 billion this year, falling to

£116 billion next year, then

£89 billion in 2012-13, then

£60 billion in 2013-14 and

£37 billion in 2014-15, falling further to

£20 billion in 2015-16
As a share of the economy, borrowing will fall from 10.1 per cent of GDP this
year to 1.1 per cent in 2015-16.
Public Sector Spending - Within the public sector, actions announced to tackle
the deficit included:
Reductions in current spending of over £30 billion a year by 2014-15 spending reductions of £32 billion per year by 2014-15 were announced. The
details of these reductions will be published in the Spending Review on 20th
October 2010. The final departmental spending settlements will be set then.
A two-year public sector pay freeze - a two year pay freeze will be introduced
from 2011-12 for public sector workforces, except for those earning £21,000 or
less. In detail:

those earning £21,000 a year or less (1.7 million people or 28 per cent of
the public sector workforce) will receive an increase of at least £250 in
these years

pay will also be frozen in 2010-11 for civil servants who are yet to agree
a legally binding pay deal, except for those earning £21,000 or less (who
will receive at least £250 a year). These civil servants will then exit the
freeze ahead of other groups.

there will be an investigation into public service pension provision to
inform October's Spending Review and report in full in time for next
year's Budget
6

for the armed services, the operational allowance will be doubled, to
£4,800

plans to be drawn up for fairer pay across the public sector, without
increasing the overall pay bill, so that those at the top of organisations
are paid no more than 20 times the salaries of those at the bottom
Waste and efficiency - The government will deliver £6.2 billion of savings in
2010-11 to start to tackle the budget deficit and to bear down on waste and
inefficiency across the public sector.
The Efficiency and Reform Group has been set up to support departments in
renegotiating contracts. It will oversee an immediate freeze on unnecessary
spending on consultancy, advertising and new ICT spend over £1 million.
Asset sales - the government launched the sale of the High Speed 1 rail link.
This will be the first of a wider programme of asset sales. Over the next 12
months the government will:

assist a capital injection into the Royal Mail Group

resolve the future of the Tote

announce its decision on selling part of the student loan portfolio

release the 800MHz and 2.6GHz spectrum to support super-fast mobile
services

explore the options for a potential sale process in the national air traffic
control service (NATS)
The Economy – Other key points announced

bank bonuses - action will be taken on unacceptable bank bonuses, with
a levy based on banks’ balance sheets from 1 January 2011 to reduce
profits from excessive risk-taking

National Insurance - the threshold at which employers start to pay
National Insurance will be raised by £21 per week above indexation in
April 2011

National Insurance - new businesses outside the Greater South East will
be exempt from up to £5,000 of employer National Insurance
Contribution payments for first ten employees hired

Enterprise Finance Guarantee - EFG increased by £200 million to
support £700 million of additional lending until 31 March 2011 - the EFG
supports lending to small businesses that find it difficult to get normal
commercial loans
Copies of the full Budget report (121 pages) can be downloaded along with all
other Budget documents from www.hm-treasury.gov.uk
7
Responses to the June 2010 Budget.
Charity Tax Group
The increase in the standard rate of VAT from 17.5% to 20% from 4 January
2011 will increase the irrecoverable tax burden of charities by at least £150
million per year, warns the Charity Tax Group (CTG).
At a time when charities are being asked to do more as part of the Big Society
initiative to supplement and replace provision of social welfare and other services
by the State, this will be wholly counter-productive as it will directly impede their
vital work, warned the CTG.
“We fully understand the Government’s urgent need to tackle the deficit through
spending cuts and tax increases,” said Helen Donoghue of the CTG.
Donoghue added: “But it has also emphasised the need for fairness and
protection for the least well off and, as our research has shown, the impact of this
VAT increase will have a detrimental and disproportionate effect on the charity
sector."
“We are therefore strongly urging the case for special protection for charities
against this increased burden through a limited rebate scheme. This would
refund by matching grant the extra VAT incurred where it relates to their essential
non-business expenditure.”
There has been much speculation about an increase in the standard rate of VAT,
possibly to 20%.
CTG has been reviewing its previous research on the impact of irrecoverable
VAT on charities and the likely impact of an increase on charities:
• Figures for the last available financial year were obtained from 87 charities: For
those 87 charities, the total irrecoverable VAT was £142,860,700 (if the VAT rate
had been 17.5% throughout the relevant period the equivalent VAT amount
would have been £153.8 million)
• Extrapolated to the whole sector, this evidence would suggest an estimate for
the total irrecoverable VAT amount of £1.04 billion - £1.3 billion (includes both
non-business and exempt business irrecoverable VAT)
• An increase of the standard rate to 19% would cost the sector an additional £86
million
• An increase to 20% would cost the sector an additional £143 million
8
• Smaller charities (income < £30 million) suffer disproportionately with VAT
accounting for 3.6% of income available for charitable expenditure. For charities
with an income over £30 million the proportion is 2.3%. VAT rate increases would
widen this disparity to 4.4% versus 2.8% respectively.
ACEVO
Stephen Bubb, head of chief executives body Acevo, said the scale of the
challenge facing charities as a result of the Budget was enormous.
"The spending cuts outlined will impact on front-line services," he said. "The
vulnerable will likely receive less support and charities will be asked to do more,
and will have to do so at a time that their cost base is rising due to the VAT rise."
It was vital that the government talked to the sector about the way forward, he
said.
"It is crucial that the state works with us in genuine partnership, that we are fully
engaged in the spending review and that it is not a PR process, as some
Conservatives have suggested," he said.
NAVCA
Neil Cleeveley, director of policy and communications at local umbrella body
Navca, said: "This is further evidence of just how tough public spending cuts are
going to be. When the state retreats from providing services, the voluntary and
community sector fills the gap.
"That’s why we need to know the government’s plans for the big society. We
need to know that local charities and community groups will get the support they
need to help communities through these hard times."
NCVO
The National Council for Voluntary Organisations published a summary on its
website of the implications of the Budget for the sector, but declined to
comment further. They will continue to update their website during the
consultation period over the summer and have added their own ‘Initial spending
Review Briefing’ There are also links on the site to their most relevant articles in
a new ‘Coping with Cuts’ section.
Commission for the Compact
Richard Corden, Chief Executive at the Commission said: "The breadth and
depth of the social and economic challenges facing local authorities as a result of
the budget deficit are now clearer. In these circumstances, using the Compact is
more important than ever."
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"It provides a tool for local authorities to manage difficult decisions around
spending and budget priorities where voluntary and community sector
organisations are involved."
"The Commission initially issued guidance for local authorities on managing
budgetary decisions in December 2009, and we encourage those local
authorities that haven't read it to do so now.
"Our guidance highlights those Compact commitments that, when met:



help local authorities to meet these social and economic challenges;
allow them to make robust decisions that minimise the long term impact
on service users;
help them to identify new ways of working and to maintain positive
partnership working with voluntary and community sector organisations
10
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