Budget 2010: What impact will it have on your finances?

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By Luke Jovetic
Know Your Money Editor

The emergency Budget was revealed on Tuesday (June 22nd) in what the coalition government stated was an attempt to shore up the country's economic problems, reduce the £156 billion deficit and get the UK on the road to recovery, rather than the road to ruin.

We round up some of the key issues and take a look at what they might mean for your finances.

VAT

This is one change that is likely to hit everyone in the wallet as the sales tax is set to rise from 17.5 per cent to 20 per cent from January 4th 2011.

The government states the increase will raise £13.5 billion a year by 2014/15.

In real terms this means that an item currently priced at £100 that is subject to full VAT will cost shoppers £102.13 from next year, although retailers may round prices up to suit.

Some experts are already suggesting the VAT hike will cost households around £500 a year, which could make savvy shopping more important than ever.

Chief executive of lobby group Consumer Focus Mike O'Connor suggested the "VAT rise will hit the poorest consumers hardest".

All this could make it the perfect time for savings savvy consumers to make efforts to allow their cash to go further by shopping around and taking advantage of discounts.

Council tax may freeze

The government announced plans to keep council tax rates at the same level for one year for local authorities that can keep their costs low.

It said in plans to work it partnership with councils to implement the hold in 2011-12 but it is not yet clear who will benefit.

Income tax

As previously announced by Labour, taxpayers will pay an additional percentage point in national insurance from April next year. This will cost those earning £30,000 per annum around £250.

The tax-free personal allowance for those under 65 is set to rise to £7,475 from the current £6,475.

This £1,000 increase will benefit millions of workers as they will not be required to pay tax on their first £7,475 of income from next April.

High earners will pay for this as the threshold for the higher 40 per cent tax is set to fall from the current level of £43,875 to an as yet unknown figure.

No new alcohol or tobacco tax

Alcohol and tobacco will not be taxed any further than at present. However, for the next four years tobacco costs are already set to rise by two per cent above inflation and alcohol rates will increase by the same level until 2014-15.

The government said it will also reverse the plans to increase the duty on cider by ten per cent above inflation and will put it into place by the end of June.

The view of the chancellor

Chancellor of the Exchequer George Osborne defended the "fair" measures introduced in the Budget.

He said: "The biggest risk out there are the debts and if we don't deal with the debts then I'm afraid the country will be on the road to ruin and I'm not prepared to see that happen."

The chancellor added: "I'm sure if we get this right we'll get the jobs, we'll get the growth, we'll get the prosperity."

The view of the opposition

Shadow Chancellor Alistair Darling said that cutting public spending so drastically was a "huge risk" for the government to take.

Speaking to the BBC Radio 4 Today programme he said: "I'm very concerned, and I'm not the only one - there are a number of commentators and others who are extremely concerned that this Government is taking a risk."

What the experts say

Director of policy at the Citizens Advice Bureau Teresa Perchard said: "Single people and couples who are working but earning less than £10,000 a year and with no children will gain very little from the increased tax threshold because an increase in their income will lead to a lowering of their housing benefit and council tax benefit.

At the same time they will have to bear the rise in VAT.

"Many working families with children and earning under £25,000 will also gain little from the change in the threshold, though for those with the lowest incomes, the increases in Child Tax Credit will mitigate for some, though not for all."

She also welcomed measures designed to protect pensioners and the decision to maintain universal child benefit.

Important Notice
This guide is intended for general information only and is not intended as, and does not constitute, any form of advice, recommendation or endorsement by us of any particular product(s) or services and you should rely on your own further research and professional advice in relation to your specific requirements and circumstances before purchasing any products or services. Use of this guide is subject to the Terms of Use of the KnowYourMoney site.