Budget 2006

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  1. The key changes in the Budget are:


    The chancellor froze the duty on whisky and sprits for the ninth successive year. He will add 4p to a bottle of wine and 1p to a pint of beer from Sunday. In the hope of world cup success, Brown also froze the duty on Champagne and British Sparkling wine, as well as cider.


    The chancellor was keen to emphasise his green credentials with a cut in the rate of vehicle excise duty to zero for cars with the lowest emissions. The next band of £75 will be cut to £40. He also introduced a new top rate of £210 for the 1% of cars that are the heaviest polluters. Brown claimed the changes would mean that 3m motorists would pay £100 or less for their road tax. It is government policy to increase fuel duty at least in line with inflation. However, Brown has deferred any increase until September because of high and volatile petrol prices.


    The duty on cigarettes is to go up by 9p a packet.


    The Chancellor is keen to build more houses and get more young people onto the property ladder, which is tricky when the average house price is more than £100,000. In his budget Brown emphasised his commitment to shared equity with a payment of £970m to support the schemes.

    Income tax

    Gordon Brown has confirmed that our personal tax allowances - the amount we can earn tax-free – will rise in line with inflation. So the income tax allowance will go up from £4,895 to £5,035. And we will start to pay higher-rate tax at £33,300, up from £32,400. Taxpayers will stump up £145 billion in income tax in the coming financial year, more than double the amount when Labour came to power in 1997.

    The chancellor does not even need to increase the headline tax rates to boost the Treasury's coffers. Instead, he relies on so-called fiscal drag. Wages tend to rise faster than inflation so each year hundreds and thousands more people have been pushed into the higher tax bands. The number of people caught by the higher tax rate of 40% has ballooned from 2.1m in 1997 to 3.4m last year, according to the Office for National Statistics.

    The economy

    There were no real surprises on the economic front. Gordon Brown trumpeted the strong performance of Britain compared with ! some if its international competitors. He also made little change to his forecasts, which have previously been criticised as too optimistic. John Hawksworth, head of macroeconomics at Price Waterhouse, says: “The Chancellor has made little change to the public borrowing forecasts set out in the Pre-Budget Report, with the overall budget deficit set to be around £37 billion in 2005/6, falling slightly to around £36 billion in 2006/7 and then more sharply to around £30 billion in 2007/8. We agree that the Chancellor should just about meet his fiscal rules, although his margin for error is relatively small.”


    Gordon Brown's 10 th budget is already being dubbed the budget for schools. The chancellor is polishing his credentials as a future leader of the party – and the country. He is also throwing a sweetener at the rebellious back benches. Brown's long term aim is to narrow the gap between state and private schools. The government has already raised funding per pupil from £2,500 to £5,000, but the average spending per pupil in the private sector of £8,000 a year. In private schools there is one teacher for every nine pupils compared with one teacher for every 16 in state secondary schools. To help achieve this aim, investment per state school pupi! l will rise from the current £5,000 to the current private school spend of £8,000 per pupil over five years, and allowing for inflation. Direct funding to head teachers will increase to £440m next year. The chancellor also announced more money to recruit an extra 3,000 secondary school science teachers. And for the first time there would be a free entitlement for everyone up to the age of 25 to get qualifications equivalent to A-levels.

    Green issues

    The chancellor wants 250,000 more homes to be given grants for insulation, bringing the total to 2m. The funding is offered to some elderly people and low income families. Brown also allocated £50m for micro-generation technology for homes, schools and businesses to produce renewable energy, perhaps from solar panels.


    The government will make a further payment of £250 or £500 into the child trust fund (CTF) when the child is seven. The money in a CTF grows tax-free but cannot be touched until the child reaches 18. Labour already makes a payment of £250 or £500 when the child is born.

    Inheritance tax

    The chancellor has announced that the threshold for inheritance tax will jump by £100,000 to £285,000. So, your family will pay 40% tax on anything you leave above the threshold. Soaring house prices mean that inheritance tax is not just a tax on the very wealthy; it can affect ordinary families, too. There are already more than 1.5 m houses valued at more than the 2006-7 threshold, according to Halifax . The big jump in the threshold this year came after intense lobbying, but the Treasury nevertheless estimates it will collect more than £3.6 billion from death duties this coming tax year, compared with! just £1.6 billion nine years ago. The chancellor also laid out plans to raise the threshold to £325,000 over the next four years.

    The Minimum Wage

    This is to increase to £5.35 per hour


    The chancellor has announced a cut in the rate of income-tax relief on venture capital trusts ( VCTs). The schemes were introduced in 1995 to encourage investment in small, vibrant companies. You can invest up to £200,000 a year in a VCT and there is no tax on any dividends or profits when you sell. If you buy the VCT at launch and hold the shares for at least three years, you also qualify for an income-tax rebate. In 2004 ! the chancellor doubled the income-tax rebate from 20% to 40%. But he only promised the tax boost for two years. It was cut to 30% in the budget. You must also hold the shares for five years from issue, not three, to qualify for the tax relief. Experts point out that a further change could make the schemes more risky. Jason Hollands of Foreign & Colonial says: “Currently, VCTs must invest in companies with gross assets of no more than £15m, but the asset test has been cut to £7m, so pushing investors further down the scale.”

    Stamp duty

    The exemption on stamp duty will be raised to £125,000. You will pay tax at 1% on residential properties between £125,000 and £250,000. It rises to 3% for properties worth between £250,000 and £500,000. If you are buying a house for more than £500,000 you pay tax at 4%. In the last budget, the chancellor raised the exemption threshold from £60,000 to £120,000 but the average first-time buyer property now costs £146,267, over £20,000 more than the threshold.


    Child benefit will go up from £17 a month to £17.45 a month, the expected increase. Child benefit is not means tested and goes to every family with children. The chancellor also announced an increase to the child element of the child tax credit by 14% over the next few years. He argued that an increase in the tax credit would mean poorer families would be better off than if he had chosen to cut taxes or increase allowances.


    Elderly people and the disabled will be entitled to free off-peak bus travel anywhere in the country from April 2008. They are to qualify for free off-peak travel on local buses only from April.


    Gordon Brown announced a boost to childcare vouchers. If your employer offers vouchers that are put towards the cost of government-approved childcare, including nannies, you can now escape tax and Nics on earnings of up to £55 a week, £5 more than the previous limit. The tax relief would be worth £1,173 a year to a higher-rate taxpayer, up from £1,066. If you pay tax at the basic rate the increase means your tax saving would go up from £858 a year to £944. Both parents can claim the relief so you could do! uble the tax saving to £2,346. The vouchers are usually offered instead of part of your salary – known as salary sacrifice.

    National Insurance

    The starting point for National Insurance Contributions (NICs) for employers, employees and the self-employed will be increased in line with inflation from £94 to £97 a week. NICs are not paid on earnings or profits below this amount. The upper earnings and profits limits for NICs will rise in line with inflation from £630 to £645 a week. The chancellor also promised a review of the system to consider the merits of aligning the NIC and income tax bands of the lower paid.

    Individual Savings Accounts

    The Chancellor confirmed that the ISA limits will remain at £7,000 for a maxi-ISA and £3,000 for a mini-ISA until April 2010. Some people were hoping for an increase in the limits to encourage saving.

    Real Estate Investment Trusts

    A new type of scheme should make it easier to invest in residential property from January 2007. At the moment, property funds can invest in either commercial property or shares in property firms. If you want to invest in residential property, you have to become a landlord. Reits will change all that, and are already popular in America and Japan . The budget firmed up the details of the schemes, including the fact they you will be able to invest in Reits through an Isa.