What the Emergency Budget means for us

George Osborne, the coalition Government's Chancellor, has given his first Budget, with the focus on reducing the deficit through savings. We asked Paul Lewis of Radio 4’s Moneybox fame to look at what was announced and how the tax and benefit measures will affect you.

VAT

Some things – like the increase in Capital Gains Tax – were not quite as bad as feared. But we did get the widely predicted rise in VAT. It will go up from 17.5% to 20% from 4 January next year. And if you are insuring your home, your car, or your dog, then the price of that will rise too. The tax on most insurance policies will increase from 5% to 6% from the same date.

Welfare changes

Some experts had suggested that welfare benefits would not rise with inflation next year. They were wrong. Instead Treasury official dusted off a plan to change the rate of inflation used. Out goes the old Retail Prices Index (RPI) which has been measuring price rises since World War II. In comes the much younger Consumer Prices Index (CPI) which nearly always shows a lower rate of inflation than the RPI. So benefits will rise by less each April saving a whopping £5.8 billion a year by 2014/15.

Pensions

From April 2011 the basic state pension paid on your National Insurance contributions will rise in line with earnings or the CPI (whichever is higher) – and by at least 2.5% in any case. And, for 2011 only, if RPI is rising more rapidly than any of those then it will be used instead. The rest of the state pension such as SERPS will rise with CPI.

The state pension age is already due to increase to 66 between 2024 and 2026, but the Chancellor announced a review of this timetable, and it's widely expected that the change will be brought forward. The government will also start consultations soon on how quickly to phase out the Default Retirement Age from April 2011.

Disability Living Allowance

Tough new rules will apply to those claiming Disability Living Allowance from 2013. In future you will need a medical before you can claim it and that will also apply to existing claimants. No announcement has been made about extending that change to attendance allowance for the over 65s.

Income Tax

If you pay tax and are under 65 then you will benefit from a rise in the amount of tax-free income you can have before you start paying tax. It will go up by £1,000 next April instead of around £200 which expected and will be £7,475. However, there is no news on the level of the higher allowances for those aged 65 or more.

Capital Gains Tax

There will be no change in the inheritance tax threshold – frozen at £325,000 – and little change in Capital Gains Tax. A new higher rate of 28% is introduced at once for those with income and gains above about £44,000 in one year.

Winter fuel payment

If you are under pension age and work then National Insurance rates will rise by 1% to 12% from April 2011. Winter fuel payment will not be changed this year – but to qualify you have to be 60 by 5 July 2010. The qualifying age for free prescriptions stays at 60 – but not for long. Expect an announcement soon to link it to the rising women’s pension age.

Council Tax

The Chancellor also announced that council tax will be frozen for a year - 2011/2012, meaning bills won't go up.

Housing benefit

There are a number of significant changes to Housing Benefit and housing costs on income-related benefits including Pension Credit. Some of these changes will affect only people of working age, but a number of them will affect older people too.

Cuts in spending which could damage services that many older people rely on will not be announced until 20 October.

Finally, no changes in duty on petrol, tobacco or alcohol were announced – except cider which will see a cut in the extra duty imposed by Alastair Darling. Cheers!

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