The emergency budget at a glance

George Osborne has delivered his first Budget, but what's in it that affects you? By Felicity King-Evans, deputy editor at

To a backdrop of cheering and jeering MPs, the coalition Chancellor outlined his plans to use a 20/80 rule of thumb - namely to achieve 80% of this through cuts in public sector spending and 20% through higher taxes.

Here's what the Emergency Budget has in store for you.

VAT hiked to 20%

Let's start with what will be the worst news for most people - the VAT hike. From January 4, 2011, the main rate of VAT will rise from 17.5% to 20%. Osborne said that this measure alone will raise £13billion a year in extra revenue by the end of the Parliament.

However, he did reassure the country that "everyday essentials" such as food and children's clothing will remain VAT exempt over the course of the next Parliament. With many people questioning whether VAT would be applied to food, this will be some relief.

Bank tax 

In a recent poll, over three in ten voters said they would begin by taxing the banks more heavily, if they were Chancellor.

Osborne has not disappointed, claiming the "failure of the banks imposed a huge cost on the rest of society".

So, he outlined plans to introduce a bank levy on balance sheets of UK banks and building societies, as well as on the UK arms of foreign banks. Although there will be some exemptions, for example, on smaller banks, the government expects this levy will generate more than £2billion a year.

Public sector pay

Those employed by the public sector knew this Budget was going to be particularly tough on them. Some commentators suggested that the private sector has had its recession and now it's time for the public sector to go through its own downturn.

So it won't have come as too much of a surprise that the Chancellor announced a two-year pay freeze for public sector workers earning more than £21,000 a year. When you factor in inflation, that's a real-terms cut to the salaries of many public servants.

However, the 1.7million earning £21,000 or less will receive a flat pay increase of £250 a year - meaning those on the very lowest salaries receive a proportionally higher rise than those closer to the £21,000 mark.

Pensions, of course, are the other big cost to the public purse. By 2015/16, the OBR forecasts the country will be spending more than £10billion a year meeting the gap between pensions contributions and payments.

John Hutton, former work and pensions secretary in the Labour government, has been asked to carry out a review and present an interim report in September.

State pensions

Lots of changes for state pensioners. The government plans to accelerate the increase in the state pension age to 66 and will be consulting on whether or not it should phase out the default retirement age.

Osborne also promised "lasting help" for pensioners. He pledged to re-link the basic state pension to earnings, which had been removed 30 years ago by the thenConservative government, from April next year.

There will also be a guarantee that each and every year, there will be a rise in basic state pension in line with earnings, prices or a 2.5% increase - whichever is greater.

Tax allowances

Raising the threshold at which workers begin to pay income tax was a key pledge of the Liberal Democrats and Osborne went to some way to doing so in his Emergency Budget.

Currently, everyone under the age of 65 has a tax-free allowance of £6,475 but this is going to rise by £1,000 in April next year, lifting 880,000 on low incomes out of having to pay any tax at all. Meanwhile 23million basic rate taxpayers will be up to £170 a year better off.

Higher rate taxpayers won't benefit from this change and there will be no change to the tax thresholds for greater incomes.


The Chancellor was adamant that the country needs to reduce its benefits bill, warning that welfare spending has increased from £132billion 10 years ago to £192billion today - a rise of 45%.

He outlined a number of measures to combat the annual bill. From next year, all benefits (excluding state pension and pension credit), as well as tax credits and public service pensions will rise in line with consumer prices instead of retail prices, saving around £6billion a year by the end of the Parliament.

Capital Gains Tax (CGT)

There had been protests about planned hikes in CGT as soon as it was hinted that it might rise in this Emergency Budget, but the general consensus seems to be that it could have been worse.

It was expected that Osborne might raise CGT in line with higher and 50% tax rates, but instead he has kept it at 18% for those paying basic rate tax. From midnight, taxpayers on the two higher rates will pay 28% tax on their capital gains.

The annual exemption amount will remain at £10,100 this year and rise with inflation in the future.

Disability Living Allowance (DLA)

From 2013, the coalition government is to introduce a medical assessment for DLA, which both new and existing claimants will have to undertake.

Housing benefit

Osborne described the current housing benefit bill as "completely out of control", having risen from £14billion 10 years ago to £21billion today.

He pledged to reform the system in order to reduce the costs of housing benefit by £1.8billion a year by the end of Parliament.

These reforms will include restricting local housing allowances, limiting social tenants' entitlement to appropriately sized homes, readjusting Support for Mortgage Interest payments and placing maximum limits on housing benefit - namely £280 a week for one-bedroomed properties and £400 a week for four-bedroomed or larger homes.

National Insurance (NI) contributions

During the election campaign, the Conservatives had been scathing about the Labour government's plans to increase employers' NI contributions, calling it a tax on jobs.

Osborne outlined plans to make it cheaper for firms to hire people and revealed that from April next year, the threshold at which employers begin paying NI will rise by £21 a week, making it cheaper to hire people earning less than £20,000.

Corporation tax

The country's current rate of corporation tax is making the UK uncompetitive, the Chancellor argued, and so it will be cut by 1% a year for the next four years, bringing it down to 24%.

Landline duty

There's been a lot of debate about the previous government's planned landline tax of 50p a month but today Osborne confirmed thecoalition government is to scrap it before it even begins. Instead, he said the government will support private broadband investment, partly using funding from the Digital Switchover underspend.

Tax credits

It was widely anticipated that the Chancellor was going to announce plans to reform the tax credit systems, especially to remove benefit from higher-income families and Osborne certainly delivered that.

He revealed that there are more than 150,000 families earning more than £50,000 a year and receiving tax credits, which he said the country cannot afford.

To tackle this, the coalition government is to reduce payments to families earning more than £40,000 and increase the taper rate at which awards are reduced.

Osborne plans to end an extra baby element in the tax credit system that gives families with a child under one extra help. This will be stopped in April next year.

In addition, the government will abolish the Health in Pregnancy Grant (a one-off, tax-free payment of £190) from April next year.

Lone parents will be required to seek work as soon as their youngest child starts school.

Council tax

Osborne said he intends to help councils freeze council tax for one year from April, saving the average family £35 a year.

Child benefit

Osborne acknowledged that there are some tough decisions to take regarding child benefit and that he had considered and rejected a number of different options, including means testing it and taxing it.

Instead, he had decided to freeze child benefit for the next three years.

Booze, fags and fuel

Smokers, drinkers and drivers may have been braced for pain, but there is a (brief) reprieve. There will be no increases in duties on these areas until the autumn, on top of which the government will repeal plans to increase cider duty.

However, drivers are still going to be hurt by an increase. You pay standard rate VAT on fuel, which is now rising from 5% to 6% when the VAT hike comes into force in January.

The Civil List

And finally, if you're wincing as a result of the Budget, spare a thought for the Queen. Her Majesty hasn't had a raise in her Civil List income in 20 years and the Chancellor has now revealed this will remain frozen at £7.9million for a further year.

However, he promised a new means of support for the Crown at a later date and revealed that the Royal household's expenditure will be scrutinised by the National Audit Office and Public Accounts Committee in the future, like any other area of public spending.

The cuts and where they're coming

Most of the savings outlined by the Chancellor will result from cuts to the budgets of government departments and, while that might not hit us in the pocket immediately, the results will inevitably be seen soon.

Osborne reiterated the coalition's commitment to providing the NHS with real increases throughout the Parliament, and also to honour the country's commitments to international aid.

That means other departments face cuts of around 25% over four years, although not all areas will receive the same settlement. He spoke of the importance of education and defence budgets, implying these could be treated more favourably.

However, we won't know precisely how each department will be hit until the spending review later this year, which Osborne today revealed would be given 20 October, 2010.


With thanks to: Felicity King-Evans, deputy editor at