Money Advice News & Articles Blog

21st March
written by Paul Flintoft

2012 Budget

The 2012 budget had one chief objective – to help reduce the UK’s record debt and therefore the confidence of gilt market investors, through a combination of reduced spending and private sector growth stimulus.  So did chancellor George Osborne’s budget move in the right direction to achieve that objective?  Let’s first look at the key budget announcements:

Income Tax

  • Last year, the personal allowance rose by £1,000 and in two weeks time, it will go up by another £630 to £8,105.  It will rise by a further £1,000 to £9,205 from April 2013
  • Top tax rate on incomes over £150,000 reduced from 50% to 45% from April 2013
  • The high tax rate (40%) threshold will be reduced from £42,475 to £41,450 in 2013/14
  • Personal tax statement to be sent to 20 million taxpayers from 2014. It will detail an individual’s income tax and National Insurance payments and how those contribute to public spending


  • Child benefit cuts to be phased in for families with at least one parent earning £50,000, and axed for those on £60,000. If someone in the family earns over £50,000 then child benefit will be gradually reduced by 1% for every extra £100 earned over this amount to avoid a ‘cliff-edge’ cut off. Child benefit is currently worth £20.30 a week for the first child and £13.40 each for any more, regardless of the parents’ income

Business Tax

  • Corporation tax cut to be cut from 26% to 24% from April 2012. By 2014 it will fall to 22%
  • Government considering enterprise loans for young people to start their own business
  • Goal to increase exports to over £1 trillion this decade
  • The chancellor wants to see Britain as Europe’s technology centre

Property Tax (Stamp Duty)

  • Stamp duty on homes worth over £2 million to be raised from 5% to 7% from midnight (22nd March). Any such homes bought through companies will pay 15%
  • Aggressive clamping down on stamp duty tax avoidance schemes


  • New single-tier state pension for future pensioners to be set at about £140 and based on contributions
  • New cap on tax reliefs set at 25% of total income for anyone claiming more than £50,000 in a year, but no significant change to pensions relief
  • Automatic review of state pension age to ensure it keeps pace with increasing lifespans

Sales Duty Tax

  • No changes to the VAT rate, though VAT may be added to hot supermarket takeaway food, which is currently exempt
  • Tobacco duties to rise by 5% above inflation from 6pm (21st March) – equivalent to 37p on the price of a packet of cigarettes
  • No change to existing plans on alcohol duty - meaning the duty will rise 2% above the rate of inflation
  • Fuel duty rise of 3p a litre to go ahead as planned in August 2012
  • Fair fuel stabiliser will mean that above inflation rises in fuel duty will only return if price of oil falls below £45 a barrel
  • Vehicle excise duty to rise by inflation, but frozen for road hauliers

The Economy

  • The Independent Office for Budget Responsibility (OBR) revises up UK growth forecast for 2012 to 0.8% – from 0.7%
  • Forecast for 2013 is 2%, for 2014 is 2.7%, and in each of the two years after that 3%
  • Eurozone growth forecast for this year revised down from 0.5% to -0.3%
  • UK inflation forecast to fall from 2.8% this year to 1.9% next year
  • OBR forecasts official unemployment to peak this year at 8.7% before falling each year to 6.3% by 2016-17
  • Government borrowing this year to be £126bn – £1bn less than forecast in the autumn. Predicted to be £120bn in 2012-13 and £98bn in 2013-14. Forecast to fall to £21bn by 2016-17
  • The Chancellor has confirmed the Government is looking at issuing bonds with over 50 years maturity and perpetual gilts as Britain did 6 decades ago (a perpetual gilt is a bond that pays interest indefinitely without returning the original capital)

Budget Overview

The great consolidation continues as the chancellor’s main objective remains – to reduce the country’s huge deficit – and this budget has confirmed that he is sticking to ‘Plan A’.  No doubt Mr Osborne will be confident that the UK will retain its AAA credit rating (at least in the short to medium term) and therefore the confidence of gilt investors.  The markets today were certainly not ruffled.

For private sector growth stimulus, the reduction in corporation tax headline rates will be welcomed as Britain sends out a signal to the world that it’s open for business and investment.

>>> Download the full HM Treasury 2012 Budget Report (pdf)

The Losers

  • Those driving a lot of (non-haulage) road miles will be hit with yet another duty rise of 3p per litre in August
  • Price of cigarettes to go up 37p from today while beer and wine will go up by 5.7%
  • Those who purchase houses over £2 million will pay an extra 2% stamp duty (up from 5% to 7%)
  • Current pensioners excluded from new £140-a-week state pension

Overall there were no major surprises.  The biggest and widest reaching announcements were:

  • The increase in the personal allowance threshold will benefit those on lower/middle incomes by approximately £220 a year (or £170 after inflation). This will go at least part of the way in offsetting the record high cost of living (fuel, energy and food)
  • Corporation tax cuts were accelerated more than some expected.  Mr Osborne hailed the plans as the biggest sustained reduction in business tax rates for a generation.  The headline rate is not just lower than the UK’s competitors, but dramatically lower – 18% lower than the US, 16% lower than Japan, 12% below France and 8% below Germany
  • Child benefits will remain reasonably generous and there will be no drastic cut off for those paying the high tax rate
  • George Osborne confirmed that a new flat-rate state pension at £140 a week in today’s prices is firmly in the pipeline for Britain.  Many of today’s pensioners feel aggrieved however, as they will be excluded from the new flat-rate state pension
  • The 2% increase in ‘mansion tax’ i.e. a 2% increase of stamp duty on properties over £2 million and the announcement of a clamping down on property tax avoidance schemes

Useful Links

>>> Grab the Free Money Advice Newsletter
>>> Full HM Treasury 2012 Budget Report (pdf)
>>> 2011 Budget Overview
>>> Opportunities to increase your income
>>> Get out of debt – help & advice
>>> 6 Household money saving tips

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