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There were few surprises for those on low incomes in this Budget. The real meat will be in Budget 2010 – Part 2, expected to be in June.

Introduction

This is the first of at least two budgets in 2010. First LITRG look at the changes that will happen from 6 April.

We can analyse today’s Budget in three ways for those on low incomes:

• Changes from 6 April which we already knew about
• Things which change in 2010-11 newly announced today
• Proposed future changes

Pre-announced changes

Taxes/NIC

Tax rates and personal allowances remain unchanged for those on low or modest incomes .

National insurance rates remain unchanged apart from two exceptions:

• the Lower Earnings Limit (LEL), which determines access to state pensions and other contributory benefits, will increase by £2 to £97 per week
• the Class 2 rate for volunteer development workers will increase by 10p to £4.85 per week.

Child Trust Fund (CTF)

Disabled children in receipt of Disability Living Allowance at any time during the 2009-10 tax year will receive an additional payment of £100 into their CTF account from April 2010.

Tax credits and benefits

Most elements of Working Tax Credit (WTC) and Child Tax Credit (CTC), Child Benefit and Guardian’s Allowance increase by 1.5% from April 2010.
 
However, the child element of CTC will rise by £65 (being £20 above indexation) and the threshold for receiving maximum CTC will increase to £16,190 in 2010/11. Other rates and thresholds remain unchanged.

Pension limits and allowances

The “trivial commutation” limit increases to £18,000 (from £17,500). This allows someone between 60 and 75 to convert their small pension rights into a cash sum provided the total of all those rights do not exceed the limit.

All rights need to be cashed in within a 12 months period if you want these rules to apply to all your pension pots.

After taking off a 25% tax-free amount the balance of cash is taxable. People who do not normally pay tax may be brought into taxation through this action. If there is more than one pension policy it may be advantageous to cash them over two tax years (but within 12 months) to utilise otherwise unutilised personal allowances.

The minimum retirement age increases from 50 to 55 from 6 April 2010 for those with a private pension. 

State pension

The basic state pension increases by 2.5% from April 2010, giving a full entitlement of £97.65 per week. However, additional state pensions are not increased at all.

This is causing problems with coding notices for pensioners for 2010-11 because HMRC do not always include the correct state pension figure in the coding notice. If HMRC do not have a precise figure from the Department for Work & Pensions they will “guess” that the pension has increased by 2.5%. If you have a state pension in addition to the basic, this will be too high and you will not have received all the personal allowances to which you are entitled.

Every pensioner should check their coding notice; see our previous advice on this subject.

Pension Credit

Guarantee pension credit will be increased to £132.60 a week for single pensioners and £202.40 for couples from April 2010.

The state pension increases, whilst tax personal allowances are frozen, will drag many more pension credit recipients into the tax net. Although pension credit itself is not taxable, in arriving at your income calculation for pension credit entitlement any tax you pay should be a deduction. Taking off the tax, generally paid through self-assessment, may either give you an entitlement to pension credit or to increase the entitlement that you already have.

The Department for Work & Pensions seem totally incapable of coping with this issue and their guidance on the subject is woeful.

Newly announced changes today

Bank accounts

Banks are to be forced to make available free basic bank accounts to those on the lowest incomes and it is estimated that a further one million people will be able to open such accounts. This will, of course, be a cost-saving measure for government as dealing with individuals without bank accounts is an expensive business for such bodies as HMRC.

Stamp duty

Stamp duty has been abolished from midnight tonight for residential properties of £250,000 and under for a period of two years for first-time buyers.

Saving Gateway

The Saving Gateway has been known about for the last two years. It is a government sponsored savings plan for (mainly) low income people. Savings of up to £25 a month will be permitted over a two year period where the government contribute 50p for every £ saved.
 
The scheme will now be launched in July 2010.

Business rates

There will be a temporary increase in the level of small business rate relief for one year from 1 October 2010.

Winter fuel payments

Winter fuel payments will remain as now for the winter of 2010-11.

Carers

A new income tax exemption will be effective on and after 6 April 2010 for certain payments to carers looking after children under a special guardianship order, or under a residence order where the carer is not the child’s parent or step-parent. This exemption will be similar to the current tax exemption for payments to adopters and will be distinct from the new income tax regime for shared lives carers. Kinship carers who are providing care to a child who has not been placed with them under a residence order will be entitled to claim that new relief for shared lives carers.

Tax Credits

From April 2010, HMRC will aim to simplify the childcare element of Working Tax Credit for those parents who use childcare only for short fixed periods such as the summer holidays.

Mortgage Interest

The interest rate used to calculate mortgage interest payments in means tested benefits will be frozen at 6.08% for a further six months until December 2010.

Proposed future changes

From 6 April 2011 people aged 60 and over will qualify for WTC if they work at least 16 hours a week. This is more generous than the pre-budget report announcement which said it would be at age 65. We expressed the view it should be given from pension age, so we welcome this change of heart.

The WTC disability element for those who have been claiming the Employment and Support Allowance may change from 6 April 2011. ESA customers who have a "limited capability for work" and leave ESA to move into work for at least 16 hours a week with the help of WTC, will automatically pass the disadvantage at work test and qualify for the disability element of WTC. HMRC will consult on this difficult area and also on the disadvantage test of WTC.

From October 2011 there will be adjustments to Housing Benefit which, through changing the basis of calculating rents, will save £125 million by 2014-15. It is difficult to see how this will not impact on the poorest.

The child element of Child Tax Credit will rise by £4 per week from April 2012 for children aged one or two.

More work will be done on analysing the “hidden economy” and HMRC will make its processes better. What this means for people on low incomes we shall have to wait and see. The government intends to launch a consultation later in the year.