The Chancellor is set to unveil his budget this afternoon, in the House of Commons, and during his speech he is expected to announce that the threshold in which anyone pays income tax will increase to over £9,000 during the next year, in a move which would leave the average taxpayer £305 better off.
Last April, ministers lifted the tax threshold by £1,000 to £7,475; meaning the first £7,475 of a person’s income was not tax deductible; and a further increase of £630 was expected next month, with the Coalition Government pledging to increase the threshold to £10,000 by 2015.
It is unclear how the tax increase will be paid for when it comes into force, however it is expected that the change to the higher rate threshold will mean higher earners will not gain from the change; as the Chancellor looks to make this, his third budget, a budget for the working people.
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It has been estimated that the governments borrowing could fall below £100 billion for the first time since 2008 / 2009.
Economists have said that they expect this weeks budget, underpinned by forecasts from the Independent Office for Budget Responsibility, to reveal a broadly unchanged fiscal and economic picture; leaving the Chancellor, George Osborne, little room to manoeuvre giveaways.
Ahead of the budget tomorrow, George Osborne has pledged that budget will be fiscally neutral, choosing to bank any improvement in the books to reassure markets and protect Britain's triple-A credit rating.
This, along with the government's recent decision to take on the state-owned Royal Mail pension scheme is set to have a significantly beneficial impact on borrowing over the next year; although improvement is not expected to follow through to forthcoming years, meaning the budget deficit could run higher again in 2013 / 2014.
As a result, it is widely believed the OBR's underlying 2012/ 2013 public sector net borrowing estimate could hold in line with November's forecast for £120 billion, given the little change in the economic outlook.
Taking into account the Royal Mail transfer, the government’s borrowing forecast is down to around 92 billion pounds in 2012/ 2013. It is the first time the budget deficit has dropped below £100 billion since the global financial crisis of 2008/ 2009.
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Businesses are expected to face a permanent tax crackdown on abusive tax schemes, under schemes set to be unveiled by the Chancellor, George Osborne, in Wednesday’s budget.
It is widely believed that tax avoidance is set to be at the heart of the budget, with the Chancellor telling the Andrew Marr Show, yesterday, that the it would be “a budget for working people”, at the same time as pledging to “come down like a tonne of bricks” on those who used tax avoidance schemes.
Treasury sources have also fuelled speculation that tax avoidance will be the main element of the budget, by suggesting the government is set to adopt the GAAR, following a recent report by Graham Aaronson QC, despite businesses traditionally being wary of the General Anti-Abuse Rule (GAAR), due to it complicating tax planning, as under a GAAR companies have to disclose their tax arrangement in advance and schemes can be shut.
Mr Aaronson has attempted to address such concerns by businesses, by recommending an “anti-abuse” rule rather than an “anti-avoidance”, which would limit the scope of its application.
Mr Aaronson said: “A general anti-abuse rule narrowly targeted to deter such schemes, while not affecting responsible tax planning, should lead to a fairer, more principled and ultimately simpler tax system.”
The clampdown on tax avoidance is also expected to be used as a way to justify a reduction in the top rate tax, from fifty-pence to forty-five pence.
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With less than a week to go before the Budget, the Chancellor, George Osborne, has given the biggest indication that he is to scrap the fifty-pence tax.
Mr Osborne has come under intense pressure from business leaders, as well as many in his own party, to slash the top rate of income tax amid claims it deters money-makers from being based in the UK.
Although Downing Street insisting the claims that the levy on earners over £150,000 would be reduced to 40p were "speculation", newspaper reports suggest that Mr Osborne is set to push ahead with a reduction in the fifty pence tax rate after analysis found the levy is reaping substantially less for the Exchequer than expected.
The newspaper reports suggest that a preliminary study, due to be published next week, is to show the tax on the highest earners is bringing in hundreds of millions, not the £2.6 billion predicted
A government source said: "The budget has to strike a balance. It has to show we are all in this together, but it also has to show that as a country we are open for business. We want a top rate that does not put off entrepreneurs or businesses.
“It is one of the highest top rates worldwide at a time when we need real growth. Above all, real growth is what we need to promote wealth and prosperity."
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The UK has been warned that it faces a one in two chance of losing its safe haven status, if the government eases its deficit reduction measures.
Following a ratings assessment, the credit ratings agency Fitch have said that Britain still has a higher budget deficit and debt than most triple A rated bonds, and was in a similar position to France and the US, who also had a top rating with a negative outlook.
Within a statement released following the closure of the London markets on Wednesday, Fitch warned the UK had, "very limited fiscal space to absorb further adverse economic shocks in light of such elevated debt levels and a potentially weaker than currently forecast economic recovery".
Fitch’s announcement, which echoes that made previously by Moody’s comes a week before the UK’s budget, and adds more pressure on the Chancellor, George Osborne, who said: “A week from the Budget, this is a reminder of why it is essential Britain sticks to its plans to deal with its debts.
“As Fitch itself says, the reason we are keeping our triple A rating is because of ‘the progress made in reducing the government’s structural budget deficit and the credibility of the fiscal consolidation effort.”
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