Budget 2011: a million low-paid people escape tax but fiscal drag catches others

About 1.1m low-paid people will be spared any need to pay income tax by the time Budget announcements take effect, Chancellor George Osborne said.

But there will be losers as well as winners from Budget changes. For example, the proposal to switch indexation of personal allowances – or slices of tax-free income – from the Retail Prices Index (RPI) to the Consumer Prices Index (CPI) after April, 2012, could prove a stealth tax by fiscal drag for millions of others. CPI tends to be a lower measure of inflation than RPI and smaller tax-free bands mean bigger tax bills.

From April 6, the threshold for higher rate tax will be cut by £1,400 to everyone earning £42,475. This means an extra 750,000 will pay 40pc tax from nex month onwards.

Mike Warburton of accountants Grant Thornton said: “The Coalition agreement commits the Chancellor to raising personal allowances to £10,000 by the end of this Parliament which would have suggested an allowance of £8,315 was required for next year.

“Instead, from this April the allowance will only be £8,105. So this is not as generous as the Chancellor appeared to suggest.”

Mr Osborne proposed to merge income tax with National Insurance Contributions (NICs) into a single tax on income but he said this would take years to put into effect. Most importantly, he promised that pensioners and savers – who currently pay no NICs – will be no worse off.

Motorists will be better off than expected as the Chancellor will use a £2bn windfall tax on the oil companies to scrap earlier proposals to increase fuel duty by 5p per litre. In fact, the tax will fall by 1p with effect from 6pm tonight. Cyclists will also benefit from £100m extra funding for councils to repair potholes.

First time buyers will be given more help to get onto the housing ladder. A £250m fund will set out to provide low cost loans to fund deposits for 10,000 people.

Britain’s tax legislation is now longer than India’s, Mr Osborne said, but he promised to simplify it by scrapping 43 reliefs. As most of his predecessors have done, the Chancellor pledged to crackdown on tax avoidance. He identified three forms of Stamp Duty avoidance on property purchase and claimed he could raise another £1bn extra revenue each year.

However, as part of wide-ranging reforms to encourage people to give more to charity, there will be new incentives to reduce inheritance tax (IHT) liabilities by making donations. Those who give more than 10pc of their estate to charity, will receive a 10pc cut in the fixed IHT from 40pc to 36pc.