Brown drops tax bombshell

A MAJOR shake-up in income tax was the big surprise in chancellor Gordon Brown's 11th - and almost certainly last - budget today.

The basic rate of the tax is to be reduced to 20 per cent in April next year, down from 22pc, but the 10pc lower rate is being abolished.

That will mean there are only two income tax rates - a basic rate of 20pc and a higher rate of 40pc coming in for incomes of more than £43,000 a year.

The income tax announcement came at the end of one of a relatively-short budget speech that was quickly been seen as an eye-catching attempt by Mr Brown to make a bid for the top job in government.

There were many green measures aimed at encouraging people to pay more attention to the environment.

And there were also measures aimed at encouraging people to save more money.

Mr Brown was also showing his generous side by promising more money for the hard-pressed NHS, the armed forces and security services, and education across the country.

Drivers of gas-guzzling cars were, as predicted, hit by a steep increase in vehicle excise duty, and cars which fell into the second lowest band saw their tax disc cost fall.

Mr Brown announced an immediate 30pc cut in band B of vehicle excise duty to £35, matched by moving the top band 30pc higher to £300 now and to £400 next year.

He also extended the 20pc differential to encourage people to switch to bio-fuels through to 2010.

For the coming year, fuel duty will rise 2p per litre, for 2008 2p and for 2009 1.8p, but this year's annual fuel duty increase deferred to October.

Tax on alcohol and cigarettes was also increased.

Excise duty on 20 cigarettes to rise from 6pm tonight by 11p while beer duty is to rise 1p a pint, cider 1p a litre, wine 5p a bottle and sparkling wine 7p. But duty on spirits is to remain frozen.

Mr Brown said the economy would grow by between 2.5 and three pc over each of the next two years.

The cost of waging war in Iraq and Afghanistan meant that an extra £400 million would have to be allocated to the Ministry of Defence.

A further £86 million would be allocated for security and counter-intelligence services.

Over the next year the amount of money allocated to the NHS in Britain would increase by £8 billion - 10 pc of its current budget.

Businesses across the country were expected to welcome news that corporation tax was being cut to 28pc.

The chancellor claimed his budget was aimed at improving the environment, announcing schemes to help green efforts around the world.

Mr Brown said he wanted to encourage home insulation and new low-carbon homes.

New grants would be available for some people to insulate their homes and set up their own micro-generation schemes such as wind turbines or solar panels.

Until 2012, all new zero-carbon homes up to £500,000 will be exempt from stamp duty and the government is to support new mortgages for energy-efficient homes.

The landfill tax will increase by more than inflation each year to encourage councils to find other ways of disposing of rubbish.

However he also rejected Tory calls to put VAT on airline tickets, which would have meant a 17.5% rise in prices.

He told MPs: “It would apply only to domestic flights, business would be able to claim back VAT, and even by 2020 it would save just 50,000 tonnes of carbon - less savings in one year than achieved by the climate change levy in just one week.”

The threshold of one of the government's most unpopular taxes, Inheritance Tax, is to increase to £350,000 by 2010.

Child benefit is to increase to £20 a week by 2010.

People are to be able to invest more in Individual Savings Accounts - the limit was increased from £3,000 a year to £3,600.

Mr Brown claimed that changes to the tax system would take 200,000 children in Britain out of poverty.

The amount spent on education will increase from £60 billion this year to £74 billion in 2010.