Budget 2011: personal taxes may see major change but not yet

The Budget contained no radical changes to personal taxes, but the Chancellor did flag up the Government's intention to look seriously at merging income tax and national insurance.

The proposal was made in the small business taxation report published by the Office of Tax Simplification (OTS).

The Government believes that integrating the two taxes would remove distortions in the system and would make the system of personal tax easier for employers to manage. The Government is to consult on the options open to it and on a timetable for possible reform. But the Chancellor insisted that he was not proposing extending national insurance to pensioners or that the contributory principle be abolished.

Also as a result of the work of the OTS, some 43 tax reliefs that no longer have a rationale are to be abolished, helping to lighten tax legislation by 100 pages.

Although the IR35 regime is to remain, the Government has pledged to improve the way it is administered.

The income tax personal allowance is rise by a further £630 next year, as part of the Coalition's commitment to lift more low earners out of the income tax regime, taking it to £8,105 in 2012/13.

It is estimated the move will mean that up to 1.1 million more people will not to have face income tax charges. However, the allowance increase, unlike in last year's Budget, is not limited to the basic income tax rate, which means that there will be no significant pull of more taxpayers into the higher rate band.

Although he conceded that the time was not yet right for removing it, the Chancellor re-iterated his belief that the 50 per cent income tax rate is regarded as a temporary measure and that it would do harm to the economy if it were to become permanent.

From April 2012, the default indexation assumption for direct taxes will switch to be up-rated in line with the Consumer Prices Index.

To encourage charitable giving and to support the voluntary sector, the rate of inheritance tax for those who give 10 per cent of their estates to charity is to fall from 40 per cent to 36 per cent from April 2012.

Meanwhile, the Gift Aid benefit limit climbs from £500 to £2,500 from April 2011.