12 May 2010 Last updated at 09:06 ET

New government: All change for personal finances

By Anne Redston Professor of tax law, King's College London

The new government has just announced the most radical personal tax changes for a decade.

More money to spend at the fair?

We will all be affected: rich and poor, working and non-working.

The new regime will be fairer, with benefits for low earners, but it could strip the rich of their favourite tax shelter.

So, what are the details?

'Money roundabout'

One of the Lib Dems' flagship policies was increasing the tax-free personal allowance to £10,000. It is good news that the coalition government has promised to "work towards" this target - everyone will then be able to receive income of £10,000 a year without paying any tax.

But is this a sensible policy, given the huge national debt? The truth is that it will not cost as much as people think.

Currently, you pay income tax when your earnings reach £6,475. This reduces your take-home pay, so you claim higher levels of benefit to top-up your income again.

The government is taking with one hand and giving with the other: a money roundabout.

The new proposals will allow you to keep more of your income before tax and reduce the need for government top-ups. This should trigger a spin-off saving, by reducing benefits and cutting bureaucracy.

The policy makes sense too, when you realise that £10,000 is roughly the earnings of a full-time worker on the minimum wage. Taxing the minimum wage has always seemed crazy to me, so this policy shift has my full support.

Capital Gains Tax

Another potential change is planned for Capital Gains Tax (CGT). People pay CGT when they sell assets, such as shares, a business, or a second home.

High earners will lose a favourite tax shelter

Somewhat strangely, the highest rate of tax on capital gains is 18% - about one-third of the 50% top tax rate on earnings. The new government may increase the CGT rate to 40%, and perhaps even 50%, on all non-business assets.

This would be a real shock to people wealthy enough to pay CGT, but it makes good policy sense. Why should someone pay 50% tax on their earnings, but only 18% on the increased property value of their holiday cottage?

This may also protect business assets from increased taxes, so encouraging entrepreneurs. Finally, such a change would only affect the rich, because everyone has a CGT personal allowance, allowing you to make gains of up to £10,100 a year without paying any CGT at all.

Inheritance tax

In their manifesto, the Conservatives promised to increase the tax-free inheritance tax (IHT) threshold, from its current £325,000 to £1m per person.

This was opposed by the Liberal Democrats, and it has been abandoned by the coalition.

Again, this seems right in tax policy terms: although IHT is unpopular, it taxes transfers of wealth rather than everyday earnings. It is thus less damaging, and less painful, than cutting your take-home pay.

The last government planned to increase National Insurance Contributions (NICs) for both employers and employees. Both opposition parties opposed this: the Lib Dems said it was "a damaging tax on jobs" and the Conservatives called it "Labour's jobs tax".

Now they are in government, the coalition plans to raise the starting point for employers' NICs which will reduce the cost to employers, but leave in place the higher levies on employees. This should protect jobs, but raise some revenue.

What we do not know yet is whether the higher employee contributions will affect everyone.

The Labour government planned to shelter low earners from the rise; it remains to be seen whether this part of the proposal will survive. If not, it may cancel out some of the benefits low earners will gain from their new tax-free allowance.

50p tax rate and married couples

The top tax rate increased to 50p from April this year. This was supported by the Lib Dems and not actively opposed by the Conservatives: their manifesto said: "We will not abolish it for the rich while at the same time asking many of our public sector workers to accept a pay freeze."

Income tax plans have been welcomed by Anne Redston

While a rate reduction is possible at some time in the future, for the time being, politicians will keep it firmly in their back pockets, to give it away when times improve.

The Conservative manifesto promised a tax break for married couples. It is a possibility that this will survive, and the Lib Dems have been given the option to abstain when it comes to a vote in the House of Commons.

The tax relief may benefit those who are married, or in a civil partnership, where one partner has a very low income or none at all. Non-working partners could be able to transfer some of their unused tax-free allowance to the working partner. This is expected to save £150 a year.

However, it may not apply to all married couples and civil partners, but only to those who pay the basic rate of tax - currently, anyone whose income is less than £43,875.

Both parties have extensive plans to reform the tax system and this is just the beginning. But this is a good start. These are fiscally intelligent proposals and the end result is a fairer tax regime.

Anne Redston is a barrister at Temple Tax Chambers and Visiting Professor at King's College London.

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