Tax

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By Sarah Modlock

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He said it was to be a balanced Budget for the family. As he raised the red box for the last time, Gordon Brown knew he was about to use surprise tax cuts to sweeten the bitter taste he will leave behind a few months from now.

Although the concept of paying less tax is hugely appealing, I wouldn't get over-excited just yet. Because what he has given with one hand will be taken away just as quickly with the other for many people. The basic rate of income tax will drop by 2p in April 2008. At the same time, the 10p income tax rate on the first £2,090 earned above your personal allowance is being abolished and this means in effect that you will have to pay 20% as soon as you earn more than your personal allowance rate. In other words, a bolishing the 10% start point, which he created in a previous Budget, will actually help Brown pay for the 2p cut in income tax which has got everyone smiling.

'The Chancellor was forced to downgrade his forecasts for the public finances again, severely constraining his ability to deliver a populist Budget,' says Simon Ward, Chief Economist at New Star Asset Management. 'In fact, the cuts in the headline basic income and corporation tax rates conceal a net revenue grab. The cost of these reductions will be recouped by abolishing the 10% starting income tax rate, increasing NI contributions by higher earners and reducing investment allowances.'

Saving and investing - no incentives

For anyone who does find they have more to spend each year, the incentives to save and invest were absent. Peter Vipond of the Association of British Insurers says 'The Government must now work with the FSA to make saving as easy as spending'.

Brown has increased the cash ISA limit by 20% from £3000 to £3600. The overall ISA limit only increases by under 3% from £7000 to £7,200. This means a Mini Stocks and Shares ISA actually falls by 10% from a current £4,000 level to £3,600.

Tomas Carruthers, CEO of Interactive Investor says the Chancellor has missed a trick to encourage long term investment in the stock market. 'He made much of the 20% rise in the cash ISA limit, but the amount you can invest in a mini stocks and shares ISA actually decreases. The kick on effect is that the overall ISA limit only increases by a paltry 3%,' he says. 'While the rise in the cash ISA limit might encourage savings, the fall in the stocks and shares element could have the effect of stifling long term investment. It's a real shame that he didn't increase the limit to at least £10,000, a serious incentive to encourage more people to invest.'

Carruthers' view is echoed by Fidelity International. 'We firmly believe that making it more tax-efficient to save will go a long way in encouraging consumers to make more provisions for their future, and urge the Government to address this at the next budget by raising the limit to a more realistic £10,000,' says Richard Wastcoat.

Inheritance tax - still not enough

The Inheritance Tax ( IHT) threshold will rise to £350,00 by 2010. But let's not forget that previous Budgets had set in train an increase in the IHT threshold to £325,000 by 2009. Today's decision is not as generous as it looks and comes as a huge disappointment to millions of homeowners living in the shadow of IHT.

Stephen Herring, Tax Partner at BDO Stoy Hayward, comments: 'The proposed phased increases in the Inheritance Tax nil rate band to £350,000 by 2010/11 is welcome but every houseowner will know that this increase fails to reflect house prrice inflation in recent years and many more households will be paying IHT than was the case when the Chancellor took office.'

The opposition

The Conservatives dubbed Gordon Brown's Budget 'a tax con not a tax cut' after the Chancellor signalled a reduction in the basic rate of income tax just weeks before he seeks to take over from Tony Blair.

Conservatives seized on the changes to describe the income tax changes as Brown's 'stealthiest tax yet', and went on to warn that despite the Chancellor's window dressing, taxes on business are likely to rise by £1 billion in 2008-2009, plus a further £1.8 billion increase in the following financial year.

Party leader David Cameron stressed that after the 101 stealth taxes introduced during Brown's ten year tenure at the Treasury, it was no wonder people were now asking 'where has all our money gone?' With the Chancellor mentioning the NHS just once in his 48 minute Budget statement - to re-announce what he first said three years ago - Cameron said the hole at the heart of the Budget was the Government's failure to fix the National Health Service.

Cameron went on to accused the Chancellor of "wasting money on an industrial scale", and said that as a result of Brown's Budgets average families were paying £1,300 more in tax. And under Brown's ten years in charge of the economy, the savings ratio had halved, business investment as a share of GDP was under 10 per cent and going backwards, Britain's trade deficit was widening, and research and development spending was falling.

Here are the key points at a glance:

Your savings and taxes

• Basic rate of income tax to fall from 22p to 20p from April 2008.


• The top-rate income tax threshold will rise to £43,000 from April 2009.


• The 10p band on non-savings income will be abolished.


• Inheritance tax will rise from £285,000 now to £350,000 in 2010.


• The tax exemption for capital gains will rise from £8,800 to £9,200, and will be £18,400 for married couples.


• The annual ISA allowance will increase by £200 to £7,200.

• Beer will rise by 1p a pint from midnight Sunday.


• Cider will increase by 1p a litre.


• Wine will rise by 5p a bottle and sparkling wine by 7p.


• Duty on spirits will be frozen.


• Cigarettes to rise by 11p a packet. VAT on nicotine patches to be cut from 17.5% to 5%.

• Road tax on the highest-polluting vehicles will increase to £400 from April 2008.


• Fuel duty will increase by 2p for 2008, and 1.8p for 2009.


• The least polluting vehicles will have their duty cut to £35.


• There will be no VAT on airline tickets, which would have meant a 17.5% rise in prices.

• Child benefit, for a first child, will rise from £17.45 a week to £20 a week by 2010.


• Free nursery expanded to 15-hours-a-week.


• Extra funds for Childline and Parentline Plus and 200,000 more children to be lifted out of poverty.


• Free child care for unemployed parents extended.


• Education to be a right for every young person until they are 18.

• The 125,000 people who lost their pensions because of company insolvency will get help with a financial assistance scheme increased from £2bn to £8bn.

• Investment in schools, hospitals, security and defence and infrastructure will rise from £43bn this year to £60bn by 2012.


• Education spending in England will rise from £60bn this year to £74bn in 2010. From now to 2010 spending per pupil will rise by a further 20%, 10% in real terms, to £6,600


• Investment in the NHS in England will rise by £8bn this year.


• An extra £400m to be allocated to the Ministry of Defence to cover overseas commitments in Iraq, Afghanistan and elsewhere.


• An additional £86m for intelligence and counter-terrorism in the coming year.

• Corporation tax will be cut from 30p to 28p from April next year.


• Tax rate on small companies to be raised in three stages from 20p this year to 22p in 2009.

• 50,000 16 to 17-year-olds who sign activity and learning agreements will receive a training wage in return for gaining skills.

• Grants of £300 to £4,000 for pensioners installing insulation and central heating in their homes.


• Tax-free allowance for pensioners under 75 will rise in three stages from £7,280 to £9,770 in 2011. For over-75s, the tax free allowance will rise annually from £7,420 to by £10,000 by 2011.


• Pension credit guarantee to rise to £130 a week by 2010

• £50m for a 10-country initiative across central Africa to prevent the destruction of the second largest rain forest in the world.


• £800m to the Environmental Transformation Fund, jointly run by the international development and environment secretaries.


• Until 2012 all new zero carbon homes up to £500,000 will be exempt from stamp duty.

• BUDGET SPECIAL: Follow all the latest Budget 2007 news


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