This piece first appeared in Saga Magazine in August 1997
The text here may not be identical to the published text

LIGHTLY BROWNED


Gordon Brown's first Budget



It was a different sort of Budget. Coming in the middle of the tax year, the first Labour Budget for 18 years did not contain the usual list of new tax allowances and benefit rates. Instead it raised extra money to spend on getting unemployed people and lone parents back to work, improving school buildings, and treating more patients in the National Health Service. But the bill for these improvements is going to be paid by higher taxes one way or another.

LOWER PENSIONS
The most radical and surprising change was an extra tax imposed on pension funds - including those held by individuals with personal pension plans. The change will raise an extra £3.5 billion a year for the Treasury. Pension funds do enjoy very favourable tax treatment. Until the Budget they had four distinct tax concessions.

It is this last concession that the Chancellor ended and it means that pension funds will grow that bit more slowly because their dividend income from UK shares will be cut by a fifth. The effect on individuals will vary.

People who have retired - will normally continue to get the same benefits.

If you have a company pension that guarantees you certain benefits, then those benefits will have to be paid. And if there is not enough money in the fund to make the payments then your previous employer will have to put extra money in. So you need not worry about losing them. However, if your company has traditionally paid you extra money over and above the guaranteed amounts then those additional payments may be at risk in future. For example some pension funds increase pensions each year even though they are not obliged to do so. That may now stop.

If you get a personal pension then that is paid through an annuity which will already have been bought and those benefits, and any annual increase you have paid for, will continue to be paid. If you are delaying buying an annuity and using the so-called 'draw-down' facility to take an income out of your pension fund, then the balance may now have shifted in favour of buying an annuity rather than waiting.

People who have not yet retired - may have to pay more in.
If you are in a company pension and your pension is linked to your salary then you may find that you or the company has pay higher contributions to ensure the fund will be adequate to pay the promised pension. However, many pension schemes have surpluses which mean there is no need for higher contributions.

If you pay into a personal pension plan or into a company scheme that does not link your pension to your salary, then you should consider paying in more contributions to ensure that you get the benefits you were expecting in retirement. Estimates of what is needed range from 5% to 15% more. However, the closer to retirement you are the less the change will affect you. And you should always be cautious about sales representatives who try to use the Budget as a way to make you pay more into your scheme.

STATE PENSIONS AND BENEFITS
The Government has decided to press ahead with cuts in social security spending announced by the previous Government. These will save around £650 million a year by 1999/2000 (see Saga Magazine February 1997 for details). One of the main changes is that benefits and pensions which are claimed late will in future only be backdated for a maximum of three months instead of up to a year. This change has already begun. However, the new Secretary of State Harriet Harman has decided to go further. From next year the three month period for backdating is to be reduced to one month. So anyone who makes a late claims for a pension or benefit after June 1 1998 will only get one month of the money they missed. A similar change will apply to housing benefit and council tax benefit from October 1 1998. The savings will be £57 million a year when the changes are fully in force.

So the message is even stronger now than ever - if you think you have an entitlement to a pension or other benefit claim it now. You could lose a lot if you do not.

TAXES ON SAVINGS
If you have gilts (government stock) then the interest is normally paid net of 20% tax. Non-taxpayers have to claim this back. From April 1998 interest on gilts will normally be paid gross. That will save non-taxpayers the trouble of claiming it back. But will mean more work for taxpayers filling in tax forms and making the payments.

From April 1999 Peps and TESSAs will be replaced by a new Individual Savings Account. The details of these new accounts will be announced later but it is likely that investments currently in Peps and TESSAs will have to be transferred to the Individual Savings Account and that tax relief will depend on keeping the investment long-term.

The way that dividends on shares are taxed will be changed from April 1999. It should not cost individual taxpayers any more.

PRIVATE MEDICAL INSURANCE
The Chancellor abolished tax relief on insurance premiums for private medical insurance premiums for people aged 60 or more. The change came into effect at once. Any new or renewed premium due on 2 July 1997 or later will not get tax relief, putting up the cost of the premiums by about a fifth - unless the insurance companies bear some of the increase. The saving to the Treasury will be about £120 million a year. However, not all of this will be paid by older people. The tax relief is given to whoever pays the premiums and often that is a younger relative.

HOUSE PURCHASE
The cost of mortgages will rise by up to £10 a month from April 1998. At the moment borrowers get tax relief on the interest due on a mortgage of up to £30,000. The relief is paid at a special rate of 15% and is deducted from the mortgage payments by the lender whether the borrower is a taxpayer or not. From April the rate of tax relief will be reduced from 15% to 10% and that will add a maximum of around £10 a month onto mortgage repayments. If your mortgage is less than £30,000 the rise will be correspondingly less. In the long-term it is almost certain that mortgage interest tax relief will be abolished. If you have a home income plan, tax relief is given at 23% and that will remain unchanged.

If you are buying a house which costs more than £250,000 then you will face a higher bill for Stamp Duty. This ancient tax is levied at 1% on property which is bought for more than £60,000. From July 2 two higher rates were introduced. Stamp Duty is now 1.5% for property that costs more than £250,000 and 2% for property that costs more than £500,000. The rate of duty applies to the whole cost. So duty on a property which costs £250,000 is £2500 but on one which costs £250,001 it is £3750.

VAT ON FUEL
The one tax cut in the Budget was the long-promised reduction in Value Added Tax (VAT) on gas, electricity, paraffin, and coal. They have been taxed at 8% since April 1994. Under European Union rules the VAT cannot be reduced below 5%. And the Chancellor announced that the tax would be cut to that level from September 1 1997. So the price reduction will be in place for the winter. The average saving will be around £18 a year.

When VAT was imposed on fuel retirement pension and some other benefits were increased slightly to help pensioners and poorer families pay for it. It seems unlikely that any of this extra money will be taken away. But we will not know for certain until November when the levels of pensions and benefits are announced.

The Chancellor also announced that he will publish a report in October about the best way to help people on low incomes save energy and whether VAT should be reduced on insulation materials. It is unlikely that there will be any change until next year.

CIGARETTES AND ALCOHOL
For the last few years the tax on cigarettes and other tobacco products has risen by 3% above inflation. The Chancellor has increased this to 5% above inflation and the new prices will start on December 1 this year. However, hand-rolling tobacco will not increase in price.

Duties on alcohol will rise from January 1 1998 by 3%, roughly in line with inflation. This rise reverses the policy of freezing duties to bring them more in line with those charged in the rest of Europe.

MOTORING
The Chancellor signalled a tough time for motorists. The tax on petrol was increased immediately by 4p a litre. Just over 40p of the price of a litre of unleaded petrol is now tax. In future, taxes on road fuel will rise by 6% ahead of inflation.

The Chancellor also increased the rate of vehicle excise duty (car tax). From November 15 the cost of taxing your car will rise by £5 to £150 a year.


August 1997


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