A BUDGET CALLED PRUDENCE

The Chancellor Gordon Brown called it a Budget that "will make work pay". He might better have called his first full-scale Budget on March 17 1998 a Budget for "our country" - a phrase he used no less than 12 times in 62 minutes. Or even a 'jam tomorrow' Budget - most of its more radical changes will not happen until April 1999 at the earliest and many of those are aimed at families with young children and people looking for work. But there are some changes this year which will affect the tax and finances of older people and more are promised for 1999 and 2000.

TAX
All the main tax allowances for 1998/99 were increased in line with the rate of inflation of 3.7 per cent. That means the amount of income you can have before you pay any tax at all has risen to £4195 (£80.67 a week) if you are under 65; £5410 (£104.03 a week) if you are aged 65-74; and £5600 (£107.69 a week) if you are aged 75 or more. The higher levels apply if you are 65 or 75 at any time in the tax year. So if your 65th or 75th birthday is before 6 April 1999 you will be allowed the higher amount. A blind person gets an extra tax-free allowance of £1330 (£25.57 a week).

If your income is higher than your tax-free allowance, you will pay tax at 20 per cent on the next £4300 (£82.69 a week) of income. If your income is higher than that, then the rate of tax depends where it comes from. If it is income on savings it will be taxed at 20 per cent. But if it is income from a pension or a job then it is taxed at 23 per cent. Once your income reaches a certain level the extra allowances for people over 65 start to be withdrawn. This year that level is £16,200 (£311.53 a week) and the withdrawal is complete when your income reaches around £19,000 if you are single and around £21,000 if you are married. If your income is higher still, then not only do you not get the higher allowance but once your total annual income reaches £31,295 (£601.82 a week) your tax rate moves up to 40 per cent on income above this amount. Only one person in fifty over age 65 is in that happy position.

The Chancellor left alone the rather complicated rules that surround the married couple’s allowance though he did increase the allowance slightly. Although it is still called an 'allowance', it is in fact simply given as a deduction at the end of the calculation of your tax. The amount of the allowance and how much it is actually worth are given in Table 1. The amounts in the column headed ’value' are 15 per cent of the allowance and that is the amount you deduct from the tax you owe. Next year, 1999/2000, the value of these allowances will be reduced further to 10 per cent. When that happesn, the Chancellor said the allowances of what he called 'elderly taxpayers' would be protected. That implies a large rise in the allowance, but no change in its value, next year. For example, if the value of this year's allowances changed to 10 per cent instead of 15 per cent, the amount of the allowance for someone aged 65-74 would have to be raised from £3305 to £4960 because 10 per cent of £4960 is worth about the same as 15 per cent of £3305, around £496 off your tax. No change is planned in the amount of the allowance for younger people in 1999. So when the value drops from 15 per cent to 10 per cent the amount it is worth will fall by £95 to £190. The chancellor is using that money to help pay for an extra £2.50 a week on child benefit for the first child in a family from April 1999. In later years it seems likely the allowance will disappear altogether. It is not clear how older people will be protected from the effects of that change.

Spending
The Chancellor continued the policies of his predecessors by shifting more of the burden of tax onto spending rather than income. The taxes on cigarettes and petrol were both increased well above the rate of inflation. Nowadays, Chancellors have an ideal excuse to do so. Cigarettes seriously damage your health and petrol damages the environment. So instead of being apologetic about the rise the Chancellor was proud, raising the duty on petrol by 6pc above the rate of inflation - an extra 4.4p on a litre - to help the environment you understand not the Treasury.

But there was some good news on transport. Gordon Brown said that three out of four rural communities had no bus service at all. And he set aside another £50 million so support rural transport. And vehicle excise duty (car tax) was frozen this year at £150. Next year it will be cut for smaller, more efficient vehicles, though it may be raised for the sort of gas guzzlers the Deputy Prime Minister John Prescott still likes to drive.

Inheritance
To the surprise of many people, the Chancellor did not announce any big changes in inheritance tax. He raised the level at which estates are exempt to £223,000. Only three estates in a hundred will pay any tax at all. He did tighten up on the rules which allow you to claim exemption from inheritance tax on some works of art and important antique objects. In future, you will not be able to claim exemption unless you open your home to the public.

He also changed some capital gains tax rules. They are too complicated to go into here. But they were mainly aimed at encouraging people to hold assets for a longer period and stopping some loopholes which allowed the tax to be avoided.

SAVINGS
There had been a lot of confusion and lobbying before the Budget about the Chancellor's plans to replace the tax-free savings schemes called Peps and Tessas. The plan was to make people transfer their money into a new Individual Savings Account or ISA and to cap the amount in an ISA at £50,000. As an individual could already have put £82,000 in a Pep and £5000 in a Tessa - plus the growth in the fund - that seemed very unfair to many better off people. In the event, the Chancellor gave in gracefully. No new Pep or TESSA can be started after April 5 1999. But any money already in a Pep can be kept there indefinitely with all future interest and growth entirely free of tax. Payments can continue to be made into any existing TESSA for the full five year life of the product. And a new TESSA can be started right up to April 5 1999.

The new Individual Savings Accounts will start on April 6, 1999. In the first year you can put up to £7000 into it and you can then put in £5000 a year for the next nine years. So a total of £52,000 can be invested over the ten years. Under these proposals the scheme will end in 2009. But in 2006, the Government will review it and decide how it will continue.

Unlike Peps, which are generally invesetments in company shares (what they call 'equities' in the jargon), an ISA can contain shares, cash and life insurance. This is a strange mixture and it is generally not a good idea to mix life insurance with investments. So most people would be well advised to avoid putting life insurance into an ISA when they begin in April 1999. But the cash element is more attractive. Normally, the limit for putting in cash will be £1000 each year. But in the first year you can put up to £3000 cash in and the capital from a maturing TESSA can also be put in on top of this allowance at any time. Any interest the cash earns will be entirely free of tax. You will not be able to use an ISA account like a regular building society or bank account because the amount you put in will be limited to £1000 (£3000 in the first year) regardless of what you take out. You can also put taxable National Savings products into an ISA which will be a very attractive deal in some cases.

There are complex rules about who will manage your ISA and supermarkets and the Post Office will probably sell at least the cash version of the ISA. More details will emerge in the next few months.

All ISA accounts will have to have a manager and they will charge a fee. Remember that if you do not pay tax there is no point in putting money into an ISA and paying those management fees. Even if you just pay tax at the basic rate, the fees might eat up most of the money you save by not paying tax. Many pensioners, particularly married women, can invest tax-free anyway because their income is too low to pay tax (see Tax Saving Tip).

May 1998

e-mail Paul Lewis on paul@deadline.demon.co.uk