The Conservatives will scrap the gold plated pension scheme enjoyed by Members of Parliament if they win the next election. That pledge was made to Saga by George Osborne, 37, who will be Chancellor of the Exchequer if that election victory comes about.

He was answering the common complaint that MPs cannot really understand the fears about retirement faced by most people when they have a pension scheme that promises them £30,000 a year for life from the age of 60 after just twenty years in the House of Commons.

"The MP’s pension scheme is too generous. I don’t think [it] is acceptable given that so many private schemes have closed. It will be a Conservative manifesto commitment and if I am the Chancellor I will close it to new members, subject to a vote in the House of Commons."

Principles
Fairness is one of four principles that George Osborne says will determine tax policy if he becomes Chancellor. The others are simplicity, transparency and certainty and – all four principles are loosely taken from the 18^th century economist Adam Smith. So what would Chancellor George Osborne do?

It was his promise to the Conservative conference on 1 October 2007 to raise the Inheritance Tax threshold to £1 million which marked the start of his party’s climb back to popularity. And he has confirmed that a widow or widower who was left everything by their late spouse or partner will be able to inherit the new threshold. So they could be able to leave their heirs up to £2 million without any inheritance tax being due. That is good news for the heirs of the five people in a thousand who leave £2 million or more who will save over half a million pounds inheritance tax. But what about the vast majority whose estate is not even close to the current IHT threshold of £325,000? Why spend hundreds of millions of pounds on a huge tax break for families who are already wealthy?

"With tax you are of course helping taxpayers by definition. There are other things we have to help lower and middle income people."

An Osborne chancellorship would scrap the basic and lower rate tax on savings interest. At the moment tax at 20% is taken from savings interest automatically and anyone who does not pay tax or should pay less than that has to claim it back and then fill in another form to get it paid gross in future. According to the Revenue it has taken a total of £250 million tax off three million people who should not have paid it and have never claimed it back. By scrapping basic rate tax on savings interest that problem would be solved for the future.

Of course with interest rates falling to their lowest level ever, the amount earned by savings has plummeted and so has the advantage of any tax break. Someone with £1000 savings earning even an above average 2% a year would save less than 10p a week in tax under his plans. Would that really create the "save, save, save society" his boss David Cameron wanted when he announced the policy in January?

The higher 40% rate of tax on savings would not be scrapped and that would lead, in the words of David Cameron, to "top rate taxpayers continuing to pay the same". But the truth is slightly more complex. What Cameron said is true for those who have an income from work, rent or a pension above £43,875 where higher rate tax begins. For them, any savings interest would be taxed at the higher rate too. But people whose income is all from savings interest – and that means they have £2 million or so in the bank – will benefit like anyone else from the abolition of the basic and lower rates leaving them £7,230 a year better off. So again why do most for the richest?

"It is true of course that people higher up the income scale can benefit but it is also true that many millions of people on low and modest incomes benefit enormously…I want a suite of policies that target different groups with the overall message of a tax and benefit system that encourages saving."

Tax allowance
The other change announced earlier this year would help anyone aged 65 or more with an income between £9,460 and £32,930. Osborne would raise by £2000 the threshold at which people over 65 start to pay tax. It would rise from £9,490 (aged 65-74) and £9,640 (75 or over) to £11,490 and £11,640. That would mean a maximum tax saving of £400 a year. However, he would not scrap the hated taper which reduces the extra allowance given to those over 65 whose income exceeds £22,900. The allowance is reduced by £1 for each £2 income rises above that limit and by the time income reaches ££28,930 (£29,230 aged 75 plus) the allowance has fallen to the same £6,475 allowed to younger people. Osborne’s higher allowance would run out at around £33,000.

The effect of this taper is that income between £22,900 and the upper limit is taxed at 30% rather than 20%. That is because each extra £2 of income is taxed at 20% and also cuts the allowance by £1 dragging another £1 into tax. The result is that an extra £2 of income results in tax on £3 and that 60p is 30% of the extra income. But Osborne says "We will continue to taper away the allowance…for reasons of affordability given the state of the public finances."

That creates a very strange anomaly when it comes to savings income. Anyone over 65 whose income is in the taper zone will still face a marginal rate of tax of 10% on any savings income even though the income tax due on it is zero. For example, someone with an income of exactly £22,900 would get the full tax allowance of £11,490. But if they are left some money which is put in the bank and earns them £1000 in interest that will increase their total income and their allowance will fall by £500 bringing another £500 into tax at 20%. So the extra £1000 of savings income will mean they pay £100 more tax – an effective rate of 10%.

Osborne accepts the problem. But stresses the postitives

"The calculations we have made are that if you've got savings, if you're a pensioner then you are beneficiaries of this policy at a time when savers are seeing their income fall away."

"It is perfectly reasonable when the rest of society is looking at the way it spends money for the public sector to do the same. In a recession when family budgets are under pressure councils have their obligations to minimise the tax burden they put on people and a council tax freeze is very sensible."

Finally I asked George Osborne what led a man from a wealthy titled family with a traditional public school and Oxbridge education into politics?

"What drives me is a fundamental belief that the Conservative Party has a better answer than Labour. I chose to go into public life because I wanted to use what talent – or lack of talent – I had to engage in my society. Giving people back more of their own income and promoting personal and community responsibility."