Chancellor's pre-Budget speech may not produce obvious bombshells, says Paul Slade. But pay attention to the small print
Homebuyers, self-employed people and struggling authors could be in for nasty surprises when the Chancellor Gordon Brown gives his pre- Budget statement on Tuesday. Mr Brown uses this annual statement to preview moves planned for his Budget the following March. No bombshells are expected on major issues such as income tax, but there is plenty of scope for Mr Brown to tinker with the small print of the tax regime. These detailed, apparently insignificant changes often prove expensive for ordinary taxpayers.

For homebuyers, the fear must be that Mr Brown will target stamp duty on property purchases to raise extra tax revenue at little political cost to the Government. Stamp duty, paid by the purchaser, starts at 1 per cent for homes worth no more than pounds 60,000, rising through a series of bands to 3.5 per cent if the house is worth more than pounds 500,000.

That means British homebuyers face the lowest transaction cost in the EU. So any Chancellor who wanted to increase the tax could present the change as a harmonisation measure. Sue Anderson, the Council of Mortgage Lenders spokeswoman, says: "Increased stamp duty is an easy target. When anyone talks about tax harmonisation in Europe, they say is that our property sector gets off lightly in comparison with other European markets. It does, but as a result we have a good level of mobility within the market which is important when you have a high level of owner occupation, as we have. One can see it could be a tempting measure but, in our view, it would be damaging."

We do know an announcement is due on the carry-forward arrangements on personal pensions. The Government wants to abolish these provisions, which are particularly valuable for the self-employed. Personal pension savers are allowed to contribute only a certain percentage of their earnings to the scheme tax-free each year. But the rules allow unused contributions to be carried forward for as long as six years. This has let small business owners cope with fluctuating income by topping up their pension in good years to make up for the contributions they missed when times were tight.

Sheena Sullivan, tax partner at accountants Pannell Kerr & Forster, says: "They're not taking any more tax relief than they are entitled to, they're just taking it as and when they can afford to make the payments. It would cause considerable problems to take that ability away."

But the Government's latest consultation document on stakeholder pensions says personal pension carry-forward provisions "should be removed" in April 2001 to bring personal pensions into line with the proposed new stakeholder regime. That document asked for responses by 29 October, a date some suspect was chosen to let Mr Brown make a further announcement in next week's pre-Budget statement.

Richard Baron, tax executive at the Institute of Directors, says: "A lot of people don't actually know their income until after the tax year is over. If you're self-employed, you haven't had a chance to work out your profits. If we're lucky, he'll climb down on that one - and if we're unlucky, he might confirm it." John Glendinning, the Scottish Amicable pensions development director says: "We like the idea of harmonising stakeholder and personal pension regimes, but we want to see carry-forward extended to stakeholders. The people using it are the entrepreneurs we believe should be supported."

Small company owners who hope to take advantage of Mr Brown's new share option tax breaks should also listen carefully to Tuesday's speech. Financial advisers fear people working for small companies will join the proposed new scheme without realising that could cut their pension rights at retirement.

Mr Brown's plan, announced at this week's CBI conference, would allow companies capitalised at pounds 15m or less to give 10 top staff share options worth up to pounds 100,000 each. The options would be free of income tax and - providing the shares were held for at least 10 years - would attract capital gains tax at 10 per cent instead of the normal 40 per cent.

But the offer of share options is unlikely to be made without some corresponding cut to the employee's salary. The maximum benefits you can take from an occupational pension scheme depend on salary alone, and share options do not count. Cut your salary, and you cut the pension income you will be able to take. Steve Chilcott, a financial adviser at The Income Drawdown Advisory Bureau says: "The manager may end up with a windfall as far as his share options are concerned, but he may have problems with his pension." In the case of overfunded pensions, surplus funds are returned to the employer, but only after deduction of tax at 40 per cent.

Most authors get only a modest income from their writing, so may think this aspect of their financial affairs would escape the Chancellor's notice. Don't be so sure. New legislation on intellectual property rights is in the pipeline, which could deduct 40 per cent income tax from authors who pay tax at only 23 per cent.

Authors often receive payment for their work as a lump sum. On the face of it, that means the money would count as income in whichever tax year the cheque arrived. Sums above pounds 28,000 (the starting point for higher- rate tax) would therefore be taxed at 40 per cent.

This single payment may represent several years of work, so the Inland Revenue has been letting authors declare the payment over three years, keeping tax charges down to the lowest possible rate. Now that spread relief may be abolished.


n Increase in the 3.5 per cent stamp duty homebuyers must pay on purchase. This is a soft target for the Chancellor, because an increase could be presented as tax harmonisation to bring the UK into line with the Europe.

n Confirmation that the opportunity to carry forward unused personal pension contributions from previous years is to be abolished. This would hit self-employed pension savers, who rely on these provisions to top up their pensions in a good year.

n Details on plans for a special employee share-ownership scheme for small companies. Some managers could unwittingly undermine their pension income at retirement.

n Abolition of spread relief for authors. This provision has so far allowed authors to save tax by spreading lump sum payments over up to three years, so keeping their annual income low enough to minimise the tax they pay.