Pensioners and high earners hold their breaths for Budget D-Day
The Chancellor must plug the gaping hole in public finances but has little room for manoeuvre. While scrapping higher-rate tax relief would bring in £7bn, it would damage pensions.
Sunday 19 April 2009
Millions of British savers will be looking to the Budget next Wednesday for rescue from the meagre returns they are receiving on deposits. The Bank of England's dramatic cuts in interest rates from 5 per cent last autumn to 0.5 per cent today – aimed at preventing the recession turning into a depression – has left savers scrabbling around for paltry returns. This is a particularly acute problem for pensioners, who rely on savings to bolster what the state pays them.
"They have seen their incomes dwindle to almost nothing in just a few months. Some are dipping into their capital to keep up living standards but this can only go on so long. They need help on Wednesday," says Charlotte Black, a spokeswoman for investment management firm Brewin Dolphin.
Ms Black echoes other financial firms and opposition MPs in calling for an emergency tax break for savers. "The Chancellor was to have announced a one-year, basic-rate, tax holiday on all income derived from savings accounts and company dividend payments. The latter is important because it will encourage people to remain invested in the stock market, which will aid economic recovery."
A possible alternative option to help savers is a one-off expansion of the amount people can pay into individual savings accounts (ISAs). At present, people can put up to £3,600 into a cash ISA or £7,200 into equities or a combination of equities and cash. All money held in an ISA grows free of tax. "Because savings rates are so low, the Government isn't bringing in that much from the tax it imposes on deposits anyway, so there is room for them to, say, increase the ISA limit to £10,000 for a year, which would allow people to shelter more from tax," says John Whiting from accountancy firm PricewaterhouseCoopers.
However, those hoping depositors will be given a helping hand may be disappointed, as talk among Whitehall officials of this being a "budget for savers" has all but evaporated. "We are worried that things have gone very quiet of late and that savers – who have done the right thing and not over-borrowed – will be left to fend for themselves," says Ms Black.
High earners already know there is pain on the way. From 2011, people earning over £100,000 will have to pay a new top rate of tax of 45p in the pound. In addition, a half-pence rise in national insurance contributions is also planned. One option for the Chancellor would be to bring these tax hikes forward to 2010. A further increase to NICs can't be ruled out either. "National insurance increases are a nice one to sneak under people's radar. Everyone is affected, but no one gives it the same weight as an income tax increase," says David Kilshaw, the head of private client advisory at accountancy firm KPMG.
Capital gains tax (CGT) could also be an area from which the Government could squeeze some extra cash: "The current CGT rate of 18p is much lower than the 40p top rate of income tax. In the past, differentials between the two haven't lasted long, with the lower tax rate rising in line with the higher one," Mr Kilshaw adds.
Top earners may also suffer if the Chancellor decides to scrap higher-rate tax relief on pension contributions. At present, basic-rate tax payers get relief at 20p in the pound on pension contributions, but higher-rate tax payers enjoy 40p in pound. Scrapping higher-rate tax relief would raise around £7bn a year for the Treasury but could damage retirement savings further: "This would be a disincentive to save. What is forgotten is that pension tax relief is really just tax deferred. You may get 40 per cent relief on the way in, but in retirement these same people will have to pay income tax on their pensions," says David Cule, a principal at Punter Southall.
More generally, the temporary cut in VAT from 17.5 per cent to 15 per cent announced in the pre-Budget report is set to run until the end of the year. After that, however, VAT could be shifted to a new higher level. "This could bring in billions for the Treasury," says KPMG's Mr Whiting.
"Ultimately, the markets are looking for the Chancellor to set out how the Government will close the gaping hole in public finances. In the short term, this means room to spend more money will be very tight; in the longer term, there will be tax rises," he said.
Malcolm and Evelyn Coulson, both 61, retired, Cambridge
Savings rates are diabolical. We're not feeling the pinch as much as some friends, but we have cut back on our leisure activities. Generally, we are relying on the state pension as well as breaking into capital such as bonds and ISAs to fund current expenditure. Food and fuel costs are taking a big chunk of our weekly spend, so it would be good to see something done there, perhaps a cut in fuel duty or at least no increase. As for our savings, we are hoping that the ISA allowance will go up this year so that we can at least keep more of the paltry interest earned. It would also provide an incentive for other people to save.
Catherine Gilchrist, 30, from Bournemouth
More money for public transport should be a priority. In the country, services are poor. I'd like something done for savers. I'm on a tracker mortgage so have benefited from low interest rates, but I have elderly relatives who have done the right thing and they are being punished.
Taxes on cigarettes and alcohol should be raised to the skies as the long-term health implications are enormous, as are the costs to the NHS.
Any talk of a freeze on public-sector pay being announced is worrying. Teachers and other public-sector workers are undervalued as it is. Why would a science graduate want to be a teacher?
The high earner
Michael Phillips, 32, director, London
I'm a busy man, so improved nursery provisions would be good. Overall, spending on schools and the health service is essential to keep up, despite the recession, as both are woefully under-resourced. The Government should also be thinking green and trying to introduce a much clearer grants system for energy-efficient home improvements. On balance, I think it's fair to up the tax rate for higher earners. But 45 per cent taxation for six-figure earners is posturing. The contribution to UK debt is a drop in the ocean.
- 1 Scottish independence: Ireland since 1919 is a lesson for Scotland in what a Yes vote means
- 2 Watch a man race the Circle line - and win
- 3 A bottle of wine a day is not bad for you and abstaining is worse than drinking, scientist claims
- 4 Grandmas keep accidentally tagging themselves as Grandmaster Flash on Facebook
- 5 Daniele Watts: Django Unchained actress detained by Los Angeles police after being mistaken for a prostitute
Daniele Watts: Django Unchained actress detained by Los Angeles police after being mistaken for a prostitute
The political class is doing what Hitler couldn’t – destroying Britain
Scottish independence: Nationalist leader Jim Sillars threatens pro-union companies with 'day of reckoning' after independence
Scottish independence: Yes campaign feels the heat as Alex Salmond's NHS claims come under furious attack
Portuguese academic says British are 'filthy, violent and drunk'
£23m Birmingham cycle scheme is attacked by Tory councillor for not catering to the elderly
iJobs Money & Business
£20 - 24k (Uncapped Commission - £35k Year 1 OTE): Guru Careers: We are seekin...
£20 - 24k + Benefits: Guru Careers: This is a great opportunity for an enthusi...
£280 - £320 per day: Ashdown Group: The Ashdown Group have been engaged by a l...
£400 - £450 Per Day: Clearwater People Solutions Ltd: **URGENT CONTRACT ROLE**...
Day In a Page
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village
A secluded seven-bedroom detached house with large private garden, £490,000
A three-bedroom cottage overlooking Sarratt village green with open fires and solid oak floors
A three-bedroom maisonette flat in a Grade I-listed, Georgian townhouse in a sought-after location
A one-bedroom apartment located within a private gated development, north of Turnham Green
Look forward to a brighter future at two-bedroom Sunny Cottages, ideal for Londoners looking to downsize
A three-bedroom red-brick cottage with outbuildings and pretty gardens, £200,000
This three-bedroom flat within a former textile factory spans the corner of the fourth floor and has a balcony