Brown grinds down on the savers

Click to follow
The Independent Online

Gordon Brown, one of Britain's longest-serving Chancellors of the Exchequer, this week produced a classic of the sort of Budget statement we have come to expect from him. His speech introducing the annual Pre-Budget Report lasted a crisp 30 minutes but, as ever, he provided only a taster of a labyrinth of tax measures, changes, adjustments, reports, consultations and further consultations.

The economic judgement has been a matter of hot debate, which will continue for some time. But Mr Brown's personal finance judgement was a consistent continuation of the themes which have run through his Chancellorship, a determination to close loopholes and, latterly, remove incentives to save.

Several commentators have bemoaned Mr Brown's harsh attitude towards such popular devices as the individual savings account (Isa), at a time when the demographic time bomb, combined with a nationwide pensions shortfall, is making it more urgent than ever to encourage saving.

But the answer is simple. The Treasury is convinced savings incentives do not work, in the sense of making us save more than we would anyway, and are essentially state-designed marketing tools for the financial services industry. Hence the annual Isa "season", when fund managers advertise their wares heavily between January and April to persuade people to take up their Isa allowance before the end of the tax year on 5 April.

Anne Young, Scottish Widows senior technical manager, said: "It is disappointing that the maximum investment limit in an Isa will be reduced from £7,000 to £5,000 in 2006-07, given that we are all being encouraged to save more. The hardest-hit by these proposals will be higher-rate taxpayers."

But, now that Mr Brown is a father, he is under no doubt that financial incentives for childcare are essential. From April, child benefit will rise by £180 a year. Over the next five years, more than 1,000 children's centres will be set up, which the Chancellor hopes will become "a focus of community life". And employers will be able to provide childcare free of national insurance and income tax costs, but this will not be compulsory, yet. They will be paid for with vouchers.

To Busy Bees, the largest supplier of childcare vouchers to NHS Trusts, this means thousands of people will have the opportunity to become better off, just by signing up for childcare vouchers. John Woodward, managing director of Busy Bees, said: "For employers, there are enormous benefits in providing staff help with their childcare needs: better recruitment and retention, improved morale, low absenteeism and increased productivity. And it will inevitably encourage more parents back into the workplace."

But Mike Warburton, senior tax partner at Grant Thornton, said: "There already was a national insurance exemption without limits for childcare vouchers provided by the employer, which acted as a similar incentive. We welcome this measure, but it does not resolve employees' dilemma of deciding whether they will be better off paying for childcare themselves where higher limits apply or accepting it as part of a remuneration package. Another question is whether families will be better off with registered child-minders rather than nannies."

And the Chancellor has left the childcare element of the working tax credit unchanged instead of raising it in line with inflation. Mr Warburton said: "This freeze on the childcare element could, in effect, be subsidising employer-supported childcare measures, which will make more headlines. This is another example of the Chancellor giving with one hand and taking away with the other."

But when it comes to saving, Mr Brown has made no attempt encourage poorer folk to put money by to supplement their state pension. The only bone thrown in their direction by the Government this week was the announcement by National Savings & Investment that it is to replace its much-discredited and long out-of-date, 142-year-old ordinary account with an instant-access savings account. The minimum deposit will be £100, money available from cash machines. The interest rate will be disclosed in the new year, but the plan is to place it in the middle of the market.

That apart, until the Sandler simplified savings products are introduced in 2005 there is nothing for the small saver. Even then, there are no proposals to encourage saving with the sort of pound-for-pound scheme enshrined in the forthcoming Child Trust Fund.

Instead, Mr Brown has concentrated his intellectual firepower on closing loopholes, even if it means causing some unintentional loss to the sort of people who would have been expected to rank among Labour's natural voters.

A series of moves on trust law will have the effect of raising the income and capital gains tax on assets held in trust from 34 per cent to 40 per cent, making it less worthwhile to set up trusts. They will also prevent people from putting second homes into a trust to avoid capital gains tax, and from using gift relief to postpone or avoid paying tax on gains where they continue to benefit from the assets.

Guy Smith, of Moore Stephens, said: "For the individual, the changes to the trust regime will hit hard. It's not only the very wealthy who will be hit, a lot of the middle class have been using trusts to help manage their inheritance tax liabilities. Why? Because this Government has deliberately held the inheritance tax nil rate band, despite the escalation in property values over the last seven years, so drawing more and more people into the inheritance tax net. Many of the mechanisms being used for what many saw as an attack against the Englishman's castle no longer work."

Unfortunately, what appears to be a genuinely unintended consequence of the assault on trusts is going to hurt employees who hold shares in the companies that employ them. Through the arcane effect of trust law, the measure to make it harder to use trusts also means anyone who held employee shares between April, 1998 and April, 2000 will face a bigger tax bill. Before, capital gains tax fell to 10 per cent if the shares were held for two years, but that now stretches to 2010 before taking effect.

The Chancellor made much of his support for enterprise, but the changes he made to enterprise investment schemes and venture capital trusts look decidedly half-hearted. Both have had their investment limits doubled to £200,000, but it will be harder to avoid capital gains tax on VCTs, which will not help a sector which has, understandably, been in steady decline during the three-year bear market.

Mr Brown said he wants to take another look at occupational pension reform and the knotty problem of what to do about foreigners living in Britain who claim non-domicile resident tax status. Doubtless, these will form the basis of another dramatic set of measures to be unveiled in another Budget speech.


* From April, child benefit will rise by £180 a year for seven million children. More than 1,000 children's centres over next five years, with a nursery place for every infant aged three and four. Employers can provide childcare free of national insurance and income tax;

* Most personal tax allowances up in line with inflation;

* Isa restrictions confirmed: tax relief goes in April, £7,000 stocks and shares limit comes down to £5,000 in 2006, cash Isas from £3,000 to £1,000. Isas abolished in 2009. Sandler products to qualify from April 2005;

* Pension-pot limit held at £1.4m, subject to National Audit Office report

* Tax hit for ESOPs held between 1998 and 2000;

* Trust loopholes closed to make it harder to avoid inheritance tax;

* Investment limit for venture capital trusts and enterprise investment schemes to be doubled to £200,000. Extra tax relief for VCTs, but not for investors, who will no longer be able to defer capital gains on VCT holdings;

* Real-estate investment trusts to be aided to invest in private rentals

* Tax relief cut on professional subscriptions;

* Rates and tax relief for amateur sports clubs;

* Government examining the tax position of non-domicile residents.

Looking for credit card or current account deals? Search here