Subtle tax blows on the cards: Vivien Goldsmith looks into her crystal ball to predict some measures in Tuesday's Budget

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The Independent Online
THE BUDGET on Tuesday is likely to bring bad news by stealth. The Government needs to take more tax, but it would like us to keep spending - if we can afford to - so the tax hits will be subtle.

The betting is that tax rates will not be raised, but marginal nibbles at the allowances and tax bands could take their toll.

Convention dictates that these are increased by the rate of inflation. This is so low that the rise will be small. Using December's figure of 2.58 per cent (and rounding the results), the basic personal allowance rises from pounds 3,445 to pounds 3,535, and the married couples allowance would rise from pounds 1,720 to pounds 1,770 - although this was frozen at the last Budget, and it may be allowed to wither away.

Indexation of tax bands would push the 20 per cent tax band from the first pounds 2,000 of taxable income to pounds 2,100, and higher rate tax at 40 per cent would kick in at pounds 24,300 rather than pounds 23,700 - assuming no other allowances.

On these assumptions basic rate taxpayers would be pounds 2.90 a month better off, and higher rate payers would have an extra pounds 6.92 a month to spend.

But the Chancellor is unlikely to leave things on an even keel with so much to do.

Miras, mortgage interest relief at source, is already restricted to basic rate tax. The loss of tax relief to higher rate taxpayers did not cause an outcry. If Miras was restricted to 20 per cent then the monthly cost of a pounds 30,000 endowment loan at 7.99 per cent would rise by pounds 10 to pounds 159.80, assuming the Miras level remains unchanged at pounds 30,000.

The Chancellor could go further and remould the tax bands to nominate the 20 per cent rate as the standard rate and restrict all reliefs at this level. This would have the most serious impact on pensions.

Other areas to watch include:

Pensions. Lump sums from pensions could become taxable, at least above a certain level.

National insurance. No national insurance contributions are payable by employees on earnings over pounds 21,060, due to rise to pounds 21,840 from 5 April. All earnings could be made subject to national insurance or the ceiling could be raised.

Schemes to avoid National Insurance, payment in gold bullion, for example, could be stamped on.

Self Assessment. The Chancellor is likely to announce the start date for a new system of DIY tax assessment that would put the onus on taxpayers to draw up their own tax assessment.

Personal equity plans. Extending PEPs to include gilts is believed to offer the best opportunity for the Government to persuade more savers to buy government stock. But gilts are available through National Savings, and perking up this route to make them easier to buy and understand would be just as likely. A new savings scheme aimed at basic rate taxpayers is possible.

BES. The Business Expansion Scheme is due to come to an end in December. The question is whether the Chancellor will clamp down on the six-month loan back schemes and whether he will announce a revitalised BES that goes back to encouraging investment in fledgling businesses.

VAT. Food, fuel, children's clothes, books, newspapers and magazines may be drawn into the VAT net, although this could be at a reduced rate.

Redundancy counselling. This is at risk of being taxed if the exiting employee has a package worth more than pounds 30,000. The Chancellor may make a gesture and propose that this help to find another job is tax free.

Childcare. The government focus has swung to the care of school age children. But hopes of tax relief for a wider range of employee-assisted childcare such as vouchers seem slim.

(Photograph omitted)

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