Is Gordon boxed in or will it be the worst case for tax?

Melanie Bien looks ahead to this Wednesday's Budget and asks if low growth and high borrowing will force his hand

On Wednesday, Gordon Brown will unveil his seventh Budget along with forecasts of lower economic growth and higher borrowing than he predicted this time last year.

With 60 per cent of independent financial advisers predicting that the Budget will be bad news for investors, according to a survey conducted by JPMorgan Fleming, there is some trepidation ahead of Mr Brown's speech.

Below, we look at what is likely to be included in this Budget, and see what commentators are hoping the Chancellor will introduce – and what he'll leave well alone.

National insurance

Talk of reduced economic growth and higher borrowing usually comes hand in hand with a tax hike. But with this year's Budget coming after the new tax year has started, the timing couldn't be worse.

Given that the increase in national insurance contributions announced in last April's Budget takes effect from today, Mr Brown will have trouble introducing another significant rise in NI so soon, according to accountancy firm KPMG. With the introduction of new tax credits also affecting the first wage packets received by workers after today, that's two big changes they will have to take on board. Any more tinkering with NI will only confuse the situation further.

However, the war with Iraq might persuade the Chancellor of the need to raise some extra revenue, especially as it doesn't look like the conflict will be over quickly. This could lead to a further, smaller increase in NI to come into effect next April.

What is likely is that some revenue will be raised by increasing the NI ceiling to align it with the threshold for the higher rate of income tax. Accountancy firm PKF estimates that this could cost top-rate taxpayers almost £1 a day.

Personal allowances are also likely to be frozen for another year, dragging more people into the higher-rate tax band. By keeping the allowance for those under 65 at £4,615, instead of increasing it in line with inflation to £4,715 for 2003-4, KPMG estimates that the Chancellor will be able to raise £600m.

Income tax and VAT

Because of promises in the Government's election manifesto, an increase in either of these taxes would not seem to be an option for the Chancellor. But with VAT at 17.5 per cent, it is one of the lowest rates in Europe. An increase to 20 per cent would still leave the UK somewhere in the middle of the scale if the Government was prepared to weather the fall- out from reneging on an election promise. The last time VAT was raised was just after the end of the last Gulf war in 1991.

Capital gains tax

The capital gains tax allowance is expected to rise to £7,900 from the current figure of £7,700, in line with indexation. CGT is payable on any profits made from selling shares or a property that is not your main residence.

Inheritance tax

KPMG also believes that inheritance tax (IHT) will increase in line with statutory indexation from its current level of £250,000 to £255,000 from 6 April 2004.

At the moment, if your estate is worth more than £250,000, your heirs must pay 40 per cent tax on the excess. However, the Chartered Institute of Taxation, among others, is calling for the inheritance tax threshold to be raised significantly from the current level. With house prices increasing dramatically over the past few years, they argue that the moderately affluent, especially those living in London and the South-east, are now caught in the IHT trap. In other words, it is no longer a rich person's tax.

Savings

It is likely the Chancellor will follow recommendations in Ron Sandler's report on savings and abolish the current system whereby 5 per cent of sums invested in single premium investment bonds can be withdrawn free of tax each year. This removes a simple and tax-efficient income facility and in future withdrawals may need to be declared on tax returns.

To maximise this tax break before it disappears for ever, independent financial adviser Bestinvest suggests that those considering an investment bond should buy before Wednesday. Those with an existing bond should also think about topping it up before the Budget. This should safeguard the provision – unless a retrospective announcement is made. But if you do decide to take action, think it through carefully first.

"It would be sensible for individuals who may be affected [by changes in the Budget] to play safe and review their options before 9 April," says John Turton, director of Life & Pensions at Bestinvest. "However, we strongly recommend that individuals avoid panic-induced decisions; you should never make financial decisions based solely on tax benefits unless they are appropriate to your overall situation."