Money: It's good news now, bad later

Nigel Eastaway finds brilliant Budget sleight of hand
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The Independent Online
Last week's Budget was a brilliant sleight of hand which allowed the Chancellor to generate good press - who could resist 10p in the pounds 1 as a starting level for tax ? - while delivering some bad news for the future.

At the time it wasn't always clear which Budget changes will come into effect soon, and which are reserved for future years (see box for a timetable). For example, the married couple's allowance isn't being scrapped until April 2000; in the 1999/2000 tax year it will still be worth pounds 197 a couple (aged under 65).

You should also look at the 1999 Budget together with changes announced in the past to get a better overall picture of what's going on. The Chancellor announced net tax reductions of more than pounds 1bn for 1999/2000, with further tax cuts of nearly pounds 5bn proposed for the following two years. That pleases the voters, but when you look at all the measures announced in earlier Budgets which take effect in 1999/2000, the Revenue's tax take is going up by more than pounds 3.5bn. By 2002 it will have raked in an extra pounds 12.5bn. This leaves the Chancellor with net tax increases of some pounds 2.5bn overall for 1999/2000, and well above that for each of the next two years. It's a clever ploy.

The most important "good news" as far as the Chancellor is concerned is the 10 per cent rate of tax, starting next month, to replace the 20 per cent band. But there is a much lower band width - just pounds 1,500 versus pounds 4,300 for the existing 20 per cent band. The second "big giveaway" was the massively increased pounds 100 winter allowance for pensioners (up from pounds 20).

The main money-spinners are increases in tobacco duty (see box), and more stamp duty on homes costing over pounds 250,000. For houses in the pounds 250,000 to pounds 500,000 bracket, it's up from 2 per cent to 2.5 per cent, and from 3 per cent to 3.5 per cent on homes over that level.

We will also have to pay more for our insurance policies. Insurance premium tax rises from 4 per cent to 5 per cent. This is the tax on general insurance policies: travel insurance is already taxed at 17.5 per cent.

From April 2000 we'll also get a 1p cut in the basic rate of tax. This will be the lowest standard income tax rate for 70 years - but even for those earning over pounds 32,500 it will only amount to around pounds 22 per month.

The Chancellor will be clawing some of this money back from 2000 onwards when millions of people lose the married couple's tax allowance and mortgage tax relief (Miras).

Miras is a tax break worth about 10 per cent on the first pounds 30,000 of mortgage payments. The cut will affect those with smaller mortgages more than the better-off. If standard mortgage interest rates remain at current levels, the cost of a home loan of more than pounds 30,000 will go up by pounds 17.25 a month next April. This, says the Council of Mortage Lenders, adds up to an extra 0.35 per cent on the level of interest on your loan.

Tax bills for people who benefited from both these tax breaks will increase by about pounds 31 per month from 2000. Families will have some of this loss offset by the new children's tax credit, worth pounds 416 a year, but this does not come in until April 2001, and in effect it will be means-tested as it will be gradually withdrawn if one or both parents are higher-rate taxpayers.

Another give-away to look forward to in 2001 is aligning the National Insurance threshold with income tax. So employees will start to pay NI on wages over pounds 87 a week in 2001 (up from pounds 66 from April 1999). Those earning less will be outside the tax and NI system.

Nigel Eastaway is chairman of the Chartered Institute of Taxation's technical committee.


Already in force

Petrol up by 7.3 per cent. A gallon of unleaded fuel is now pounds 3.13.

Tobacco up by 6.3 per cent - 17.5p on 20 cigarettes.

6 April 1999

New 10 per cent tax rate on the first pounds 1,500 of taxable earnings.

Company car tax discounts reduced and car fuel charges raised.

Mobile phone benefit abolished.

Computers on loan from employer no longer a taxable benefit.

1 June 1999

Road tax for small cars with engines up to 1,100cc goes down to pounds 100 a year. All other cars will cost pounds 155 (up from pounds 150).

6 April 2000

Married couple's allowance, widow's allowance and tax relief for maintenance payments abolished.

Mortgage tax relief (Miras) abolished.

Basic rate of income tax reduced to 22 per cent.

National Insurance contributions Class 2 cut to pounds 2 per week; Class 4 increased to 7 per cent.

6 April 2001

Child tax credit introduced.

NI threshold aligned with income tax allowance at pounds 87 a week.

6 April 2002

New system for company car taxation.