Stamp prices could rise to fund Post Office pensions

The Post Office could have to inject a further pounds 150m a year into its pension schemes, enough to force the organisation to raise the price of postage stamps, if the Chancellor makes sweeping changes to the taxation of share dividends in today's Budget.

The full burden, which would come if Mr Brown removed the tax credit on dividends for institutional investors, would knock 10 per cent off the pounds 10bn value of the two Post Office funds. Richard Close, finance director, warned the organisation would have to raise its pension contributions. "The issue is the sheer size of our pension fund. It's the second or third largest in the UK," he said.

The Post Office yesterday reported record profits of pounds 577m for the year to the end of March, an increase of 37 per cent, and intensified its campaign for greater commercial freedom. The increase camefrom the 1p rise in the price of stamps last year, which raised pounds 130m. The Post Office paid pounds 285m of the profits to the Treasury, while a further pounds 216m would go in corporation tax.

The Post Office blamed a pounds 21m loss in its Parcelforce division last year on strikes at Royal Mail, which it said had put off new customers. It also announced the creation of 400 jobs in a pounds 10m telephone marketing centre in Sunderland. A further three call centres are planned by Subscription Services, the business which collects BBC licence fees.

Announcing his retirement as chairman, Sir Michael Heron warned the Government not to spend too long on its review of the Post Office's operations. "The Post Office has to be treated as more than a cash cow for Government. It's possible for Government to continue to benefit from the Post Office's profitability while offering more commercial freedom to compete with post offices from abroad."

In a submission to the Department of Trade and Industry the Post Office will urge for a fixed percentage of profits to be paid as a dividend to the Treasury each year, rather than a variable cash target. It will also ask for freedom from public spending and pay limits, and the ability to make acquisitions and form joint ventures. Though the DTI previously ruled out privatisation, Post Office sources suggested a partial share sale could be on the political agenda.