Your Money: Bamboozled by fireworks

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The Independent Online
IT WAS a taxing Budget in more ways than one.

The Chancellor managed to bamboozle us with an array of measures that nearly masked the overall effect.

Those who kept their eyes on the obvious targets, such as the basic tax rate, would have missed the show. It was rather like a fireworks display with no rockets. But there was a grand design.

The main theme was the creeping 20 per cent tax band. The good news for taxpayers is that it is part of the Government's policy to make this the standard rate rather than 25 per cent.

But the bad news is that the Chancellor is using this line to hack chunks off tax reliefs by restricting them to 20 per cent long before the band has much impact on the overall tax charge.

Even with the pounds 500 extension in the coming tax year, and a further pounds 500 step in the following year, the 20 per cent band will only cover the first pounds 3,000 of taxable income. While many will find that this becomes their top rate, there are millions of others who will lose higher reliefs and find the gains marginal. This year, the extension of the 20 per cent band saves someone able to use it fully just pounds 25 in tax - 500 times 5p.

The Chancellor may have been surprised (and delighted) at the lack of outcry when he first clamped down on higher tax relief by restricting Miras (mortgage interest relief at source) to the basic 25 per cent rate. But it would have been most undignified of higher-rate taxpayers to have complained.

Next year, it will be the turn of basic-rate taxpayers to take it on the chin, when Miras and the relief on the married couple's allowance is screwed back to 20 per cent.

Homeowners wanting to move have had a rough time, with so many discovering that the value of their property has sunk below the level of their mortgage debt. But for those who stay put and take the long view, the dramatic fall in interest rates has meant a lightening of the burden of monthly mortgage payments. The prospect of another pounds 10 a month cannot be too terrible to contemplate when, for instance, the cost of a pounds 60,000 interest-only loan has come tumbling down over the last year by pounds 129.50 a month to pounds 349.58.

Married couples are still coming to terms with the new freedom to split their allowance or agree for one partner to take it all. For the first time, the wife has a right to half of it, and it can decently be called the married couples allowance after April. Before, it was the old married man's allowance in a thin disguise.

But it will continue to be awarded to the husband if couples take no action. There is still a fortnight to inform the Inland Revenue in writing if you want to rearrange things for the coming tax year, and until 5 May actually to deliver Form 18 (available from tax offices).

IT WAS a Budget that left a lot of the professionals reeling. Many involved in private-client share dealing, unit trusts and pensions were uncertain about the overall impact of the dividend taxation changes.

The stock market fell in the aftermath of the Budget, but underneath was a feeling that perhaps a recovery really is under way. Even the relentless rise in unemployment was checked.

The improved cash flow of companies could allow them to declare higher net dividends to mitigate the loss on tax credits. But this seems too much to look for when so many businesses have been straining to hold dividends at current levels through harsh times.

Investing in personal equity plans will not be quite so rewarding. But some tax shelter is still better than none.

Despite the troubles within pension funds, pensions remain a tempting way to reduce the income tax bill. This could be the time to take advantage of full tax relief while it still remains. Remember, there is another Budget coming in November.

THE court hearings concerning the divorce of the ex-wife of former Tory MP Sir Eldon Griffiths turned on the way solicitors handled her case for a share of his pension.

He had offered to give her part of his MP's pension. But pensions cannot be cut up like a cake.

Their indivisibility has thwarted the smooth division in many divorce cases, which is why a working party on pensions and divorce is to deliver a report shortly.

This should come up with more flexible solutions.

The argument that tight pension rules are the counter- balance to the generous tax reliefs could be upset if they were to be tampered with.