FOOL'S EYE VIEW
Pre-Budget Highlights

By Cliff D'Arcy & Stuart Watson (TMFTiger)
December 10, 2003

The Chancellor delivered a short pre-Budget statement on Wednesday. There were precious few surprises, with the main emphasis being on the strength of the economy, pensions, improved childcare benefits and help for sports clubs (leading to the obligatory mention of the Rugby World Cup).

The economy

The pre-Budget speech began with the usual preening regarding the state of the British economy. Growth for this year is expected to be 2.1%. In both 2004 and 2005, growth of between 3% and 3.5% is being forecast.

On the borrowing front, things aren't quite so rosy. Britain will have to borrow £37b this year, £10b more than previously predicted. For next year, the forecast has been increased from £24b to £31b. However, despite this, the Chancellor still reckons he will adhere to his two rules regarding the public finances. These are: not to borrow for spending over the economic cycle (he's predicting a £14b surplus) and to keep net debt below 40% of national income (it's currently around 33%).

So, this probably means no major tax hikes before the next election, but it could be a fairly close call.

The Chancellor confirmed that he has decided to switch the measure of inflation in the UK from the current RPIX figure to the HICP (Harmonised Index of Consumer Prices - often referred to as 'hiccup'), which is the standard international measure. This means that the Bank of England now has an inflation target of 2% (previously 2.5%), but increases to pensions, benefits and index-linked gilts will be calculated as before.

Homeowners and homebuyers

Homebuyers can breathe a sigh of relief, because the Chancellor didn't mention any change to the rates of stamp duty on property sales. However, he is considering the recommendations of the Miles Review into the UK mortgage market and the Barker Review of housing supply. Also, in order to boost the weak private rented sector, the Chancellor is considering the introduction of REITs (Real Estate Investment Trusts - read more).

Families with children

Employees who are given financial support for childcare from their employers (not just in work-based crèches) will not pay income tax or National Insurance Contributions on the first £50 per week. This could be worth an extra £1,000 a year for higher earners, and could come in the form of a subsidised service, vouchers or a childcare allowance.

However, you won't benefit if unregistered friends or relatives look after your children while you're at work. Furthermore, you could end up losing out if you already benefit from employer help with childcare, because any excess above the £50 exemption will no longer be tax-free.

The government is to raise the 'child element' of the Child Tax Credit by 13%, which means as much as £180 a year extra for the parents of seven million children. Also, the government will create a thousand children's community centres for pre-school children and their parents.

Council Taxpayers

The Chancellor is to give an extra £3.6 billion to English local authorities next year, which should help them to balances their budgets better and, therefore, avoid council-tax increases on the scale that we suffered this year. The Chancellor also warned over-spending councils that he will use his capping powers to limit excessive rises where he deems this necessary.

Investors

Sadly, it seems there will be no reprieve for the withdrawal of the 10% dividend tax credit for ISAs. This means that ISA investors will lose one-tenth of their income from shares with effect from 6 April 2004. It was also announced that the ISA limit will be reduced from £7,000 to £5,000 in 2006/7. At the same time, the limit for mini Cash ISAs will be reduced from £3,000 to £1,000.

The chancellor will consult on doubling the annual limit for Venture Capital Trusts and Enterprise Investment Schemes to £200,000, plus increasing income-tax relief for VCTs to 40% for two years, which is good news for the very well heeled!

Pensions

Mr Brown pointed out that the cost of pensions in Europe would increase to around 15% of national output by 2050. In Britain, he predicts that this figure would rise to just 5%. However, the bad news for pensioners is that pensions will remain linked to inflation, and the link to earnings (abolished in 1980) will not be restored.

The Chancellor has also proposed that, regardless of the type of pension they have, retiring workers could take up to a quarter of their pot as a tax-free lump sum. This simplifies the existing system, whereby the tax-free limit can differ between schemes.

There's some welcome relief for fat cats: the Chancellor has asked the National Audit Office to look into his proposal to create a £1.4m lifetime cap on pension pots, which means these lucky people won't have to pay 60% tax on any excess just yet.

Mr Brown also announced rules to make annuities more flexible, plus provision for older workers to draw occupational pensions early. There is also a proposal to allow the inclusion of residential property, which will no doubt interest the buy-to-let brigade.

Tax rates

Most will increase in line with inflation, rising by about 3%, with the notable exception of the Child Tax Credit.

                            2003/04              2004/05
                                  £                    £
Income tax 

Personal allowance            4,615                4,745 
10% tax band                0-1,960              0-2,020 
22% tax band           1,921-30,500         2,021-31,400 
40% tax band            Over 30,500          Over 31,400 

Other taxes and allowances 

CGT annual exemption          7,900                8,200 
Inheritance tax             255,000              263,000 
Child Tax Credit 
(child element)               1,445                1,625