Foolish Special

[ November 8, 2000 ]

Pre-Budget Report: Great News On ISAs

Gordon Brown strutted his stuff this afternoon in his latest pre-Budget report. There was all the usual economic gubbins but here's the highlights as far as we were concerned.

ISAs

The most welcome bit of news in the Chancellor's proposals is that we'll be allowed to save more on a tax-free basis. The investment limit for the Individual Savings Account is to remain at £7,000 for a further five tax years until 2005/6 instead of dropping to £5,000 from next April as had been planned.

And, although he didn't say so in his speech, he also intends to lower the age limit so that 16 and 17 year olds can open a cash ISA from next April. It's a shame that this proposal is limited to cash ISAs and doesn't extend to shares as we think the earlier you can invest in equities the better. Our guide on investing for your children has more details.

Shares

A document called "Helping People to Save" outlines the Government's proposals in this fundamentally Foolish area. However, some of the investment marketing proposals, such as allowing tied agents employed by banks and insurance companies to sell products from other companies as well as their own still seems fundamentally flawed. The agent will still be likely to try and sell the product earning him the most commission.

There was no announcement, as we'd hoped, on abolishing stamp duty on shares.

The Chancellor promised to look at the national insurance liabilities many fast growing businesses accrue on their employee share option schemes and compensation packages. Companies will be able to settle this earlier, during the course of the vesting period, rather than when the options are exercised.

The Government will also consult on reforming capital gains tax for those disposing of substantial shareholdings. The tax could be deferred over a number of years. Some exemption may also be allowed. This applies more to institutional than private investors, since you have to hold 5% of the company's shares. However, if you run your own business and want to sell it then this may apply to you.

Pensioners

There's a whole load of new bits and bobs planned for pensions. We're still trying to get our head around most of it, but the overall thrust is to increase the pensions of the poorest bracket of pensioners. One development is a planned increase in the Basic State Pension from £67.50 to £72.50 in April 2001, followed by an increase of £3 in April, 2002. After that it will revert to increases in line with inflation.

Even bigger increases are planned for the minimum income guarantee (MIG). The MIG effecitvely provides a floor to pensioners' incomes. The plan is for it to be increased to by a whopping 17.5% to £92.15 (from £78.45) for a single person and to £140.55 (from £121.95) for couples. Further increases to £100 and £154 respectively are then planned by 2003. Crucially, after this point, the intention is to increase the MIG in line with average earnings growth rather than inflation. In addition to all this, small increases are planned for pensioners' personal allowances (i.e. they'll pay a little bit less income tax) and in the winter fuel payment.

It's hard to see how the Government can afford to keep increasing the MIG in line with average earnings over the very long-term. It is a start, though, in terms of pulling pensioners' incomes back from the abyss. Don't think this means that you can forget about investing for your own retirement however.

There will be a further statement tomorrow by the Department of Social Security concerning an increase in the income tax allowance for pensioners from 2003.

Houses

If you live in a "disadvantaged community", a politically correct term for impoverished inner cities, then you should benefit from the abolition of stamp duty on property transactions in these areas. Such regions haven't been precisely defined yet though. You don't have to pay stamp duty on houses with a value of less than £60,000 anyway so this may not benefit that many people.

Fuel

As expected the Chancellor did make a number of concessions on fuel taxes. It remains to be seen if this is enough to appease the protestors.

Your turn

Finally, many of these changes and reforms are merely proposals at the moment. The Government invites your views on the issues and proposals in the Pre-Budget Report. You can e-mail your views to budget@hm-treasury.gov.uk.

Useful links
Pre-Budget Report summary -- full report