Sparse giveaways likely from chancellor strapped for cash

Tax giveaways in Wednesday’s Budget may be few and far between, as experts suggest a possible increase in the individual savings account limit could be accompanied by the scrapping of higher rate tax relief on pension contributions .

Both the chancellor and Gordon Brown have said they want to help savers hit by low interest rates and experts think an increase in Isa allowances could be on the cards. But this may come at the expense of investors contributing to pensions.

“The government is so strapped for cash that it will need to get the money from elsewhere for any giveaways,” said Malcolm Cuthbert, partner at Killik & Co, the investment adviser.

“Obviously, government finances are tight but abolishing higher rate relief would be a clear disincentive to save through a pension,” said Laith Khalaf, pensions analyst at Hargreaves Lansdown financial advisers.

“The horrible fear is that he could try to pass off a move like this as hitting the Fred Goodwins of this world [the former RBS chief executive, who walked away from the bailed-out bank with a £700,00-a-year pension].”

Some financial advisers suggested that high earners should bring forward pension funding to beat a possible reduction in relief. Cuthbert said that for those with available cash, it was worth contributing in the next few days before the Budget, in case any restriction took effect immediately.

But Khalaf said it was difficult to see how a reduction could be implemented this tax year, especially for occupational pensions and “salary sacrifice” schemes where full tax relief is given at source.

A boost to the annual Isa limit, possibly to as much as £10,000 from the existing £7,200, is seen as the most likely Budget move to help savers, especially as low interest rates mean the tax cost need not be that high. To aid pensioners specifically, some experts are urging the chancellor to introduce a “granny bond” or “pensioners’ gilt” offering a guaranteed return.

However, Macintyre Hudson, the accountancy firm, predicted an “investment income surcharge” could also be announced for some savers. “The current political mood allows the chancellor to recover significant revenue by increasing taxes on the investment income of the better-off,” said Nigel May, tax principal. “The fact that, because of National Insurance, the total charge on investment income is actually lower than that on earned income is an anomaly he may want to address [NI is not levied on income from savings and investments]. There won’t be many of his backbenchers weeping for the bankers on this one.”

There are fears that Darling could bring forward the implementation of NI increases and a 45 per cent top rate of income tax that he announced in last autumn’s pre-Budget report. Increasing the basic rate of income tax to 21 per cent and the top rate to 50 per cent could also be options, said Deloitte, the accountants.

With the housing market still weak, the chancellor is expected to announce a continuation in stamp duty concessions. The temporary increase to £175,000 in the level at which stamp duty kicks in on property purchases is due to end in September. This could be extended for another year or a new permanent threshold, of perhaps £150,000, may be announced.

With the reduction in VAT to 15 per cent due to expire at the end of the year, the chancellor is also expected to indicate if this sales tax will revert to 17.5 per cent.