Beware Of Brown's Last Budget

On 21 March, Gordon Brown presents his final Budget as Chancellor before becoming Prime Minister. What could be in store?

On Wednesday, 21 March, Gordon Brown is set to present his eleventh and final Budget before moving from 11 to 10 Downing Street to become Prime Minister when Tony Blair at last steps down later this year. The big question, therefore, is what does Gordon have in mind for his legacy Budget?

I'm going to engage in a bit of financial kite-flying now, by trying to second-guess what Gordon Brown may announce in the Budget. To be honest, this is a tall order, because Gordon is the 'tinkerman of taxation'. During his ten-year stint as Chancellor, Tolley's Yellow Tax Handbook has more than doubled in length from 4,555 pages in 1997 to 9,806 pages today. Nevertheless, with some expert help from accountancy firm BDO Stoy Hayward, here we go.

1) Income taxes

Although income-tax rates won't change, I expect Gordon to increase tax allowances in line with inflation, rather than earnings. This pulls more people into the next tax bracket, in a process known as 'fiscal drag'. For example, in 1997, only 2.1 million people paid higher-rate tax at 40%. However, thanks to Gordon's failure to increase tax allowances sufficiently, four million people now pay some tax at the 40% rate.

There's a slim chance that Gordon could go after higher earners by raising the higher rate of income tax above 40%, but this would upset too many powerful people (including MPs!), so it's probably a non-starter. As for National Insurance Contributions (NICs), I expect he'll leave contributions rates alone, and raise the lower and upper thresholds marginally. Upping NIC rates is far too high-profile, so Gordon will avoid any public outcry by not hiking these.

2) Spending taxes

Value Added Tax (VAT) provides a large and ever-increasing contribution to HM Treasury. In 2004/05, VAT amounted to £73 billion, or a sixth (16%) of the total tax take. All the same, Gordon likes materialistic consumers, plus raising VAT rates would be a big political gamble. Therefore, any changes to the VAT regime will probably take the form of 'stealth', rather than obvious, fiddles.

3) Sin and pollution taxes

With his stern Scottish Presbyterian background, Gordon doesn't look kindly on people who drink and smoke to excess. Hence, he is certain to hike taxes on alcohol and tobacco above the rate of inflation, citing health concerns as an excuse to reach deeper into our pockets. Anyone fancy a booze cruise to the Continent?

Strangely, however, he seems to favour gamblers and the taxes they generate -- more than £600m a year from the National Lottery alone. Also, given the government is actively encouraging adults to bet by licensing more and ever-larger casinos, there's no way that Gordon is going to interfere with gaming firms.

Green taxes will probably feature high on Gordon's agenda as he adopts an environmentally friendly posture, using fears of global warming as an excuse to tax us to the hilt. Although Gordon has already angered air travellers and motorists by raising air passenger duty and fuel duty in December's Pre-Budget Report, we may face more inflation-busting taxes on motor vehicles, Vehicle Excise Duty ('road tax'), fuel, airline travel and so on. Gordon may even go so far as to impose a tax on airline fuel (currently untaxed), but I doubt it. On the other hand, Gordon could boost his green credentials by introducing tax allowances for environmentally friendly businesses, buildings and projects.

4) Death taxes

Inheritance Tax (IHT) -- the tax paid by a person's estate after his/her death -- is deeply unpopular and long overdue for an overhaul. Thanks to booming house prices, more and more estates are being hit by IHT, which takes two-fifths (40%) of the value of estates worth over £285,000 (£300,000 in 2007/08).

It would be nice if Gordon raised this nil-rate band for IHT to, say, £500,000, but, given that only one in sixteen estates (6%) presently pays IHT, there's not much political capital to be made here. Instead, we may have to settle for a few years of above-inflation increases to the nil-rate band. He could exclude principal private residences from IHT, but that could conceivably inflate the housing prices further. This would mean first-time buyers taking it in the neck, so I don't expect Gordon to announce this exemption.

5) Company taxes

Oddly for a Labour Chancellor, Gordon Brown seems to prefer businesses to people, having lowered the usual rate of corporation tax from 33% in 1997 to 30% in 1999. He's certainly keen to boast about the UK's attractions for inward investment from international companies. However, the UK tax regime for firms is less attractive than it once was, so Gordon may take steps to lessen the tax burden on firms.

This could take the form of lower tax rates, higher allowances or more exemptions. Still, business owners would be ecstatic were corporation tax to be cut to, say, 25%. Also, it would be a great help if Gordon was to simplify the tax regime for business by introducing flatter taxation with lower rates of tax, but fewer complex exemptions and reliefs. This would cut the time taken and costs incurred by firms in managing and paying their taxes.

Finally, if you'd like to pay less tax, then visit our Tax centre and read the following articles: Eight Taxes To Avoid, Ten Ways To Avoid Inheritance Tax, Stop Working For The Taxman and Stop Paying Too Much Tax.