Budget Musings / NS&I Index linked savings

I personally haven't expected too much from the budget due to the parlous state of the country's finances but have taken note of a few things:

• Income tax bands: personal allowance frozen at £7,475 for 2011/12  but there is a decrease of £2,400 in the basic rate limit, taking it to £35,000 (added to the personal allowance this is the starting point for the higher rate i.e £7,475 + £35,000). 
• The 2010/11 personal allowance of £7,475 will increase to £8,105 in 2012/13, again with a corresponding decrease in the basic limit leaving the higher rate threshold unchanged at £42,475 (i.e. £8,105 + £34,370). Subsequent years will see the allowance increase by RPI at least, until the it reaches £10,000.
• In 2011/12, personal allowances will reduce by 50p for every pound that income (incl. interest and dividends) is above £100k, so make use of pensions contributions, or other tax efficient investments to maximise your allowances
• Indexation of direct taxes: the default indexation basis for all direct taxes incl. inheritance tax and capital gains tax will move to CPI from RPI from 2012/13
• ISA limits: from April 2011/12 ISA limits will increase to £10,680, of which £5,340 can be saved in cash. Again, going forward, the default indexation for ISA limits will be CPI rather than RPI.
• Pensions Tax relief: the annual limit will be £50,000 from 6 April 2011 but the lifetime limit will remain at £1.8m, reducing to £1.5m from April 2012 as previously announced. Unused annual allowances can be carried forward by up to 3 years.
• Pensions annuitisation: the effective requirement for annuitisation will be moved to 77 (previously 75) from 6 April 2011. Savers, from the age of 75, can align multiple drawdown pension funds under the same scheme to enable consistent annual valuations.
• Capital gains tax (CGT) annual exemption: rising in line with statutory indexation to £10,600. From April 2012 (as stated earlier), this will be in line with CPI not RPI

For business:

• Corporation tax rates: set at: 20% (profits up to £300k); 27.5% (up to £1.5m); and 26% (over £1.5m) for the next year, following which the main rate of 26% will be cut by 1% per annum for the next 3 years to 23%
• Bank Levy: will increase to negate any advantage from the reduction in corporation tax.

So, not too many brightspots. You can see that more people will steadily be brought into the higher rate tax threshold over the next few years. 

Most allowances will be indexed by the "Mickey Mouse" Consumer Prices Index (CPI), (no disrespect to Mickey Mouse intended), from the more realistic, and generally higher Retail Prices Index (RPI). Thanks again to Gordon Brown (the gift that keeps on giving) for bringing CPI in.

One bit of good news was the statement that National Savings Indexed Linked savings certificates are likely to resurrected in the coming year with a £2bn funding target being set by the government.

As ever there are terms and conditions but, in the past, these have proven a very useful investment tool for me, allowing me to balance my portfolio between cash investments and equities.

The investments are 100% government backed and have typically yielded a tax free RPI + 1% over a 3 or 5 year period. 

Maturing investments can also be rolled over without affecting any new issue take-up.

Until withdrawal, one could deposit up to £15,000 in each issue of the certificates.

Likely to be very popular, I just hope that they are left in place (rather than quickly withdrawn again) and subsequent issues made which, hopefully, will act as a competitive spur to the banks that they need to work harder to keep/raise funds.

We shall have to wait and see.