2010 budget: how will savings be affected?

mp businessman savings in london©PeskyMonkey

YESTERDAY'S emergency budget was much more concerned with what goes into our bank accounts - namely: less - than with what'll happen to the money we already have.

Public sector workers earning more than £21,000 face a two year pay freeze while those earning less will have little potential for increasing their salaries, for example.

Benefits claimants will also see a drop in the cash they're entitled to in real terms: child benefit will be frozen for the next three years and there'll be a cap on housing benefit.

Changes for savers

But beyond the doom and gloom for future earning there were also a few significant changes for savers.

New ISA limits

From next April, tax-free Individual Savings Account (ISA) limits will be linked to the retail price index (RPI).

Since VAT will rise to 20% in January and the RPI has been steadily rising for the past few months this will almost certainly mean that consumers are able to save more tax free.

It won't be possible for the limit to go lower than this year's level and the new rate will be rounded up to a multiple of 120 to make it easier to calculate monthly savings.

Currently the annual cash ISA limit is £5,100.

Brian Morris, head of savings policy at the Building Societies Association, welcomed the change.

"The Chancellor's commitment to index link the annual ISA subscription limit from 2011/12 is good news for savers," he said. "We would like the Chancellor to go a step further and confirm the government's commitment to ISAs for the longer term."

In the short term, though, the commitment to ISA limits preserves some of the highest earning rates savers have available.

'Saving gateway' scrapped

On the other side of the coin, however, Osborne's budget scrapped plans for a 'Saving Gateway' scheme proposed by Labour.

If it had gone ahead and been successful, the Saving Gateway would have doubled the savings of 8m people on the UK's lowest incomes.

However, the coalition have chosen to cut Child Trust Funds (CTFs), the basis of the Savings Gateway scheme; without CTFs the plan makes little sense.

£250 CTF payments have already been cut but the new budget was the final death blow to additional payments as a £190 grant to new mothers was cut.

The treasury estimates that getting rid of the payments will save the country £560 million.

Banking levy

Also likely to catch savers' eyes is the banking levy.

Under Osborne's plan the annual levy paid by banks and building societies will rise to 0.04% in this financial year and to 0.07% the year after.

The 0.07% rate should raise around £2.3 billion but will the banks come for our savings rates to claw back some cash?

So far commentators think it's more likely to affect pay and bonuses in the financial institutions.

Morris pointed out that the rise was hardly a surprise.

"The Chancellor's announcement of a banking levy was not unexpected. The BSA is pleased that the levy is not a tax on retail deposits and welcomes that the Chancellor has exempted smaller deposit takers from the levy," he commented.

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