Taxbriefs Chancellors – 6 Kenneth Clarke 1993 – 1997 (part 2)

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Ken Clarke’s second Budget was still focussed on the deficit, but many of the measures had been announced in the previous Budget.

What he did

  • Allowances and tax bands were increased in line with inflation;
  • The reinvestment Tax Exempt Special Savings Account (TESSA – the cash ISA predecessor) was announced, aimed at preventing the money that had rushed into Tessas since their launch in 1996 being spent and boosting inflation;
  • A plan to include corporate bond funds as eligible investments for Personal Equity Plans (PEPs – the stocks and shares ISA predecessor) was revealed. This gave rise to a boom in such ISAs in the following year;
  • “Annuity deferral” was announced for personal pensions. It may not sound like it, but this was the start of income withdrawals, albeit with a requirement to buy an annuity by age 75;
  • Details of VCTs were set out, including income tax relief at 20% and capital gains tax deferral at up to 40%. The same rates were to apply to EIS.
  • More details emerged on self-assessment.

In his third Budget in November 1995, Clarke eased off his austerity drive:

  • The basic rate of tax was cut by 1% to 24%;
  • A 20% savings rate was announced for interest income received by basic rate taxpayers;
  • The main allowances and tax thresholds received above inflation increases;
  • The IHT nil rate band was raised from £154,000 to £200,000 from April 1996;
  • Consultation was promised on extending annuity deferral to other defined contribution pension arrangements.

In his final Budget in November 1996, Clarke clearly had one eye on the election due the following year:

  • The basic rate of tax was cut again by 1% to 23%;
  • The main allowances and tax thresholds were again given an above-inflation increase;
  • The IHT nil rate band was increased to £215,000;
  • A consultation was announced on the possibility of replacing the 5% rule for life policies;
  • The IPT rate was pushed up from 2.5% to 4% from April 1997.

Ken Clarke remains a MP and was Minister without Portfolio in the coalition government until July 2014. Although it is now 20 years since his last Budget, some of his 1990s innovations – EISs, VCTs, IPT, income drawdown and self-assessment – are still with us (and being tweaked to this day).




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