Switch to CPI to hit workers

Elizabeth Fournier
AN increase in personal income tax allowances could save basic rate earners £326 per year compared to what they are paying in tax today, but the benefits will be undermined by planned changes to how increases in tax thresholds are calculated.

Chancellor George Osborne yesterday said the personal tax allowance would increase by £630 in 2012-13, on top of a £1,000 increase already planned for April. This will raise the allowance to £8,105 from the current figure of £6,475, which will take 260,000 out of paying tax.

The increased allowance will be matched by an equivalent narrowing of the basic rate tax band, leaving the 40 per cent threshold at £42,475. In similar changes that come in this year the chancellor overbalanced the Treasury’s books, reducing the rate by £1,500 and pushing around 700,000 people into the higher bracket.

But the actual benefits to the taxpayer will fall behind basic government projections due to a switch in 2012 to the consumer price index (CPI) for measuring the increase in tax thresholds. It means the increases won’t keep pace with salary hikes, leaving workers more likely to be dragged into a higher bracket.

“The chancellor’s switch to the CPI index for direct taxes is a sleight of hand to boost the tax take,” said Pauline Manning a tax partner at accountancy and business advisory firm Wilkins Kennedy.

On national insurance, the chancellor stuck to inherited plans to raise contributions by one per cent from April. The change will see the standard employee rate climb to 12 per cent, with an additional two per cent on higher earnings.