Tax-free threshold on ISAs hit by change in inflation measurement from April 2012

Julian Harris
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ALLOWANCES for several direct taxes will rise at a slower rate than before, after changes made by chancellor George Osborne yesterday.

The measure of inflation used to calculate increases in direct tax allowances will change from April next year, Osborne announced.

Thresholds for capital gains tax (CGT), national insurance (NI) and ISAs, will now be pegged to the consumer price index (CPI) rather than the retail price index (RPI).

The CPI typically runs below the RPI. In February the CPI jumped to 4.4 per cent (from four per cent in January), yet the RPI also spiked by 0.4 per cent, rising to 5.5 per cent.

The change will bring a significant boost to the government coffers, according to Henderson’s Simon Ward.

“Switching to CPI for direct taxes will raise £105m in 2012-13, rising to £1.08bn in 2015-16,” Ward said.

However, CPI inflation will average 4.2 per cent this year – over twice the Bank of England’s target – the OBR admitted yesterday. It also revised up its inflation forecast for 2012, from two per cent to 2.5 per cent.

In November the OBR forecast inflation at just 2.8 per cent this year, yet its prediction has been shattered in recent months.

Higher expectations for government borrowing and the slowdown in growth were blamed on inflation by the OBR.

“Higher-than-expected inflation is expected to squeeze household incomes and weaken consumer spending growth,” it said.

“The upward revision to spending primarily reflects the impact of higher near-term inflation, which pushes up social security and debt interest bills,” the OBR also added.