One measure announced within the Budget is likely to result in some accusations of a ‘stealth tax’ once the implications are fully understood.
In the future, the Treasury will be using the Consumer Prices Index (CPI) measure of price inflation to calculate changes to most allowances and thresholds.
This will replace the current use of the Retail Prices Index (RPI). CPI tends to be a lower amount than RPI, so in practice this change will mean allowances are increased by less in the future.
There are a few examples of how this will work in practice.
The Individual Savings Account (ISA) annual allowance is currently £10,200 for the 2010/11 tax year. On 6th April 2011, the ISA allowance will increase to £10,680.
This increase was based on the RPI figure for the year to September 2010, rounded up so the annual allowance remained easily divisible by twelve (to make monthly investments easier to administer).
For the 2012/13 tax year onwards, the ISA allowance will be based on CPI inflation for the year to the previous September, so CPI for the year to September 2011 for the 2012/13 ISA allowance.
This change in indexation will also apply to the capital gains tax annual exempt amount. This is currently £10,100 for the 2010/11 tax year and becomes £10,600 on 6th April 2011 for 2011/12.
This annual exempt amount will also be calculated for future tax years based on CPI rather than RPI for the year to the previous September, rounded up to the nearest £100 in this case.
There are some exceptions to these indexation changes.
For the remainder of this parliament, the yearly increases to employer National Insurance thresholds and age related personal allowances are going to increase in line with RPI.
These subtle but important changes are important to understand so they can be incorporated with your Financial Planning for the future.
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