September inflation data

1st November 2013

The latest inflation numbers are not as important as they once would have been.

September’s retail prices index (RPI) figures, which emerged last month, would once have been the drivers for a variety of tax and benefit increases from next April. However, that is no longer the case. The Chancellor first moved over to the consumer prices index for most direct taxes and benefits, but has since chosen his own rate of increase. Thus:

• In April 2014 the personal allowance will increase by 5.9% to £10,000, well above the September inflation rate of 3.2% (RPI) or 2.7% (CPI)
• The quid pro quo for the boost to the personal allowance is that the starting point for higher rate tax (ie personal allowance + basic rate band) will rise by just 1% (£415) to £41,865, which means that the basic rate band will shrink by £145. The same 1% increase to the higher rate tax threshold will occur in 2015/16.
• The capital gains tax annual exempt amount will also rise by a mere 1% - making it £11,000 in 2014/15. A £100 rise will occur again in 2015/16.
• There will nether be a change in the £150,000 starting point for additional rate tax, nor the £100,000 threshold at which the personal allowance tapering begins.
• Most in-work social security benefits, including Child Benefit, will rise by 1%.
• State pensions will rise by 2.7%. The basic state pension is subject to the ‘triple lock’, which this year that means an increase in line with CPI, which is the normal increase basis for all other state pensions.

The process of keeping many tax and benefit increases at below the inflation rate is a well-used Treasury tool for extracting more revenue from the public. At present it is not working quite as the Chancellor might hope because earnings growth is so low. The latest figures show an annual increase of just 0.7%.

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