Budget 2011: using CPI to calculate tax explained - Telegraph.co.uk

Q. What taxes will this change affect?

A. All "direct taxes", though -- oddly -- the Treasury has said this does not include Income Tax. But it does affect National Insurance contributions made by employees, Capital Gains Tax and the amount of money savers can invest in an Individual Savings Account (Isas).

Q. How badly will people be hit?

A. Many people – nearly all taxpayers – will be hit by a small amount. The Treasury estimates that it will raise £1.08 billion a year by 2015/16.

In practice it means that people will start paying National Insurance and Capital Gains at a lower level than they would previously be expected. They will also be able to save less in an Individual Savings Account than expected.

The biggest hit will be on National Insurance. From April 2011, National Insurance is payable on anything above an annual salary of £7,748, at the rate of 12 per cent. So for someone earning £12,000 their national insurance bill will be £572.64.

If the Government had stuck with RPI, their bill would be £510.24 next year. But Blick Rothenberg, the accountants, estimate that it will increase to £547.68, if the threshold increases in line with CPI -- a £37.44 higher bill than otherwise it would have been RPI.

Q. I am confused. I thought the Coalition Government's big promise was that 23 million people would pay less income tax because the starting threshold was being raised?

A. You are right. The threshold at which income tax starts is raising by £1,000 to £7,475 next month, raising ultimately to £10,000 by the end of the Parliament. This switch from RPI to CPI does not affect income taxes, the Treasury has confirmed. But it does affect National Insurance contributions made by employees, Capital Gains Tax and the amount of money savers can invest in an Individual Savings Account (Isas).

That is why some accountants are describing the change as a "stealth tax". It drags people into paying higher rates of National Insurance, a tax in all but name.

Q. What is the change to Isas?

A. The Isa limit is £10,680 and would be expected to increase next year by nearly £600 based on the most recent RPI figure. Instead, it would rise by £470, using the CPI figure.

This will annoy savers, who can feel aggrieved this Budget did little to help them. However, it is worth remembering that the Isa limits didn't change at all for a decade after they were introduced.

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