Budget 2011: £30bn tax and pensions raid

George Osborne yesterday embarked on a 'clandestine' raid on tax and benefits by switching his cost of living calculations to a method more favourable to the Treasury.

Experts said the move could cost families almost £30bn.

Up to 40,000 more workers might have to pay National Insurance next year. And pensioners could miss out on almost £700 of income as the basic state pension is raised more slowly.

The blow will significantly reduce the positive impact of his Budget announcement of an increase in the amount of money people can earn before they start paying tax.

Mr Osborne said lifting the annual personal allowance to £8,105 will save 25m people up to £326 a year each.

But he also announced that the thresholds for various direct taxes would be linked to the consumer price index from April 2012, instead of the retail price index, which is historically the higher of the two inflation measures.

The change will affect National Insurance and capital gains tax from next year.

The Treasury insisted the change did not affect income tax thresholds. Officials estimate that it will rake in almost £2bn in extra National Insurance by April 2016.

This follows last June's decision to link pensions and benefits to CPI, which will also have an impact on the living standards of millions of families.

It means that from next year benefits and pensions will increase more slowly while more of our income is eaten away by taxes.

The Government expects to save £1.5bn in the financial year starting on April 6 as a result of its inflation switch.

In the 2015-16 year it expects to save £10.6bn bringing total savings over the five years to an astonishing £27.6bn.

The Hendle family
Smiling through the pain: Jason and Debbie Hendle with Monty and Quin

Jason Hendle could soon find himself above the higher tax threshold as a result of changes introduced by George Osborne.

He earns £40,000 as an IT analyst in Northampton, while his wife Debbie earns £6,000 as a part-time parish council caretaker. They have two children Monty, six, and Quinn, three. Mr Hendle, 43, is concerned by the change to the higher-rate tax threshold, which will now be linked to the lower consumer prices index rather than the retail prices index.

This means the threshold will increase at a lower rate than rises in wages - and that even a small pay hike will drag him into the higher-rate bracket.

'The change to the threshold banding is bad news for us,' he said. 'It will mean that any pay rise I get will be likely to send me into the higher-rate band and we would lose £135 a month in child benefits and £40 a month in working tax credits.

'It would effectively put me back a pay rise, which is frustrating at a time when the cost of living is going up.' The changes will more than offset any gain from the rise in the threshold for taxable income.

'It would be a drop in the ocean,' said Mr Hendle. 'We might get £100 extra, but there was nothing in the Budget to curb the rises in energy prices, for example, which cost us over £100 a month. That is a 30 per cent increase for us over the past couple of years.

'They are also doing little about petrol prices, which are astronomical, other than freeze the duty.' Mrs Hendle, 44, said: 'The Budget was a damp squib. They talk about encouraging mothers to work but there is not enough help. Sometimes we wonder if it is worth me working because of the cost of childcare and the taxes.'

Nicola Roberts, tax director of accountants Deloitte, said: 'Switching to CPI is a clandestine way to raise tax. Most people won't understand what this change in the inflation rate means or the corrosive effect it will have on their earnings and benefits.'

CPI tends to rise more slowly than RPI because it does not include housing costs especially mortgage rates. Over the years this can make a big difference to pensions and to the amount of tax paid.

CPI inflation is currently 4.4% while RPI is 5.5%. These are expected to fall to 2.5% and 3.6% from next year. But the difference between the two measures is expected to increase as interest rates rise.

By 2015 RPI at 3.8% is expected to be almost double the CPI rate of 2%. Linking the starting level for paying National Insurance to CPI from next April will cost 21m workers an average of £6 a year.

But the effects gradually accumulate and become quite dramatic. And by using the Government's inflation forecasts, the change in the starting level for paying NI will cost workers up to £68 a year.

An extra 40,000 low-paid workers will be paying NI next year alone because of the use of the lower inflation measure.

Tax-free savings will be another casualty of the switch to CPI. The annual ISA contribution allowance was recently linked to RPI but will from next year switch to CPI. As a result the allowance by 2015 will be £11,620 rather than £12,315.

The move to CPI could also hit pensioners next year. The state pension will rise by the higher of wages, CPI or 2.5%. But RPI is predicted to be 3.6% which is higher than all three.

The so-called triple-lock is likely to push the pension to £104.70 a week in April 2012 and to £112.75 by 2015. Using the Government's predictions for RPI it would rise to £106.19 in April next year and to £118.19 by April 2015.

By April 2016, pensioners could have missed £696 of income if they had instead received 2.5% under the triple lock. Pensions tax relief for the very wealthy will also be cut, saving £1.2billion this year alone.

Labour was quick to point out yesterday that families will also pay an average £450 in extra VAT this year as a result of the rise in January from 17.5% to 20%.

Other measures also include the introduction of a new 5% stamp duty band on homes worth more than £1m - a 25% increase in tax on properties of this value.

Alcohol duty will rise by 2% above inflation - an increase which experts predict will add 10p to the price of a pint of beer.

The threshold for paying inheritance tax has also been frozen at £325,000, raising the Treasury almost £1bn over four years.

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