Thursday, 26 January 2012


UPDATE: In the Budget on 21 March 2012 the personal allowance was raised to £9,205 from 2013/14 and could be on track for £10,000 by 2014/15.

Deputy Prime Minister Nick Clegg has called for the personal tax allowance to be raised to £10,000 more quickly than is set out in the Coalition Agreement. That commits the government to raise the allowance to £10,000 by the end of the Parliament. The next election is fixed for 7 May 2015. So it would have to be done by the tax year 2015/16 at the latest.

So reaching £10,000 more quickly means either introducing it in full 2013/14 or doing it in 2014/15, probably with an interim extra rise in 2013/14.

This blog looks at the effects of raising it in full to £10,000 in 2013/14.

The allowance is £7,475 this year, 2011/12, and will rise to £8,105 in 2012/13 – that was announced last March in the 2011 Budget.

Raising the personal tax allowance to £10,000 in 2013/14 would save basic rate taxpayers £379 (£7.29 a week) in cash terms over 2012/13. But the allowance would have risen anyway with inflation saving them £39 in tax. So the extra gain is £340 (£6.54 a week).

The cost of making this change in 2013/14 would be about £10 billion. But that could be cut by restricting the gain made by higher rate taxpayers. If their gain is limited to the same amount as basic rate taxpayers the net cost would be around £7.5 billion. And if higher rate taxpayers were denied any gain at all the cost could be cut further to around £6 billion.

The cost could also be cut by freezing the allowance at £10,000 in 2014/15 and 2015/16, saving about £2.3 billion compared to an allowance rising with inflation over those two years.

The change could produce two problems.

1.       The rise in the personal tax allowance reduces the extra value of the higher tax allowances given to those over 65.

2.       The change could also cause difficulties with plans to take child benefit away from people paying higher rate tax if savings are made by denying them the increase.

Individual gain
A rise to £10,000 in 2013/14 would mean no-one with an income less than that would pay income tax. That income represents about 30 hours work a week at minimum wage. For those with an income at that level or above it would mean a cut in income tax compared to the tax paid in 2012/13 of £379 or £7.29 a week for everyone paying basic rate tax.

If no change was made to the higher rate limit the saving would extend up the income scale to those with incomes up to £100,000. Above that the personal tax allowance begins to be reduced – and currently disappears when income exceeds £114,950.

Claims today that the increase to £10,000 would save people £700 in tax (The Daily Telegraph and Nick Clegg on BBC Breakfast) are just about true, but misleading for two reasons.

First, £700 represents the total saving for basic rate taxpayers on the total rise in the personal tax allowance under the Coalition Government – from the £6,475 it inherited to the £10,000 it has promised. That increase of £3,525 represents a saving in basic rate tax of £705.

Second, the figure takes no account of the fact that the allowance would have risen in any case each year with inflation reaching £8,300 in 2013/14 and £8,640 in 2015/16. So if the personal tax allowance does rise to £10,000 in 2013/14 that represents an increase of just £1,700 and the actual tax cut compared with what would have happened is £340 or £6.53 a week.

So claims of a gain for taxpayers of £700 are clearly misleading.

Taxpayer cost
The allowance for 2013/14 will automatically rise in line with inflation, as measured by the CPI. If that hits the expected level of 2.4% (for the last quarter of 2012) then the personal tax allowance will rise to £8,300. Any rise above that would count as extra cost. An increase to £10,000 would be a real rise of £1,700. HM Revenue & Customs estimates that each increase of £100 in the personal tax allowance would cost £570 million in 2013/14. So a rise of £1,700 would cost £9.7 billion. That figure can be crosschecked – with about 30 million people paying income tax a gain of £340 each is £10.2bn. So we can say it is around £10 billion.

This cost could be reduced by limiting the gain for higher rate taxpayers.

1.     The government could allow those on higher rate tax to benefit from the cut in basic rate tax but not get any rise at all in the level at which higher rate tax was paid. That technique will be used in 2012/13 when the personal tax allowance rises by £630 but higher rate tax will still start at £42,475. Doing that again in 2013/14 would cap their gain to the same £379 (£340 in real terms) as those who do not pay higher rate tax. To achieve that the Basic Rate Limit (BRL) would have to be cut from £34,370 to £32,475 so that higher rate tax still starts at £42,475 (ie £32,475+£10,000). As the BRL would normally rise with inflation to £35,195 that would be counted by the Treasury as a cut ‘from an indexed base’ of £2,720 in the BRL. That is a 7.7% cut. HMRC estimates the cost of cuts in the BRL at £310m per 1% change so it would represent a ‘saving’ of about £2.4 billion.

2.      The Government could go further and deny the rise at all to people paying higher rate tax. That would entail a further cut in the higher rate threshold to £40,580. The BRL would then be £30,580, a cut from its indexed level of £4,615 or 13.1%. That would count as a saving of £4 billion from an indexed base. However, doing that would have the awkward knock-on effect of reducing the income level where, under present plans, child benefit will disappear from January 2013. Currently that will start at £42,475 but if these changes are made it would be cut to £40,580 from April 2013. Taking child benefit away from households where either partner earned that much would be deeply unpopular.

The savings from limiting the gains to higher rate taxpayers would cut the cost of raising the personal tax threshold to £10,000 in 2013/14 from about £10 billion to around £7.5 billion (option 1) or £6 billion (option 2).

An additional way of saving costs is to freeze the rate at the £10,000 level in 2014/15 and 2015/16. Normally it would rise with inflation. Freezing it would count as a ‘saving’ of £2.3 billion over those two years.

Perhaps to frustrate that idea, Nick Clegg called for the allowance to rise ‘further and faster’ than set out in the Coalition Agreement. The word ‘further’ could be taken to imply that once it rises to £10,000 it will carry on rising at least with inflation – that is to at least £10,200 in 2014/15 and £10,405 in 2015/16.

People over 65
Recent above inflation rises in the personal allowance have not been matched by the increase in the higher allowances given to those aged 65 or more. They have risen with inflation – RPI up to 2011/12 and CPI from 2012/13. If the personal tax allowance rose to £10,000 for the under 65s in 2013/14 that would put it very close to the extra allowances given to the over 65s.

In 2012/13 they will be £10,500 (aged 65-74) and £10,660 (75+). If they rise in 2013/14 with inflation at 2.4% they would go up to £10,760 and £10,920. That is a very small premium over the allowance younger people get.

These extra allowances are tapered down to the standard personal tax allowance as income exceeds a certain amount – £25,400 in 2012/13 which would rise to £26,100 in 2013/14.

All these figures are approximate and calculated by me on the basis of published official figures.
·        Inflation estimates are from supplementary tables published by the Office for Budget Responsibility to accompany the Autumn Statement on 29 November 2011 Economic and fiscal outlook supplementary economy tables - November 2011 table 1.5
·        Costs of tax changes are based on figures published by HM Revenue & Customs

Friday, 20 January 2012


Inflation fell again this week and tweeps are asking me if they should cash in their National Savings Index Linked Certificates before the return falls below that on normal savings accounts.
Easy peasy. No. Here’s why.
The latest issue of the NS&I certificates went on sale on 12 May 2011 and was pulled on 6 September. If you cash those in before the first anniversary you will only get back what you put in.
After that you get RPI inflation for the period you have held the certificates. It is measured from the index published the month before you bought them. So if you bought in May it begins with the March Index published in April, and the same when you cash them in. There is also a smidge more on top, 0.25% or less for the current issue.
Although inflation is on its way down it may not fall far and will probably rise again.
Last January VAT went up from 17.5% to 20% adding about three quarters of a percentage point to the rate of inflation, says the Office for National Statistics. From next month current prices will be compared with prices including the 20% VAT so that effect will disappear from the annual rate.
The tiny falls in gas and electricity prices this week – worth just two to three percent off the average dual fuel bill and less for many customers – will still leave energy higher than it was a year ago. Prices are expected to rise again under the pressures of environmental policy and global demand.
Finally, the Bank of England is continuing with its programme of creating new money through quantitative easing. Printing money has always and will always raise inflation – so far by an amount officially estimated by the ONS at 1.5 percentage points, though the upper limit to the prediction is.
The forecasts by the independent Office of Budget Responsibility (OBR) published before Christmas give holders of index-lined certificates some comfort. The OBR’s predictions for RPI are that it will stay well ahead of CPI (which it says will fall to its 2% target and stay there) then slowly drift up to 4% by the first few months of 2017. A return of 4% plus a smidge and tax-free is better for taxpayers than anything currently on the market.
Of course what you will get depends on inflation over the course of the years ahead when you cash in. Here is the table for RPI inflation quarter by quarter which was published alongside the OBR’s report on 29 November 2011

















For basic rate taxpayers those are still good returns and for higher rate taxpayers they are far better than anything on the market now. Even the nadir of 2.8% is equal to 3.7% taxed at basic rate and 4.67% at higher rate. If you are lucky enough to pay 50% additional rate tax it is equal to 5.6% taxable interest.
So holding your RPI-tracking-plus-a-smidge, tax-free certificates makes sense.
And what about the latest offer from the Post Office? Its new inflation linked bond – issue 4 – pays annual RPI plus 0.25% a year over three years. Or you can choose a five year bond paying annual RPI plus 0.5%. But three things can make them much poorer value than the National Savings certificates. First, the interest is taxable – so they are best for non-taxpayers. Second, there are tough penalties for early encashment – so you have to be sure you will not need your money for three or five years. And third, for those with high savings, the account is only protected up to £85,000 if Bank of Ireland UK, which runs the bond, goes bust. National Savings they are not.
In 'What a steel' 18 January, the AVA is the Automatic Vending Association not the Association of Vending Agents. Apologies

Thursday, 19 January 2012


The Royal Mint is starting production of new steel 5p and 10p coins. Currently 5p and 10p coins are made of 75% copper and 25% nickel (called cupro-nickel).

These new coins will be the same diameter as the old ones (24.5mm and 18mm) but will be 11% thicker to make sure they weigh the same (6.5g and 3.25g) because steel is lighter per unit of volume than cupro-nickel. Keeping the same weight is important for banks which want to be able to weigh bags of 5p and 10p without worrying if they are steel or cupro-nickel.

However, the extra thickness will cause problems for machines which estimate the value of coins by measuring the height of the stack - 100 mixed old and new 5p and 10p will not have a constant height.

The thicker coins will also be rejected by the existing mechanisms in coin-operated machines. The industry has been very busy upgrading but it is not certain that all machines will take the new coins when they start appearing in volume around Easter.

The Association of Vending Agents (which make the machines that sell us snacks and drinks) says its members have been working hard to adapt their 462,000 machine and 'vast majority' will work with new coins. Not much comfort if the machine in your country railway station refuses your 10p and leaves you without a chocolate bar at 11pm!

Payphones - there are about 20,000 that accept coins - and parking machines - 85,000 of those - are also being adapted but some older models may never work. Bus and train fare machines and machines at toilet barriers may also have problems.

The Treasury estimates that changing all coin operated machines will cost the industry £80 million, But the savings in metal costs will be very modest at £7.5 million a year. Each current 10p piece contains about 4.5p worth of copper and nickel. Steel is much cheaper and  new 10p coin will contain about 1/5th of a pennyworth of metal - around 1/20th as expensive.

The new coins are being churned out of the Royal Mint's new nickel-plating machines at Llantrisant. Royal Mint expects to issue the coins in bulk in April when the new year demand for 5p and 10p coins begins. In 2010 the Royal Mint produced 25 million 5p (the lowest ever) and 180 million 10p coins.

Apart from being 11% thicker the new coins will be dated 2012 and, being made of steel, can be picked up by a magnet. The effect can already be seen with 1p and 2p coins - those before 1992 are made mainly of copper but after that steel was used. So you can sort new from old with a magnet.

There are no plans to extend the use of steel to 20p and 50p pieces because of fears that nickel plated steel is easier to forge than cupro-nickel. But the Treasury does not consider that making 5p or 10p coins will be worth a forger's time.

19 January 2012