Budget2011: CPI link could raise "significantly more" than £1.1bn a year

THE GOVERNMENT'S DECISION to index taxes through the consumer price index could lead to even greater revenues that the £1.08bn a year predicted by 2015/2016, ACCA's head of tax has claimed.

Chancellor George Osborne announced that tax bands will be linked to CPI from 2012, which is historically lower than the retail price index currently used - currently RPI is 5.5% and CPI is 4.4%.

This will have the effect of reducing the tax band thresholds and therefore including more people in the higher rates. This will apply to all direct taxes including income tax, NICs, inheritance tax, capital gains tax and ISAs. The Budget Book stated that this is likely to raise just under £1bn a by 2014/2015, rising to £1bn a year by 2015/2016.

However, Chas Roy Chowdhury, head of tax at ACCA, said that this could be an underestimate.

"It could be significantly more than that," he told Accountancy Age. This is because the main difference between CPI and RPI is mortgage interest rates.

"Going forward, I suspect CPI will start going down to its target level of 2% over the next couple of years and mortgage interest rates are only going to go up now. I can see RPI staying as it is, therefore there will be an even higher divergence," he added.

"The bottom line is that the taxpayer is going to be paying more tax, contributing a lot more to fiscal drag in the future," said Chowdhury.

Bill Dodwell, head of tax at Deloitte, said that the personal allowance increases will not be affected by this, as they will be well above any measure of inflation. "But it does matter for things like the lower threshold for NI and so on," he added.