The important inflation numbers

The inflation figures issued last month are the ones that matter.

Traditionally, the inflation rate for September has set the level of increase for tax bands, tax allowances and social security benefits to take effect from the following April. While the September date remains unaltered, the coalition Government has made several changes to the measures of inflation used or, in some instances, just suspended inflation proofing. Indeed, there is still a possibility that when the Chancellor gives his Autumn Statement on 5 December he will announce sub-inflation or nil increases for some benefits.

However, assuming that inflation-linking is left to run its course and no other revisions emerge, there are some things we are already sure of.

• A single person’s basic state pension will rise by 2.5% to £110.15 from April 2013. The 2.5% is not actually an inflation number, but stems from the ‘triple lock’ introduced by the coalition agreement. This says that pensions must rise by the greater of Consumer Prices Index (CPI) inflation, earnings inflation and 2.5%. With CPI inflation running at 2.2% in September and earnings growing most recently at 1.7%, the flat 2.5% wins.

• Other state pension benefits, such as the additional state pension (SERPS and S2P) will rise in line with the CPI.

• Most other state benefits will rise in line with CPI. However, Child Benefit will be frozen for a third year and in 2013/14 the full impact of the new child benefit tax will be felt (it starts on 7 January 2013).

• The income tax personal allowance will not be index-linked for 2013/14, but instead will rise to £9,205. At the same time the basic rate band will shrink to £32,245, as announced in the March Budget. Next tax year, age-related allowances will be frozen as part of the controversial move to phase them out. The ISA limit will rise to £11,640 and the capital gains tax annual exemption to £10,900, both in line with the CPI plus specific rounding adjustments.

A year ago the Chancellor had the misfortune to hit the peak of inflation (5.2% for the CPI) for benefit increases. On this occasion he may have hit the low point. From October, a new round of utility price increases will kick in, as will the impact of the jump in student tuition fees to £9,000. Inflation is therefore likely to be higher by the end of 2012.

The Chancellor cannot afford to ignore inflation in his financial planning, and nor can you. It may appear to be just small percentages each year, but the cumulative impact is insidious. For example, over the last ten years the buying power of £1 has fallen to 72.7p, while even the last five years have seen it shrink to 85.2p.

Stakeholder pensions get a stake through the heart

The last big idea to reform workplace pensions has been quietly put to rest.

In April 2001, stakeholder pensions were launched, looking remarkably like charge-limited versions of their personal pension predecessors. Six months later, employers with five or more employees were required to offer most of their workforce ‘access’ to an employer ‘designated’ stakeholder pension scheme, unless other suitable pension provision was provided.

There was no automatic entry into a stakeholder scheme, and neither the employer nor the employee was required to contribute. The net result was that stakeholder pension schemes, as a means of promoting workplace pensions, often failed. Many of the designated schemes were empty shells, devoid of members, existing only to comply with the law.

The failure of stakeholder pensions explains much about the shape of the new auto-enrolment system, which started life at the beginning of last month. It covers more employees – there is no minimum number per employer – enrolment is automatic and, most importantly, so too are employer and employee contributions. The employee’s right to opt out means that the new regime is not compulsory, although the fact that some individual employees have taken no action has prompted some experts to label it as quasi-compulsory.

HMRC’s Affluent Unit

Affluence isn’t what it used to be…

At last year’s Liberal Democrat conference in Brighton, Danny Alexander, the Chief Secretary to the Treasury, announced that HMRC would create a new ‘Affluent Unit’, targeting those with a net worth of at least £2.5 million. In the Treasury’s words, the Unit uses ‘new and innovative risk assessment techniques to identify areas where wealthy individuals are avoiding or evading taxes and duties’.

At the 2012 conference Mr Alexander revealed that the remit of the Unit would be extended to cover anyone with net worth of £1 million or more. This will increase its audience by two thirds to 500,000. To help cope with the greater number, ‘an extra 100 inspectors and specialists will be recruited’.

Further business rate rises could lead to staff cuts

Further business rate rises would leave 70% of retail businesses facing staff cuts, according to research conducted by the British Retail Consortium (BRC). The BRC also found that a 2.6% planned rise in rates would be equivalent to £175 million extra in costs for these companies.

The BRC says that rates have already risen dramatically – by 4.6% in 2011 and 5.6% in 2012 – despite the poor performance of the economy in general and the retail sector in particular.

Questioning retail chief executives, the BRC found that further rises would lead to the majority cutting back on investment in stores, with 15% saying they would expect to close outlets as a result.

BRC director-general Stephen Robertson said, “MPs who care about their constituencies will recognise the importance of their high streets and the need to take action to prevent more shops falling empty. They will want to avoid the blow to investment and job creation that chief executives tell us would come from a third successive huge hike in business rates.”

A bit more certainty on residence

The Government plans to introduce its new statutory residence test (SRT) from April 2013. This should make it much easier for you to establish whether or not you are a UK resident if your residence status is currently unclear.

A summary of responses to the consultation has recently been published, along with draft legislation. The aim of the SRT is to ensure that an individual cannot become non-resident without reducing their UK connections, but it recognises that people should not be treated as resident where they have little connection with the UK. The SRT therefore takes account of connection factors that someone has with the UK, and the number of days spent here.

There will be some situations where a person is always treated as UK resident – if they stay here for 183 days or more during a tax year, if their only home is in the UK, or if they work here full-time. Full-time working means an average of 35 hours a week (either employed or self-employed). Renting a home overseas will circumvent the ‘only home’ condition. In other situations, a person will automatically be treated as being not resident in the UK. The 16-day condition increases to 46 days if a person has not been resident for any of the three previous years, and for this purpose the SRT can be used to determine residence status for years before 2013/14. Full-time work must include at least one complete tax year, with UK visits restricted to 90 days a year and working days in the UK restricted to 20 days (this might be increased to 25 days).

If your status is not definite, then residence will be determined by a trade-off between ‘connection factors’ and ‘days of presence’. It will be harder for someone leaving the UK to relinquish residence than for a new arrival to acquire it. Connection factors are:

• Having immediate family here
  
  
• Having UK accommodation (made use of during the year)
  
  
• Doing substantive work here (40 or more days a year)
  
  
• Having a UK presence in either of the two previous tax years (more than 90 days)
  
  
• Spending more time here than in another country (only relevant for leavers).

Anti-avoidance provisions will be introduced and the concept of ordinary residence is to be abolished from 6 April 2013, although this will affect relatively few people. The SRT will be particularly welcomed by people who leave the UK without making a clean break. If they want to spend, say, two months a year in the UK, then they will know that they can establish their non-residence status if there are no other connection factors for the initial two years overseas.

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