On 17 October 2018, the Office for National Statistics (ONS) announced the Consumer Prices Index (CPI) figure for the year to September 2018 as 2.4%, down from 2.7% in August 2018.
This is represented by the yellow line. Note that this is not the same as the Consumer Prices Index including owner occupiers’ housing costs (CPIH), represented by the light blue line at 2.2%. Neither is it the same as the Owner Occupiers’ Housing Costs (OOH), represented by the dark blue line at 1%.
September’s CPI index, is always, important from a professional point of view – complicated, fascinating and significant:
There are important values that must increase by at least the value of CPI at the September preceding the start of the tax year, i.e. the 2.4%. This is courtesy of a provisions in the Income
Tax Act 2007:
The Income Tax Basic rate limit (for rest of the UK Taxpayers and Welsh Taxpayers))
The Personal Allowance (UK-wide)
The Married Couple’s Allowance (UK-wide)
The Blind Person’s Allowance (UK-wide)
The 2.4% value in September 2018 does not really allow us to predict these values at all. The Chancellor will do whatever he likes in the Budget on 29 October 2018 with regard to these, depending on what Government policy is at that time (and how much he can afford). What we do know, however, is that the above values must increase by at least 2.4%.
National Insurance and Statutory Payments
Budget 2011 announced that the basis for the indexation of the following would be in accordance with September’s CPI to determine:
The Class 1 Lower Earnings Limit (LEL)
The Class 1 Primary Threshold (PT) *
The rate of Class 2 NICs for the self-employed **
The rate of Class 3 ‘voluntary’ NICs
The Class 4 Lower Profits Limit (LPL), above which Class 4 NICs become payable by the self-employed
* Autumn Statement 2016 announced the alignment of the Primary and Secondary Threshold. This means that for 2018/19, both will be incremented by the rate of CPI as at September 2018 (i.e. the September preceding the start of the tax year).
** It was proposed that Class 2 NICs would be abolished from 2018/19, then from 2019/20. Now, plans fir abolition have been scrapped by the UK Government
The Class 1 Upper Earnings Limit (UEL) and the Class 4 Upper Profits Limit (UPL) are aligned to the Income Tax Higher Rate threshold, i.e. the Personal Allowance plus the Basic Rate limit. The above will all be confirmed by the Chancellor in the Budget and ‘Amendment Regulations’ will update the Social Security (Contributions) Regulations 2001. The CPI indexation rate will also be used to increment payments such as Statutory Sick Pay, Statutory Maternity Pay etc.
The UK basic State Pension (bSP) and new State Pension (nSP) rise in line with the ‘Triple Lock’, meaning it will increase by the higher of:
Price inflation (as measured by September’s CPI), or
The question, therefore, is ‘what is earnings inflation’? There is no statutory definition of earnings inflation, just that the Secretary of State ‘shall estimate the general level of earnings in such manner as he sees fit’. By convention, the Government has compared the Nominal Average Weekly Earnings (AWE) from the ONS for the 3 months to July in one year and compared it to the following year (i.e. May to July 2017 compared to May to July 2018). The ONS indicated that there had been a rise of 2.6% in this period.
Therefore, it seems that the Triple Lock will guarantee a 2.6% increase to the bSP, currently £125.95 per week and the nSP, currently £164.35 per week.
Of course, the bSP is incremented by the Additional State Pension (ASP) which does not apply to the nSP. The ASP is not incremented in line with the Triple Lock and will be increased by the value of CPI inflation as at September 2018 (2.4%).
The Lifetime Allowance
The Finance Act 2016 made a provision for the Lifetime Allowance (LTA), to increase by the value of CPI from tax year 2018/19 onwards. So, based on the announcement from the ONS that the CPI in September 2018 was 2.4%, we are looking at the current value of £1,030,000 to be incremented to £1,056,800 in 2019/20 (as a result of the rounding rules in FA 2016). This will also be confirmed by the Chancellor in his Budget on 29 October 2018.
September 2018’s inflation rate really does matter.