This piece first appeared in The Daily Telegraph on 1 April  2000
The text here may not be identical to the published text

The Government has admitted that the rate of inflation used to raise taxes in the Budget is three times as high as the rate of inflation used when cuts in tax were being calculated. And the difference means that many people will be paying up to £160 to much tax in 2000/01. For some the difference will be more. Even a pensioner couple on a modest income would have gained around £80 from the change.

The Chancellor told Parliament on Budget Day that "Today inflation is 2.2 per cent". But when he came to CUT taxes he used a rate of 1.1%. When he came to RAISE them he used a rate of 3.4% - three times as high. If the same rate had been used to boost the tax-free personal allowances and bands, it would have knocked more than a hundred pounds off some tax bills in the coming year. A younger single person on average earnings would have seen a cut of £27 in their bill. A higher rate taxpayer on £40,000 a year would gain £160 in a year. Someone with high capital gains would have saved £80. And a modest estate after death would save an extra £2000.

This sleight of hand came to light after the Chancellor decided to raise the duty on petrol and diesel by just "the automatic inflation rise of two pence a litre". In previous years he has raised duty levels well above the rate of inflation – the so-called fuel escalator. But this year he said that because the price of oil had risen so strongly, the rate of duty on petrol and diesel would be held to the rate of inflation – 2p a litre. In fact, the rise in the duty on a litre of petrol was slightly less - 1.61p, and VAT on top takes that to a rise of 1.89p duty per litre, though most filling stations will rond that up to 2p or even 3p. As the amount of duty before the Budget was 47.2p, the actual percentage rise on the duty is 3.4%. Customs & Excise has confirmed to The Daily Telegraph that it puts up the rates of duty on fuel, alcohol, and tobacco by the rate of inflation forecast for next September. And the Treasury is predicting that the so-called headline rate – the rate taking account of all price changes including mortgage costs – will be 3.4% in September 2000.

But that forecast rate is three times the rate of inflation used to raise tax-free allowances. In the Budget the Chancellor confirmed his announcement of the previous November that the personal tax-free allowance – the amount of money we can each have in 2000/01 before paying tax – would rise by £50 to £4385. That is an increase of 1.1%. This rise is worked out under statutory rules which use the inflation rate in the September BEFORE the Budget and round the allowance up to the nearest £5. The rise in allowances was one of the smallest ever because September 1999 saw the lowest level of inflation since May 1960. As the Chancellor admitted it has already doubled. And the Treasury is now forecasting it will treble by this September.

If this forecast inflation rate of 3.4% had been applied to the tax-free allowances then it would have added £150 to the personal allowance, £200 to the allowance for pensioners, £50 on the blind person’s allowance, raised the starting band for basic rate tax to £1560 above the tax threshold, boosted the married couple’s tax relief for pensioners by £20, increased capital gains tax thresholds by £300, added £8000 onto the threshold for paying inheritance tax, and given higher rate taxpayers another £1000 of income at the basic rate. All these increases are approximately three times as big as the ones announced by the Chancellor. Accountants Chantry Vellacott have calculate out that by using these two different rates the Chancellor has boosted the Treasury’s income by £750 million in 2000/01. And most of this extra money comes from people of very modest means.

Using the higher rate of inflation, a pensioner couple aged 75 with an income just high enough to pay tax – around £15,000 – would save £30.80 each from the rise in their personal tax allowance, another £13 from the higher married couple's allowance (which they still get) and a further £4.80 from the increase in the amount of income taxed at the lower rate of 10p in the pound. A total saving of £79.40 a year. And if the estimated rate of inflation had been used for the pension rise as well, instead of the historically low September rise of 1.1%, then it would have added £2.25 a week to the retirement pension instead of the miserly 75p rise which pensioners will get next week. Altogether this couple would have been £170 better off over the year. Instead they got just £50 added to their winter fuel allowance.

John Whiting of accountants PricewaterhouseCoopers told The Daily Telegraph "The Chancellor is giving with one hand and taking back with both. Inflation ought to mean the same in any tax change. Instead, Customs use one definition and the Inland Revenue another – doesn’t joined up government mean they should all use the same rules?"

How indexation double dealing means we pay more tax

1 April 2000

e-mail Paul Lewis on paul@paullewis.co.uk