Business

How does 3% inflation affect me?

pensioners doing the can-can Image copyright Getty Images
Image caption Pensioners may be dancing for joy, but not everyone will want to join in

Inflation - as measured by the Consumer Prices Index (CPI) - has hit 3%, the highest level since April 2012.

This will have an impact on everybody from pensioners to workers, and those running businesses too.

With prices going up by 3%, and earnings going up by just 2.1%, the average worker will inevitably be worse off than a year ago.

But pensioners, and some of those currently saving into private pensions, will see significant benefits.

State pension

Pensioners will be celebrating, as the 3% figure will be used to up-rate their state pensions in April next year. This will be the largest increase they have received since April 2012.

Those who receive the New State Pension will see their weekly income rise from £159.60 to £164.38.

Thanks to the triple lock, pensions have risen by at least 2.5% every year since 2010. In years of high inflation - such as 2012 - they have risen by up to 5.2%.

Under the triple lock, pensions rise by 2.5%, earnings or prices, whichever is the higher.

However, from 2020 onwards the government is committed to a "double lock", in which only inflation and earnings will be taken into account.

Public sector workers

Most public sector workers will see significant increases in their accrued pension benefits next year. This is because September's CPI figure is used as the basis for the payments, with some extra added on, depending on the area of work.

As a result:

  • Teachers will get a 4.6% increase (3% + 1.6%)
  • NHS employees will get a 4.5% increase (3% + 1.5%)
  • Police officers will get 4.25% (3% + 1.25%)

The rises will be viewed as some compensation for the 1% cap on public sector pay rises.

Pension savers

The maximum amount you are allowed to save into a defined contribution pension scheme - known as the Lifetime Allowance - will also rise by 3%.

At the moment, if your pension pot is worth more than £1m, you pay a 55% tax charge on any withdrawals.

From April next year, you will now be allowed to save an extra £30,000 without paying tax.

Image copyright Getty Images
Image caption Small businesses will see a significant rise in rates

Business rates

As many as 1.8 million businesses will pay more in business rates from April, as the increase is linked to September's Retail Prices Index (RPI).

This is usually higher than the CPI measure, and last month was 3.9%.

It means businesses will be liable for an extra £273m next year, according to the British Retail Consortium.

Coming on top of the rates revaluation in April this year, that will come as a considerable blow to some.

Benefits

September's inflation figure was traditionally used to set benefit payments. But most working age benefits - including Jobseeker's Allowance, Employment and Support Allowance, some types of Housing Benefit, and Child Benefit - are frozen until April 2020.

So anyone claiming these benefits will see no increase in April 2018.

However, other benefits such as Maternity Pay, Personal Independence Payments, Attendance Allowance and ESA (Support Group) have not been frozen and so are likely to rise by 3%.