On the 6th April we enter a new financial tax year and, if estimates are correct, the average UK household will be significantly worse off. Here is a breakdown of exactly what’s changing, how it’ll affect you and what you can do about it.
There are only a few weeks until the end of the tax year and there are some big changes on the horizon which could affect your spending power.
It’s important to understand that with the government committed to tackling the budget deficit it’s possible that you could lose out.
Here’s what’s changing and how you can soften the blow.
Income Tax
Personal Allowance increases from £6,475 to £7,475 per person
Your personal allowance is the amount of money you can earn each year before having to pay any income tax to the government.
From the 4th April it will increase by £1,000 to £7,475 a year and thousands of people will pay less income tax as a result.
According to government figures the increase should benefit approximately 23 million UK tax payers.
If you earn less than £7,475 a year it's likely that you won’t have to pay any income tax at all from April.
Personal allowance rates for over 65s are also set to increase by £450 from April, taking the 65-75 allowance up to £9,940 per year and the 75+ allowance to £10,090 per year.
Higher rate tax band drops from £43,875 to £42,475
Unfortunately, however, if you’re a higher rate tax payer you don’t stand to benefit from this increase in personal allowance.
To stop the elevated personal allowance benefiting high earners, the Coalition government are lowering the high rate tax threshold from £43,875 to £42,475.
The high rate tax threshold is the level at which you begin to pay the 40% rate of income tax.
Essentially any income you earn over £42,475 will be taxed at 40% rather than the standard rate of 20% from April (the 50% bracket will still apply).
However, there are a number of ways that you can reduce your taxable income without taking a pay cut. For more information on how to avoid paying extra tax in the coming financial year, read our guide How to Protect Yourself From Higher Rate Tax.
National Insurance
National Insurance contributions to increase by 1%
The standard rate of National Insurance is increasing from 11% to 12% for the 2011/12 tax year.
However, the threshold at which you begin to pay National Insurance will also increasing by £29 per week to £139 meaning low earners may pay less National Insurance in 2011.
If you earn over £139 per week then you will pay more National Insurance come April.
There’s little you can do to get around this increase. However, if you are a basic rate (20%) taxpayer the increase should be offset by the increase in personal allowance so you’re not likely to lose out.
Additional National Insurance to be paid at 2%
High earners will pay more National Insurance come April as the higher earnings rate, which is paid in addition to standard National Insurance, will increase from 1% to 2%.
The amount you can earn before paying this higher rate has also been cut to £817 in line with the reduction of the higher rate income tax threshold.
This means that if you fall within the new higher rate tax bracket you will not only pay more income tax but your National Insurance payments will increase as well.
Again, reducing your taxable income below the higher rate tax threshold is the only way to get around this increase.
Pensions
Pension guarantees to be introduced
From April the Coalition’s triple guarantee on the state pension will come into effect.
This means that the state pension will increase annually by an amount equivalent to 2.5%, the increase in earnings or the increase in prices - whichever is greater.
This gives you some reassurance that state pension payments will at least keep up with inflation.
Winter fuel allowance to be cut back
The entitlement to winter fuel allowance for anyone who is retired and under 79 will fall from £250 to £200, while the level for over 79s will drop from £400 to £300.
For more information on if you should be receiving Winter Fuel Allowance read our guide Should You Be Claiming a Winter Fuel Allowance?.
ISA limits
Increase from £10,200 to £10,680 per year
The total amount you can save each year without paying tax on your savings is set to increase by £480.
Within the new limit, up to £5,340 can be saved in cash, an increase from the 2010/11 level of £5,100, while the rest can be invested in stocks and shares through an investment ISA.
These increases could prove to be even more important this year with thousands of people being pushed into the higher income tax rate.
Read our guide, How to pay less tax on your savings for more tips on how to make your savings work harder.
Fuel Duty
Increase of 1p per litre – although this may be cancelled
Current plans are to add another 1p to fuel duty this April which could see petrol prices at the pumps continue to climb.
However, the chancellor George Osborne is under increasing pressure to delay the introduction of the tax.
The increase in fuel tax will see drivers paying more to run their cars, if you are worried that running your car could simply become too expensive, read our guide 8 Affordable Alternatives to Owning a Car.
Benefits
Benefits to increase by Consumer Price Index instead of Retail Price Index
In previous years the government has used the Retail Price Index to calculate increases to benefit payments so they track inflation. From April this will change to the generally more conservative Consumer Price Index.
This means that annual increases to benefits such as Disability Living Allowance and Job seekers allowance are likely to be smaller in future years. Consequently you’re likely to notice that the spending power of any benefits you receive will be reduced over time.
The main reason for this reduction is that the Consumer Price Index excludes changes to housing costs, such as council tax, TV licence and insurance and so tends to be lower than the Retail Price Index which includes it.
Child Benefit to be frozen for 3 years
The amount you receive in child benefit, usually £20.30 per week for the first child and £13.40 for other children, will be kept stay the same until 2014.
This means that as inflation rises, the real value of your child benefit payments will fall as they are not increased automatically like other benefits over the next 3 years.
A new limit of 3 crisis loans per year
Crisis loans are available to people who receive certain state benefits that are faced with an unexpected expense that they cannot afford to pay.
From April, a limit of 3 crisis loans per year will be introduced. For more help on dealing with an unexpected expense, read our guide How to Deal with an Unexpected Expense.
Tax Credits
Child Tax Credit entitlements to be reduced.
The three parts of Child Tax Credit are being changed from April.
- Baby Element – Previously worth £545 is being cancelled altogether
- Child Element – Set to increase from £2,300 to £2,555
- Family Element – Will now be withdrawn at a rate of 41% for anyone earning over £40,000
These changes mean that the average family will see a reduction in the Child Tax Credits they receive from April.
Working Tax Credits freeze
Both the standard basic Working Tax Credit and the 30 hour element will be frozen at their current payment levels for 3 years from April.
Couples claiming Working Tax Credits will also have to work a combined minimum of 24 hours a week, with one person working at least 16 hours a week to keep on claiming the payments.
First withdrawal to increase from 39% to 41%
The withdrawal rate is the level at which benefits, including Working Tax Credits and Child Tax Credits, are reduced for every £1 you earn over certain thresholds.
This increase means that benefits will be reduced by 41p for every £1 you earn over the benefit threshold. It will mean the amount you are entitled to drops at a quicker rate than in previous years.
Income Disregard to drop from £25,000 to £10,000
The Income Disregard was introduced to remove the need to recalculate benefit entitlements every time a claimant had a pay rise or changed their hours of work.
It’s a figure that states how big a difference there can be between your actual earnings and the earnings you declare before you have to repay any benefits you receive.
From April the reduction in Income Disregard means that you’ll need to make sure that the benefits office are kept up to date with any changes to your income. If you fail to do so you could be forced to pay back any benefit overpayments.
Housing
Warm Front to re-open
From April, the Warm Front scheme will re-open, after running out of funds for the 2010/11 tax year in December last year.
The scheme encourages people to make their homes more energy efficient by offering grants for heating and insulation. It is, however, only available to homeowners that receive certain benefits.
Warm Front’s annual budget has been cut from £345m to £110m for the this coming financial year, and given that the money didn’t last the full year last time around, you should get your application in as soon as it re-opens come April.
If you’re not eligible for the Warm Front scheme and want to cut your energy costs read our guide 6 Ways to Reduce Your Energy Bills Instantly for more helpful tips.
Local Housing Allowance rates to be cut
Local Housing Allowance or LHA will now be calculated to make 30% of local private housing affordable rather than the current level of 50%.
There will also be a cap on the amount that will be paid depending on the number of bedrooms in the property.
Additionally, under current rules, anyone who claimed LHA could keep up to £15 a week if their rent was less than the allowance. From April this is being abolished meaning you can only claim up to the level of rent you have to pay and are not able to keep any additional money.
For a more detailed breakdown of changes to the Housing Benefit system and how you could be affected, read our guide Housing Benefit Cut: Will You Have to Move?.
Public Sector Pay
2 year pay freeze for anyone earning £21,000 or more
Although already announced in 2010, Teachers, NHS workers, firemen and police officers all face a pay freeze throughout the 2011/12 tax year.
Any public sector worker who earns over £21,000 will see their pay frozen until 2012 at the earliest.
However, public sector workers who earn below the £21,000 limit are guaranteed an increase of £250 a year for the 2011/12 tax year.
