April tax changes spell bad news for families
The charity Credit Action is warning households to prepare for more belt-tightening in the new tax year. The charity has identified 45 tax changes that will implemented in April, leaving a typical family £200 worse off.
Families in the 'squeezed middle' – earning just above the higher rate tax threshold - are most likely to feel the pinch on the back of rising national insurance contributions, a reduction to the higher rate tax threshold and sweeping changes to child tax credits. Child benefit will also be frozen for three years before being removed from 40% taxpayers in April 2013.
All 29 million employees in the UK will have to pay an extra 1% in national insurance contributions. Currently higher earners – earning more than £844 a week – have to pay an additional 1% but from April this will increase to 2% on all workers earning £817 a week or more.
One of the most significant changes is the drop in the higher rate tax income threshold from £43,875 to £42,475, which will see an additional 750,000 people begin paying tax at 40%.
Fuel duty will also go up by 1p per litre above inflation and the consumer price index will now be used to measure all benefits, tax credits and public sector pensions. Previously benefits increased in line with the retail price index, which is higher than CPI, meaning benefits will now increase at a lower rate.
This is on top of losses being felt by the change in VAT to 20% in January which the Institute of Fiscal Studies says amounts to £480 per household.
Rising energy and food prices and fears over potential interest rate rises and further job losses are also putting more pressure on families.
This research from the INS Green Budget says the planned cut in total public spending over the five years from April 2011 will be larger in real terms than the UK has seen in any five-year period since the end of the Second World War.
Joanna Parsley, associate director of Credit Action, says there is no way to avoid these changes.
"It is vital that with under a month to go until these changes take effect everyone looks to revisit their finances and get them in order" she adds.
Invented by a Frenchman in 1954 and ironically introduced in the UK on 1 April 1973, VAT is an indirect tax levied on the value added in the production of goods and services, from primary production to final consumption and is paid by the buyer. Its levying is complex, with a number of exemptions and exclusions. For example, in the UK, VAT is payable on chocolate-covered biscuits, but not on chocolate-covered cakes and the non-VAT status of McVitie’s Jaffa Cakes was challenged in a UK court case to determine whether Jaffa Cake was a cake or a biscuit. The judge ruled that the Jaffa Cake is a cake, McVitie’s won the case and VAT is not paid on Jaffa Cakes in the UK.
A scheme originally established in 1944 to provide protection against sickness and unemployment as well as helping fund the National Health Service (NHS) and state benefits. NI contributions are compulsory and based on a person’s earnings above a certain threshold. There are several classes of NI, but which one an individual pays depends on whether they are employed, self-employed, unemployed or an employer. Payment of Class 1 contributions by employees gives them entitlement to the basic state pension, the additional state pension, jobseeker’s allowance, employment and support allowance, maternity allowance and bereavement benefits. From April 2016, to qualify for the full state pension, individuals will need 35 years’ of NI contributions.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
The Consumer Price Index is the official measure of inflation adopted by the government to set its target. When commentators refer to changes in inflation, they’re actually referring to the CPI. In the June 2010 Budget, Chancellor announced the government’s intention to also use the CPI for the price indexation of benefits, tax credits and public sector pensions from April 2011. (See also Retail Prices Index).