FAMILIES across Scotland are coming to terms with an emergency Budget that will have a more damaging impact on their finances than the initial reaction suggested.
The flagship measures in Chancellor George Osborne's first Budget were an increase in VAT next year, a higher personal income tax allowance and a rise in the capital gains tax (CGT) faced by high earners. The expectations had been of an attack on the wealthy, but with the previous government hiking income tax and national insurance, Tuesday's high-earner measures were limited to increased CGT and a reduction in the basic income tax rate threshold that will drag around 700,000 middle earners into the higher rate tax bracket.
Harder hit, proportionately, will be the lowest income households and middle income families, with average earners set to be around 400 a year worse off, according to the Treasury's own figures. They also show that those with earnings over 49,700 a year will be 1,600 worse off within two years as a result of the Budget.
HOW HOUSEHOLDS ARE BEING HIT
More families will be hit by the loss of child-tax credits than Osborne first claimed. From next April the credit will be removed from those earning above 40,000, a limit that will be withdrawn a year later so that families with one child and earning above 23,275 would no longer be entitled to tax credits.
In addition, child benefit – worth 20.30 a week for the eldest child and 13.40 a week for every extra child – will be frozen for the next three years instead of rising in line with inflation, a move that will cost one-child families more than 109 over that period.
Among the most painful changes for many families will be next year's 2.5 per cent rise in VAT. The rise to 20 per cent from next January will add up to 500 to the average family's annual tax bill.
This will be offset for some by a 1,000 increase in income tax personal allowances, which in turn will be eroded by next year's 1 per cent increase in national insurance contributions for those on more than 20,000 a year.
Some basic rate taxpayers will also be affected by the 10 per cent increase in CGT. The new higher rate of 28 per cent is for higher rate taxpayers only, but the gains from the sale of an asset will lift more people into the higher tax bracket, when added to their income.
...AND HOW TO FIGHT BACK
So if you want to keep your household finances on track as the Budget changes come into force over the next ten months, where do you start?
Gavin Littlejohn, chief executive of Edinburgh-based Money Dashboard, said: "For consumers, it's a case of reassessing income, tightening spending so they can afford the price hikes, setting a budget and then sticking to it. People have a habit of getting their finances in order then quickly losing track of things again. In the current climate that's a very risky strategy, so knowing how cash flow is going is vital at all times and planning ahead is key if consumers want to avoid financial disaster," said Littlejohn.
The average weekly shop will certainly become more expensive when VAT reaches 2.5 per cent, but some adjustments to the shopping list can reduce the impact. While the VAT hike will not affect most food costs, the cost of the weekly shop will still increase because the typical basket contains a range of goods, including cleaning products and toothpaste, that are not VAT exempt. Mysupermarket website estimates that the average shopping basket will cost 33 a year more when VAT reaches 20 per cent, and 66 more than when VAT temporarily stood at 15 per cent in 2009.
Ann Robinson, director of consumer policy at uSwitch.com, suggested combating the Budget by reviewing household bills. "It's estimated that the increase in VAT will cost the average family an extra 500 a year – you can easily claw this back by ensuring you are paying the lowest possible price for the basics."
Energy bill costs in particular can be reduced significantly, with a huge gap between the cheapest and most expensive utility deals. Households paying on receipt of a quarterly or monthly bill can save over 300 a year by moving to the cheapest online tariff and paying by monthly direct debit.
Even if you've moved to a cheaper tariff previously you may be able to cut costs further by switching again because the best deals are usually restricted to new customers.
Reducing energy usage is another way of cutting bills, through steps such as not leaving electrical items on standby, lowering the thermostat and improving the insulation in your home.
Cutting the cost of fuel is also easier than it used to be, with websites including petrolprices.com making it possible to find the cheapest petrol station near you. Littlejohn said: "You simply enter your post code to find out the cheapest petrol station in your area on any given day – I found a difference of 5p a litre near me."
Many families can also counter tax rises by taking up all the tax perks and benefits they are entitled to. Scots waste an estimated 729m on unnecessary tax payments each year, according to advice group Unbiased.co.uk. Unused tax credits and personal allowances, failure to maximise Isas and tax-effective pensions and unnecessary CGT payments are the most common avoidable expenses.
The threat of CGT is an easy one to mitigate. The most obvious way is to be vigilant – avoiding sales that would, when added to your income, drag you into the higher rate limit. Alternatively, married couples where one spouse is liable to the higher rate of CGT should take advantage of the lower rate, while the retention of the 10,100 annual allowance makes it worth maximising both spouses' allowances and using losses to offset any gains.
Finally, even with savings rates at historic lows it's worth tracking down the best possible deal.
"If you can, lock some of your money away for a while to get an even better return," said Littlejohn, referring to the higher returns available on fixed rate bonds with terms of three years or more. Elsewhere National Savings & Investments has accounts that guarantee inflation-beating returns. For more on this, turn to the next page.