Susie Simpson, tax manager at Pricewaterhouse-Coopers, writes:
It has certainly been difficult to keep track of what all the tax changes really mean.
With the Christmas shopping season almost upon us, it would be easy to focus on the most immediate impact of the 2.5 per cent VAT rise on 4th January 2011. However, once Christmas is over, the focus will turn to spring pay cheques to pay off Christmas excesses. The April 2011 tax changes may well impact this.
All individuals under the age of 65 are entitled to a personal allowance within which they do not pay income tax. After two years at 6,475, the basic personal allowance will be increased to 7,475 from 6 April 2011. This is a step on the way towards the promised long-term objective of a 10,000 personal allowance with further steps promised through the rest of this Parliament.
The basic (20 per cent), higher (40 per cent) and additional (50 per cent) tax rates remain the same but there is a tweak in the higher rate threshold. If either you or your husband is a higher-rate taxpayer, you are not intended to benefit from the increase in the personal allowance. As a result, you will pay 40 per cent tax on around 2,500 more of your income than you otherwise would have done.
Added to all of this, National Insurance Contributions (NICs) increase by 1 per cent for employees and the self-employed from April 2011. For employees, this is offset to an extent by a pre-announced increase in the lower limit at which employees start to pay 12 per cent NIC. This results in a NIC saving of approximately 69 per annum. There is also a reduction in the upper limit above which employees will pay 2 per cent NIC which will result in NIC savings of around 165 per annum. for higher rate taxpayers.
So, how does all of this fit together?
Taking the personal allowance changes in isolation, the tax saving on a straight comparison of 2010/11 to 2011/12 is 200 (1,000 @ 20 per cent). The Chancellor stated that 880,000 of the lowest income taxpayers will be taken out of tax altogether as a result.
However, bringing all of this together, if you or your husband are basic rate taxpayers and either of you earn more than around 33,000 then you are likely to be worse off in April 2011 because the NIC increases will wipe out the savings from your increased personal allowance. If you earn less than 33,000 then you should be slightly better off and more so as your income decreases.
You may also be affected by changes to the child and working tax credit system which take effect in April. You will no longer be entitled to the family element (currently 545) of the child tax credit if your total combined income exceeds 40,000 and working tax credits will be frozen or, depending on your situation, restricted from April 2011.
If you or your husband are higher rate taxpayers you will have seen the media coverage on the loss of child benefit for higher rate taxpayers. If you are affected by these changes they are, at least, postponed until January 2013.