Business

Budget changes will 'cut income by £200'

Finance
Image caption The 2011 Budget introduced 44 changes to tax and benefits - most of which will dent incomes

A financial education charity says tax and benefit changes coming into force in the coming week will leave households £200 worse off.

They include a one percentage point rise in the charge for National Insurance and a lower threshold at which the higher rate of tax applies.

Credit Action says of the 44 changes to both systems only 13 will have a positive impact.

It says 26 of the changes will have a negative impact on people's pockets.

The other changes, it says, will have a mixed effect on household income.

One of the biggest moves announced in the March Budget brought the level of income which people start to pay the 40% higher rate tax down to £35,001.

The well-respected independent Institute for Fiscal Studies estimated that would bring an extra 750,000 people into the upper tax band for the first time.

Set against that is the raising of the limit at which any income tax is levied by £1,000 to £7,475.

That will mean 500,000 people will be lifted out of paying income tax altogether.

Up and down

The main rate at which National Insurance is paid is being increased from 11% to 12% from the start of the new tax year. But again, the level at which the payments begin has been lifted from £110 to £139.

Added together, the changes to the income tax and National Insurance system will help low earners, leaving someone on £7,475 a year £275 better off.

People on £35,000 will not see any change to the amount of tax and National Insurance they pay.

The biggest losers will be those earning more than £35,000, with someone on £50,000 seeing their take-home pay reduced by £500 a year, according to the Institute for Fiscal Studies.

Wide-ranging changes to the tax credits and benefits system include a freezing in the rate at which child benefit is paid for three years, something that means inflation will erode its worth in that time.

Benefits and pensions in future will increase in line with the inflation as measured by the Consumer Prices Index (CPI), rather than the Retail Prices Index (RPI), which tends to be higher.

CPI was running at 3.1% in September, the month that benefit increases are based on, while RPI was considerably higher at 4.8%.

Changes being made to the working tax credit, the local housing allowance, and one of the winter fuel allowances will also negatively affect people's income.

Pension plan

Plans to reform the state pension will be unveiled in the coming week - with a new flat-rate scheme to start in 2015 or 2016.

The flat-rate pension could be worth at least £155 for new pensioners by the time it comes into effect, meaning most people will have a higher guaranteed non-means-tested benefit than is current.

Also beginning this week, around half a million Incapacity Benefit claimants could find themselves declared fit for work after a re-assessment of their health.

Trials of compulsory health checks for claimants in two parts of the country have found about a third of those tested were deemed to be able to work.

The mental health charity, Mind, has criticised the new Work Capability Assessment (WCA), calling it not fit for purpose.

It surveyed more than 300 people currently claiming the benefit and found 75% said concern about the WCA had made their mental health worse.

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