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Cameron's tax cuts: How might you be affected?

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Media captionNewsnight's Duncan Weldon uses his scales to work out how David Cameron's proposed tax cuts will balance the economy

The tax cuts being proposed by David Cameron would cost around £7.2bn, the Treasury has said.

Speaking at the Conservative Party conference, the Prime Minister promised to cut taxes, if re-elected in 2015.

"I want to take action that's long overdue and bring back some fairness to tax," he said.

The announcement comes in spite of the chancellor's statement on Monday, in which he said a further £25bn needed to be cut from public spending.

Paul Johnson, of the Institute for Fiscal Studies (IFS), said the £7.2bn figure was double the amount that George Osborne announced the government would be saving by freezing benefit payments.

Referring to the announcement of tax cuts, he said: "It will be really important to understand how this will be paid for."

Thresholds

The prime minister said the personal allowance - the amount people can earn before paying tax - would be increased from £10,000 to £12,500 by April 2020.

Doing so would take a million people out of income tax altogether, but would cost £5.6bn a year by 2020, according to the Treasury.

Mr Cameron also announced that a future Conservative government would raise the threshold for higher-rate tax.

At the moment anyone who earns more than £41,865 is taxed at 40%.

Over the last few years many middle-earners, including teachers and policemen, have been pulled into this tax bracket, as the threshold has not increased in line with the basic personal allowance.

But Mr Cameron said the government would increase the threshold to £50,000, again by April 2020.

That would take 800,000 people out of the higher tax bracket, and cost £1.6bn, the Treasury said.

How might the tax cuts affect you?
Salary Typical annual saving
Up to £10,000 £0
£10,000 to £50,000 £500
£50,000 to £100,000 £1,313
Source: HM Treasury

Pasty tax

If the changes are implemented, a basic-rate tax-payer would pay £500 less in tax in 2020 than they do at the moment, according to the Treasury.

The IFS disputes that figure, claiming the average saving would be far less.

It says that allowing for planned increases in the personal allowance, most basic-rate tax-payers would save around £160 more than they had been expecting by 2020.

According to the Treasury, someone earning between £50,000 and £100,000 a year would pay £1,313 less - a figure which may leave the Conservatives open to the accusation of cutting taxes for the rich.

As the Resolution Foundation, a body which campaigns on behalf of low to middle-income families, put it, "The distributional impact of these tax cuts is skewed towards the top half of the overall income distribution."

The IFS said the savings for higher-rate tax-payers would be more like £430.

Anyone who already earns less than the tax-free personal allowance won't be affected.

The IFS said less well-off workers could be helped more effectively by cutting National Insurance contributions instead, or increasing benefits.

And it warned that the government might have to introduce new taxes to pay for the proposed give-away after 2015.

"Remember the pasty tax?" said Paul Johnson.

"We didn't have it in the end of course, but it was the chancellor looking for money to pay for tax cuts," he told the BBC.