The chancellor promised his June Budget that would be â€˜tough but fairâ€™. What's your verdict?
Well, it seems that families will bear the brunt of the cuts announced in today's Budget. Child tax credits will be restricted to couples or individuals earning less than Â£40,000 a year. The baby element of child tax credit will be abolished and child benefit will be frozen for three years. What do other measures announced in the emergency Budget mean for you?
Tax credits and child benefits
In his Budget, the chancellor announced a range of spending cutbacks - many of which will affect families with children.
â€¢ Tax credits will be restricted for those families earning Â£40,000 a year or more from April 2011. This threshold will reduce further in 2012-13. You can read a press release about this on the Directgov website.
SAVVY TIP:If you earn less than around Â£25,000 a year as a household and have one child, you'll be better off under the Budget changes (purely relating to tax credits) after April 2011. If you earn more, you'll be worse off. If you have more than one child, the threshold is higher.
â€¢ The baby element of the child tax credit (currently worth Â£545 a year) will be withdrawn from April 2011.
â€¢ The rate at which the tax credit is taken away also rises. When you claim for tax credits youâ€™re assumed to qualify for the full level of each element of tax credit. Depending on how much you earn, the tax credit could be reduced by 39p for every pound you earned above the threshold. When your income hits a second threshold (currently Â£50,000) child tax credit was withdrawn at a rate of 6.67%. This will be changed so that both withdrawal rates rise to 41%.
â€¢ Thereâ€™s information about tax credit rates and allowances on the HM Revenue & Customs website.
â€¢ The income disregard will fall. Every year youâ€™re allowed to have an increase in your salary without it affecting the level of tax credits. From April 2011 the amount by which your income can increase in any tax year will fall from Â£25,000 a year to Â£10,000 a year. In April 2013-14 this figure is due to fall to Â£5,000.
SAVVY TIP: In a sneaky move, the chancellor introduced an income disregard for falls in income â€“ so if your earnings go down by up to Â£2,500 a year from April 2012, your tax credits wonâ€™t be increased to reflect that.
â€¢ The child element of the tax credit will increase by Â£150 above indexation in 2011-12 and by Â£60 above indexation in 2012-13. Currently itâ€™s worth Â£2,300.
â€¢ The SureStart Maternity Grant, which is worth Â£500 and is available to women claiming certain benefits, such as income support, will only be available for the first child from April 2011.
â€¢ The Health in Pregnancy grant, worth Â£190 to mums whoâ€™ve been given health advice from their midwife or doctor, will be abolished from January 2011.
â€¢ The child benefit rate will be frozen for the next three years from April 2011 at Â£20.30 a week for the eldest child and Â£13.40 for other children.
â€¢ Tax credits and benefits will be uprated in line with the Consumer Prices Index (CPI) rather than the retail prices index (RPI) from April 2011.
Child care vouchers available through employers have become increasingly popular. Last year Gordon Brown planned to abolish tax relief on child care vouchers but changed his mind and said that tax relief would be reduced to 20%. The chancellor confirmed that from April 2011 for new applicants, the weekly amounts parents would be able to claim exempt of income tax and NI would be Â£28 a week for 40% taxpayers and Â£22 a week for 50% taxpayers. This doesn't apply to those who are already receiving child care vouchers.
The income tax threshold will rise to Â£7,475 from Â£6,475 from April 2011. This rise will effectively only apply to basic rate taxpayers because the basic rate limit will be reduced by Â£2,500 and National Insurance thresholds will rise. The exact figures will be announced in the Autumn. In addition the chancellor announced:
â€¢ VAT will rise from 17.5% to 20% from January 4th next year.
SAVVY TIP: It's widely thought that children's clothes and shoes and food is VAT exempt, but it's not that simple. Children's clothes hae to be labelled or sold as such and some larger sizes won't qualify for zero rating. When it comes to food, there's a comical list of foods that are zero rated and those that attract VAT at the full rate (flapjacks are zero rated, muesli bars are not). If you want to read more you can find a document listing foods and VAT rates on the HM Revenue & Customs website.
â€¢ Insurance premium tax will rise at the higher rate from 17.5% to 20% and at the standard rate from 5% to 6% from January 4th next year.
SAVVY TIP: Travel insurance attracts IPT at the higher rate while motor and home insurance is charged IPT at the lower rate. There's information on these tax changes on the government's Directgov website.
Several changes were announced which will affect those saving for and receiving pensions.
â€¢ From April 2011, the basic state pension will increase by 2.5%, the CPI or earnings, whichever is the greater. This was promised in the coalition agreement.
â€¢ The government will review the age at which the state pensions rises to 66.
SAVVY TIP: The state pension age for women is currently rising from 60 to 65 over a ten year period (between 2010 and 2020). The governmentâ€™s plans will try and bring that forward.
â€¢ The government will look to simplify rules on tax relief. Although the government wants to be able to raise the same amount as the Labour govermnent had by restricting tax relief, it believes this could be too complicated. Instead it is considering an upper limit on the amount you could save into a pension every year of between Â£30,000 and Â£45,000.
Capital gains tax
The rate at which higher rate taxpayers pay capital gains tax will increase from midnight tonight to 28% from 18%. But itâ€™s more complicated than that:
â€¢ Basic rate taxpayers will pay capital gains tax at 18%, but only if you sell something (such as shares or a second property) that means the amount of profit doesnâ€™t take you over the higher rate taxpayer threshold.
SAVVY TIP: John Whiting, SavvyWomanâ€™s tax expert gives this example: if you earn Â£30,000 a year and sell shares and make a Â£15,000 profit, youâ€™d pay tax on around Â£5,000 (once your capital gains tax allowance of Â£10,100 has been taken into account), youâ€™d pay capital gains tax at 18%. If you earn Â£30,000 and sell shares and make a Â£50,000 profit, youâ€™d pay capital gains tax at the higher rate of 28% on the element that takes you over the higher rate threshold.
You can read more about the government's plans to raise the state pension age to 66 in the section called 'Money and retirement'.
There's a quick guide to how the Budget affects you on the government's Directgov website.
Maximising your state pension
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