Get ready for tougher taxes!

Every UK resident will be hit by these 45 big changes to taxes and benefits.

Wednesday 23rd March is Budget Day, when Chancellor George Osborne unveils the government's latest plans for taxes and spending to the House of Commons.

George's £6,000 problem

The big problem that the Chancellor faces is that the nation is living far beyond its means. Indeed, public spending this year is expected to exceed tax and other revenues by around £149 billion.

To put this colossal sum into context, it works out at almost £6,000 for each of the UK's 25 million households. In other words, the government is spending around £115 a week more per household than it collects. Oops!

45 different changes

Of course, the only way for the UK to balance its books is to cut public spending and raise tax revenues. We Brits have already shouldered several tax rises this year.

For example, on 4 January, the rate of Value Added Tax (VAT) increased from 17.5% to 20%. Also, fuel duty rose on 1 January and Insurance Premium Tax went up, piling even more pressure on motorists.

Alas, even before the latest Budget, plans are already in place for a raft of changes to the tax and benefits systems. Indeed, according to debt charity Credit Action, 45 major changes come into force on 6 April (the start of the 2011/12 tax year).

All change, please!

From what I can see, every British household -- from the richest to the poorest -- will be affected by these changes. To help you to get to grips with this financial upheaval, I've listed the main changes below:

1. Income tax

The tax-free personal allowance will increase by £1,000 to £7,475. This will free half a million people from the tax net, as well as boosting take-home pay for people on low to middle incomes.

However, the tax threshold for higher-rate (40%) tax comes down by £1,400 to £42,475. In effect, this will drag 750,000 people into the 40% tax bracket. Thus, someone earning £50,000 a year will pay an extra £80 a year in tax, thanks to tweaks to the tax thresholds.

2. National Insurance Contributions (NICs)

At present, employees pay NICs at a rate of 12% of earnings over £110 a week, up to an Upper Earnings Limit (UEL) of £844 a week. From 6 April, employee NICs will increase to 12% of earnings over £139 a week, up to a lower UEL of £817 a week.

In addition, anyone earning over £817 per week (the threshold for higher-rate tax) will pay additional NICs of 2% on earnings beyond this limit. Also, employer NICs will also go up, from 12.8% to 13.8% of pay above £136 a week.

Combining the income tax and NIC changes, workers earning under £35,000 will be better off. However, someone earning £50,000 a year will pay £500 a year more in tax and NICs.

3. Child Benefit

Child Benefit -- a tax-free benefit paid to parents of children up to 16 (19, if in further education) -- will be frozen for three years. Thus, Child Benefit is stuck at £20.30 a week for the oldest child and £13.40 for other children, until 2013/14.

In effect, this means that Child Benefit will be worth less in future, thanks to inflation (the rising cost of living).

4. Benefit increases

From 6 April, the government will raise various state benefits in line with the Consumer Prices Index (CPI) measure of inflation, instead of the Retail Prices Index (RPI). As the CPI has consistently been lower than the RPI for many years, this will slow down the rate at which benefit payments rise.

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This will hit those who live largely or solely on state benefits, including Child Tax Credit and public-sector pension payouts.

5. Child Tax Credit (CTC)

Some claimants could be paid lower amounts of Child Tax Credit, thanks to changes to the Family Element and Baby Element of this payout.

The Baby Element of CTC (£545 in 2010/11) will be abolished. However, the Child Element will be increased from £2,300 to £2,555 (£180 plus inflation). Also, the Family Element of CTC is withdrawn at a rate of 41% for everyone earning over £40,000.

In effect, low-paid workers will get more CTC, but higher earners will lose out, with some getting no CTC from 6 April.

6. Working Tax Credit (WTC)

The three core elements of WTC are also being changed.

The Basic Element is frozen for three years at £1,920, which means it will be eroded by inflation. Likewise, the 30-Hour Element is frozen for three years at £790. What's more, the Childcare Element is being cut -- working parents will only be able to claim 70% of the total cost of childcare through WTC, down from 80%.

7. Local Housing Allowance (LHA)

Lastly, the government is to introduce caps on Local Housing Allowance, the housing benefit paid to tenants on low incomes who rent from private landlords. Here they are:

Are you worse or better off?

As you can see, the tax and benefits system is fiendishly complicated -- and it keeps getting more complex with every passing year.

Nevertheless, think-tank the Institute for Fiscal Studies reckons that households will be, on average, £200 a year worse off, after taking all these tax tweaks and benefit adjustments into account.

Then again, as I often remark, "averages invite comparisons", so it's impossible to say precisely how your personal financial situation will change come April.

That said, broadly speaking, if you earn £35,000 a year or less, you'll probably be better off. What's very clear is the UK's highest earners -- those who pay higher-rate tax or soon will do -- are going to be far, far worse off!

Finally, for the full list of all 45 changes, please download this PDF document from Credit Action.

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