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Sweeping tax and benefit reform due

Sweeping changes to the tax and benefits systems which come into force at the start of the new tax year will leave the average household around £200 worse off.

A total of 44 tax and benefit changes will be introduced on April 5, ranging from a reduction in the threshold at which people start paying higher rate income tax, to a 1 per cent National Insurance hike.

Financial education group Credit Action says 26 of the changes will have a negative impact on people's pockets, with only 13 having a positive one, while other changes will have a mixed impact.

One of the biggest changes being introduced is the Government's decision to reduce the threshold at which people start paying income tax at 40 per cent to £42,475.

The Institute for Fiscal Studies estimates that the move will drag an additional 750,000 people into the higher rate income tax band for the first time.

But around 500,000 people will be lifted out of paying income tax altogether, as a result of the £1,000 increase in the amount they can earn before they have to start paying tax, with this threshold rising to £7,475 this year and £8,105 next year.

The main rate at which National Insurance is paid is being increased from 11 per cent to 12 per cent from the start of the new tax year, while the higher rate will rise from 1 per cent to 2 per cent, although the level of earnings on which people have to pay National Insurance is being increased from £110 per week to £139.

Taken 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.

Workers on £35,000 will not see any change to the amount of tax and National Insurance they pay, as the rise in National Insurance contributions will be cancelled out by the increase to the personal allowance.

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.

The Government is also introducing wide-ranging changes to the tax credits and benefits system.

These include a freezing in the rate at which child benefit is paid for three years, meaning its value will fall in real terms.

The Government also plans to start increasing benefit payments, the child tax credit and public sector pensions in line with inflation as measured by the Consumer Prices Index from April 5, rather than the Retail Prices Index, which tends to be higher.

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

Some families will also see their entitlement to the child tax credit fall due to changes to the family element and baby element used in calculating the benefit. Changes being made to the working tax credit are also likely to reduce the amount people receive.

Other changes being introduced include a cap on the local housing allowance, which will hit people living in London particularly hard, the additional payment for the winter fuel allowance will be ended, costing the over-80s £100, while a new top stamp duty rate of 5% will be introduced for homes costing more than £1 million.

There will also be a sharp reduction in the level of pensions saving on which people can receive tax relief, with this dropping from £250,000 to £50,000.

But there is some good news, the amount people can save into a tax-free ISA each year will increase from £10,200 to £10,680 from April 5.

The Government will also introduce its so-called "triple lock", under which it pledges to increase the basics state pension in line with earnings, prices or 2.5 per cent, depending on which is highest.

Copyright © Press Association 2011

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