Hard-pressed Britons face a financial squeeze on all sides this week as government tax and benefit changes pile the pressure on family finances.
The average household is predicted to be roughly £200 a year worse off after George Osborne pushes through no fewer than 44 changes with the new tax year, beginning on Wednesday.
Among the measures is the reduction in the threshold at which employees pay 40 per cent income tax from £37,400 to £35,000 of taxable income.
The Institute for Fiscal Studies has estimated that this change alone will pull 750,000 more people into the higher-rate tax band for the first time.
The Government is also increasing the national insurance contribution rate from 11 per cent to 12 per cent, freezing child benefit for three years and cutting tax relief on pension savings. While other measures such as lifting initial thresholds for paying tax and national insurance will balance some of the changes, economists say that the net effect will be to leave Britons — in particular the middle classes — poorer.
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“Overall, they will leave households, and especially the richest households, worse off,” the institute said.
The tax squeeze comes as families prepare for yet another sharp increase in fuel costs. It is estimated that gas and electricity prices could increase by up to 15 per cent as early as the summer, taking the average household energy bill from £1,170 a year to £1,300.
The Bank of England’s Monetary Policy Committee meets this week to consider increasing interest rates to stem inflation. Economists say that the Bank, which has held the base rate at 0.5 per cent since the financial crisis, is likely to increase it during the summer.
Retailers such as Next, Currys and Dixons Retail have also reported flagging sales while Marks & Spencer is this week predicted to report falling sales since Christmas.
Last month the Office for Budget Responsibility increased its assumptions about household borrowing as families struggle to cope with the austerity measures. It estimates that debt as a percentage of household income will rise to 175 per cent, from £66,291 to £77,309, by 2015, up from 160 per cent. Last year it forecast a small reduction.
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Below are the main changes to the tax and benefit systems coming into force from April 5.
• The amount people can earn before they start paying income tax will increase by £1,000 to £7,475
• The threshold at which people have to start paying higher rate income tax will be cut to £42,475
• The amount people can earn before they have to start paying national insurance will rise from £110 per week to £139
• Benefits, the child tax credit and public sector pensions will rise in line with inflation as measured by the Consumer Prices Index, rather than the Retail Prices Index
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• Child benefit will be frozen at its current rate for three years
• A new top stamp duty rate of 5% will be introduced for homes costing more than £1 million
• The level of pensions savings on which people can receive tax relief will drop from £250,000 to £50,000
• The amount people will be able to save into a tax-free ISA each year will increase from £10,200 to £10,680
• The “triple lock” pledge will begin, under which the basic state pension will increase in line with earnings, prices or 2.5 per cent, depending on which is highest