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06.04.11 - Tax Changes 2011 - How Will They Affect You? 2011/12

Posted by Ben Williams on Wed, Apr 06, 2011 @ 10:24 AM

The welfare and tax changes 2011 that come into effect today will cost British houeholds £2.3bn this year, according to estimates by Capital Economics.

Even though lower-earning taxpayers will be better off in the 2011/12 tax year, today is being dubbed 'Worse-off Wednesday' for the higher earners who will see their earnings reduced by £500m when inflation is rising.

Income Tax Changes 2011

The average Briton will get an increase of £1,000 to the personal allowance, meaning that they can earn £7,475 before paying any income tax in 2011.

It's been estimated that around 1.7m people earning below £21,000 a year will be £250 better off.

However, there's not many benefits for higher earners, as the threshold at which they start paying the Higher Tax Rate  is reduced from £37,400 to £35,000 above the personal allowance.

(NI) National Insurance contributions are also going up by 1%, although there will be an increase in the number of exempted low earners; because of a rise in the threshold.

Capital Economics UK economist told Sky News: 

"I think it's pretty unambiguously bad for economic growth because these people (higher earners) spend a lot of their income.

"Therefore consumer demand is going to weaken and economic growth is going to weaken because consumer demand makes up two-thirds of the economy."

Linking increases in benefits to CPI inflation rather than RPI inflation - which includes housing costs - will also reduce social welfare payments by £1.8bn.

The cuts announced in the Budget, which you can learn more about here, are forecast to reduce household incomes by 0.25%, but the impact is compounded by above-target inflation, which last year caused the first decline in spending power since 1981.

The Bank of England has forecast that inflation will peak at 5% in 2011, also contributing to a reduction in the spending power of households across Britain.

Between 2008 and 2011, The Institute of Fiscal Studies expects that real household income will have fallen by 1.6%.

Low income families have also been warned to prepare for a shock as a three-year freeze and other changes to Working Tax Credits come into effect.

The TUC has calculated that a couple earning £40,000 who pay £400 a week in childcare for two children will be £2,500 worse off over the next year.

And more cuts already planned for April 2012 will make matters worse.

If you want to know more about the cuts announced in the Budget 2011, click here, or to read the Budget in full, click here.

You can also learn more, specifically about Income Tax 2011/12, by clicking here or PAYE 2011.

For up-to-date Tax Tips, to help reduce the pain of the tax changes 2011, click here.Click me

Topics: Personal Allowance 2011, Tax Changes 2011, Budget 2011 changes, How will tax changes 2011 affect you, national insurance 2011