You might not have thought it by looking at today’s sunny and warm weather but today is ‘Black Wednesday’.
Spending cuts and tax changes will begin to bite into family budgets today as the new tax year marks the first full twelve months of the coalition’s austerity drive. Up to 750,000 families will be pulled into the higher 40p income tax rate, while child benefit is frozen and tax credits are scrapped.
Labour has dubbed today ‘Black Wednesday’, arguing that coupled with January’s VAT rise and escalating food and oil prices, families face a serious squeeze on living standards.
But the Treasury said changes to the income tax threshold would leave most low-income families better off.
Although lower-earning taxpayers will be better off in the 2011/12 tax year, today is being dubbed “Worse-off Wednesday” for higher earners who will see their incomes reduced by Ã‚Â£500m at a time of rising inflation.
The average Briton will see an increase of Ã‚Â£1,000 to the personal allowance, meaning they can earn Ã‚Â£7,475 before paying income tax. About 1.7m people earning below Ã‚Â£21,000 a year will be Ã‚Â£250 better off.
However, the benefits are offset for higher earners, because the threshold at which they start paying tax at 40% is reduced from Ã‚Â£37,400 to Ã‚Â£35,000 above the personal allowance.
National Insurance contributions are also going up by 1%, although there will be an increase the number of exempted low earners because of a rise in the threshold.
Linking increases in benefits to CPI inflation rather than RPI inflation – which includes housing costs – will also reduce social welfare payments by Ã‚Â£1.8bn.
The budget cuts 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, contributing to a reduction in the spending power of household incomes.
The Institute of Fiscal Studies expects that real household income will have fallen by 1.6% between 2008 and 2011.
Trade unions are also warning low income families 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 Ã‚Â£40,000 who pay Ã‚Â£400 a week in childcare for two children will be Ã‚Â£2,500 worse off over the next year.
And more cuts already planned for April 2012 will make matters even worse.
TUC general secretary Brendan Barber said: “With wages failing to keep up with the cost of living and the VAT rise biting into household budgets, these tax credit cuts could not have come at a worse time for families.”