Today marks the start of the new financial year, and with it, an overhaul of the tax system which means workers' take-home from this month on will change.

Middle and higher income earners will be significantly worse off, while lower income earners will benefit. Meanwhile, the 880,000 workers who earn between £6,475 and £7,475 a year will now pay no tax (see the Income Tax Checker).

Yet while lower earners will benefit on the one hand, many will get less in benefits.

The are four key tax changes:

  • The personal allowance rises from £6,475 to £7,475 for those under 65. This is the amount someone can earn in a year before any tax is deducted. Anyone who earns more than £100,000 gets less or no personal allowance.
  • The higher rate tax threshold falls from £43,875 to £42,475. This means income at £42,475 a year or above will be taxed at the higher 40% rate. Taxable income below is at 20%.
  • National insurance (NI) rates will rise by one percentage point.
  • The NI thresholds are also changing. Employees now need to earn £7,228 a year rather than £5,720 before NI at 12% (formerly 11%) is charged. Anyone who earns over £42,484 will be charged 2% (formerly 1%) on income above that level. The threshold was £43,888 until yesterday. Rates are also changing similarly for the self employed.

The Government says the upshot is the UK's 23 million basic rate taxpayers will pay £170 a year less on average, but it is estimated an additional 700,000 people will pay higher rate tax as a result.

The table below highlights how the changes affect employees under 65, showing how much more or less take-home pay they will have this tax year, depending on their salary (see the Income Tax Checker to get your take-home pay).

Tax changes winners & losers
Annual salary 2010/11 take-home pay 2011/12 take-home pay Net effect
£10,000 £8,824 £9,162 +£338
£20,000 £15,724 £15,962 +£238
£30,000 £22,624 £22,762 +138
£40,000 £29,524 £29,562 +£38
£50,000 £35,810 £35,609 -£201
£100,000 £65,310 £64,609 -£701
All figures are annual

Benefits overhaul

Households will be hit by changes including a freeze in the basic element of working tax credit for three years, a reduction in the amount of eligible childcare costs met by working tax credit and the reversal of a planned toddler tax credit (see the Benefits Check-up guide).

The change to the benefits regime means a couple with a joint income of £40,000, with two young children and paying £400 a week in childcare could lose £2,600 by next April, the Trades Union Congress warns.

TUC general secretary Brendan Barber says: "Working families are bearing the brunt of Government austerity measures, from cuts to vital public services, libraries and youth clubs, to the freezing, cutting and scrapping of tax credits that are hitting incomes."

What's more, where payments rise in line with inflation they will mostly be based on the Consumer Prices Index inflation now, not the Retail Price Index measure.

RPI, which includes housing costs, is usually higher than CPI, which means the change will see less generous future payments.

Further reading/Key links

What you'll get: Income Tax Checker, 2011/12 Tax Breakdown, Tax Code checker, Benefits Check-up

On Our Forums

The great tax overhaul