Emergency Budget: how the huge tax shake-up affects you

The rise in VAT from 17.5% to 20% next January will hit everyone, while higher rate taxpayers will see hikes both in their income tax and on any large investment gains they make.

Many benefits have also been cut, though there is some good news for low and middle income earners who will get £170 a year back via income tax cuts.

Here is a breakdown of how Chancellor George Osborne's (pictured, right) plans affect you:

VAT hike

The sales tax will rise from 17.5% to 20% in January.

The Government says the increase will raise £13.5 billion a year by 2014/15.

An item that currently costs £100 that is subject to full VAT will cost £102.13 next year, though retailers may round prices up.

Some estimates have suggested the hike will cost households around £500 a year.

Items such as food and children's clothing will continue to be exempt from VAT (see the High Street Haggling and Cheap Online Shopping guides).

The tax is paid for by retailers on the majority of goods sold but is usually passed onto consumers.

Mike O'Connor, chief executive of lobby group Consumer Focus, says the "VAT rise will hit the poorest consumers hardest".

Income tax rises/falls

The tax-free personal allowance will rise by £1,000 for millions of workers.

Those under 65 will therefore pay no tax on their first £7,475 of income from next April, up from the current £6,475. The threshold will eventually rise to £10,000, as promised in the original coalition agreement (see the Massive tax changes MSE News story).

The Government says this will save the UK's 23 million basic rate taxpayers £170 a year, while it means around 880,000 people will no longer pay the tax.

The benefit will be paid for by higher earners as the threshold at which you currently pay the higher 40% tax (currently £43,875) will fall, with exact figures to be confirmed in the autumn. It will then be frozen in 2013/14.

These changes will mean, for higher earners, a larger part of their income will attract the steeper 40% tax.

From next April, taxpayers will also pay an additional one percentage point in national insurance, which will cost someone earning £30,000 a year approximately £250. This was announced last year by the previous Labour administration.

Benefits cut

Millions of families will no longer qualify for tax credits or receive less income from them (see the Tax Credits guide).

Those who claim certain child and housing benefits will be among those hardest hit. Benefits across the board will be reduced for those earning over £40,000.

And from next April, benefit payments will rise based on Consumer Prices Index (CPI) inflation, not the current Retail Price Index (RPI) measure.

RPI, which includes housing costs, is usually higher than CPI, which means the change will see less generous future payments. The most recent inflation figures for May showed the CPI index rose by 3.4%, compared to a 5.1% RPI rise.

Osborne says the welfare changes will save the Government £11 billion by 2014/15 (see the Benefits cut MSE news story for a breakdown of which payments are affected).

Capital gains tax jump

Investors with a second home or shares may pay higher taxes as the capital gains tax (CGT) rate will rise from the current 18% to 28% from midnight tonight for higher and top rate tax payers.

Basic rate taxpayers will still pay the current 18% rate (see the Discount Brokers and Shares guides).

The £10,100 threshold before you pay CGT will remain in force and will rise each year in line with inflation.

This means you won't pay CGT on the first £10,100 rise in the value of your asset when you sell it.

The rise is lower than had initially been thought. It had been expected CGT would be aligned with income tax rates (20%, 40% or 50%), while many predicted the threshold to fall.

Experts warn the shake-up will complicate tax returns.

Richard Mannion, from accountancy firm Smith & Williamson, says: "It's unprecedented to have a change midway through the tax year.

"This will mean pre and post Budget day gains will need to be reported separately."

Council tax freeze

Council tax rates in England could be frozen for one year for those whose local authorities can keep costs low (see the Council Tax Banding guide).

However, the ambiguity of the Government announcement means it is not clear exactly who may benefit.

The Government says it will work in partnership with local authorities to implement the hold in 2011/12 but it hasn't guaranteed freezes for all.

Osborne says: "We will offer a deal to local authorities in England.

"If you can keep your cost increases low, we will help you freeze council tax for one year from next April."

He estimates the average family will be £35 better off next year as a result.

Pensions/retirement shake-up

There will be a shake-up of the pension system, as previously announced (see the State Pension and Pensions guides).

The changes include:

• Basic state pension. The Government will increase the payment by the higher of 2.5%, inflation or average earnings every April. Pensioners who qualify for the full amount currently get £97.65 a week.

• Pension Credit. This will increase in April 2011 by the same level as the full basic state pension. Pension credit currently tops up weekly income to £132.60 for individuals.

• Pension age. The Government will review when the state pension age will rise to 66. It will also consult shortly on how quickly it will phase out the default retirement age (currently 65) from April 2011. At present, employers can sack staff when they reach that age.

• End to compulsory annuitisation at 75. You will no longer have to buy an annuity (where you trade in your pension pot for a regular income) by 75. The Government will shortly introduce transitional measures for those yet to secure a retirement income who will soon reach 75 (see the Annuities Guide).

• Pension tax relief. The Government will consult on how much you can save into a pension with tax relief. It says provisional analysis suggests an annual allowance of £30,000 to £45,000 a year is appropriate.

Insurance costs to rise

Insurance premium tax will rise from January, which the Association of British Insurers estimates will cost the average household £8 a year (see the Cheap Insurance guides).

Standard tax will increase from 5% to 6%, while higher rates, which are applied to travel insurance and warranties, will rise from 17.5% to 20%.

No new sin taxes

Osborne today promised not to raise duty on alcohol and tobacco further. However, tobacco costs are already set to rise by 2% above inflation for the next four years.

Alcohol rates will increase by 2% above inflation until 2014-15.

The Government will also reverse the previous administration's plan to increase the duty on cider by 10% above inflation. This will happen by the end of June.

Petrol prices to rise

Drivers were spared any new petrol pump price pain today but further rises are to come (see the Cheap Petrol & Diesel guide).

Motorists will still face earlier-announced rises of 1p a litre in October and 0.76p a litre in January 2011.

And with VAT due to rise to 20% in January, new-year pump prices will go up even further.

AA president Edmund King says: "Motorists will face a double whammy in the new year."

Air taxes could rise

The Government will consider switching from a per-passenger to a per-plane air passenger duty to help cut carbon emissions.

Aviation experts expect taxes to rise if this happens (see the Cheap Flights guide).

Public sector wage freezes

Public sector workers will have their pay frozen for two years, with protection for the 1.7 million earning less than £21,000, who will receive a £250 increase in both years.

Additional reporting by the Press Association.

Further reading / Key links

See MSE's cost-cutting guides on: High Street Haggling, Cheap Online Shopping, Cheap Insurance, Cheap Petrol & Diesel, Cheap Flights, State Pension, Pensions, Council Tax Banding, Discount Brokers and Shares