Buddget Cuts are going to hurt

No matter what happens in the budget, families on incomes around £45,000 will be hit hard on 6 April

Dominic Ceraldi and family don't quite fit the stereotype of middle-class high earners in the capital. Originally from Blackburn, Lancashire, Ceraldi and his family now rent a small home in Silvertown, east London. Every day he travels across the city to south London where he works as an HR manager for a plumbing company. He's been feeling the squeeze for some time now – last year he got rid of his car as he could no longer afford it – yet from 6 April Ceraldi will be deemed to be a higher earner, forced to pay 40% tax.

Last year he earned just below the threshold for higher rate tax, which was set at earnings above £43,875, but from 6 April the point at which individuals start paying 40% tax will drop to £42,475. He is just one of 750,000 people who will suddenly find themselves in the same tax bracket as the well-off. If, like Ceraldi, they also have children, they will be squeezed even harder by the withdrawal of the £545 tax credit for families that earn more than £40,000.
But it doesn't stop there. The rate of national insurance the Ceraldis will pay is also going up, from 11% to 12%, and though the bands in which it is charged are changing, he will still see a hit on his pay packet.
The cuts come at a time when many families' finances are already stretched by rising food, petrol, gas and electricity prices. "Over the past year we've really felt it," says Ceraldi, 40, who works for Pimlico Plumbers. "Paula, my wife, is not working, and we've had to get rid of my car. I bought a new VW in 2008 but I'm saving a few hundred pounds a month now after selling it."
From 6 April he will pay 40% tax on any overtime, which, he says, will make it less worthwhile.
"I suppose I'm a Labourite sort of guy, and to say we're now in the same bracket as the middle classes doesn't seem to make sense. We are working-class people working hard to try to have a decent standard of living. I really think the tax rises are unfair. We'll also be losing child benefit next year, yet if we were a couple where we were each earning £40,000 we'd still get it. I'm very disillusioned with what the Tory/Liberal alliance are doing."

In this Wednesday's budget, the chancellor George Osborne need make no mention of the rise in income tax and NI, and the cut in tax credits, as they were all announced in the last budget. But the squeeze on the middle – while bankers continue to be paid multimillion-pound bonuses – is likely to stir political controversy.

Shadow Treasury minister David Hanson told Guardian Money this week that families across the country were already feeling the impact this year from Osborne's VAT increase, rising inflation and record petrol prices.
"But next month they face a Tory triple whammy of tax rises, cuts to tax credits, and cuts to child benefit. Inflicting all this pain in this way is a political choice by the Conservative-led government. They are cutting the deficit too deep and too fast – faster than any other major economy in the world. And they're doing it in an unfair way by hitting families with children the hardest, while giving the banks a tax cut this year.
"As he prepares his budget, George Osborne needs to urgently rethink the speed and scale of cuts which are hurting families on low and middle incomes, and holding back our economy. He should help hard-pressed families by reversing their VAT rise on fuel. When we were in government we regularly postponed planned duty rises when world oil prices were going up, as they are now."
A Treasury spokeswoman defended the changes. "Increasing the personal allowance by £1,000 from April will remove 880,000 low-income taxpayers from tax altogether. Anyone earning up to £35,000 will be better off as a result of changes to income tax and national insurance contributions. In total, 23 million taxpayers will benefit by up to £170 each per year."
She added: "The government's priority is to deal with the unsustainable deficit. The government has made the necessary tough choices, but has always been clear that those with the broadest shoulders should carry the greatest burden."
Money asked two firms of accountants, BDO and KPMG, to crunch the figures to see how much individuals and families really are losing.
• A man on £43,500 with two children under 18 and a non-earning wife will be £645 worse off from 6 April.
• A couple where one earns £28,000 and the other earns £16,000 who have one child will be worse off by £109.
• A single person on £50,000 will see his or her tax take rise by £202.
• A couple where one earns £40,000 and the other earns £12,000 who have one child will be worse off by £56.
Stephen Herring, senior tax partner at BDO, says: "The figures demonstrate that the tax policy of both the coalition government and the previous Labour government of reducing the basic rate tax band to partially fund increases in personal allowances produces increasingly anomalous results. It is not right that middle earners with incomes below twice the UK's median income now pay tax at a marginal rate of 40%. The chancellor needs to demonstrate more imagination if he is to fund further increases in the personal allowance towards the coalition government's target of £10,000 per annum."
The figures underline the impact on families if there is just one main earner, with a partner staying at home to raise children. David Kilshaw, chair of private client advisory at KPMG, says: "The analysis shows how the change to the higher rate threshold affects families where there is one main breadwinner in that bracket. Our family on £43,500, where there is a single income, is £645 worse off next year, whereas a family with a combined income of £44,000 is £22 better off."
At the top end of the spectrum, anyone earning more than £150,000 has had to pay tax at 50% since last April. But, as a TUC report entitled Unfair to Middling reveals, this followed a long period in which middle and lower earners have been under pressure. It found that wages as a proportion of GDP have fallen steadily from a post-war high of 64.5% in 1975 to just 51.7% in 1996. They have recovered slightly, standing at 53.2% in 2008.
The same report recorded that while earnings for the top 10% of earners have doubled over the past 30 years, real median earnings have risen by only 56%, and real earnings for the bottom 10% have risen by just 27%.
MoneySavingExpert.com's Martin Lewis thinks many households facing a steep rise in living costs have been saved by the UK's super-low interest rates. "Many of those on tracker mortgages at minuscule rates working for growing private companies will still, almost, be in the position of 'never having had it so good'," he says. "While their income has been cut at the edges, they should still be smiling overall.
"However, the budget measures coming into force could see their numbers dwindle. The removal of tax credits and NI hikes, combined with short-term mortgage deals ending, and petrol price hikes, are definitely leaving more across in the 'it's grim' camp."

What will change on 6 April?

40% tax The starting point for 40% tax will come down from £37,400 to £35,000. But you only pay tax on your earnings above the personal allowance, which is going up by £1,000 to £7,475.
The net effect is that people will start paying 40% tax once they earn more than £42,475 a year, compared with £43,857 previously.
Note that your personal allowance may not be exactly as above – the level for over-65s is higher, while those in work may have theirs reduced to take into account benefits such as private medical insurance. You can see what your allowance is from your tax code. For example, 572L on your tax form means you are allowed tax-free pay of £5,725. After that you will pay tax at 20% on the next £35,000 of earnings, then 40% on earnings above that.
Tax credits The income limit for child tax credit is going down from £50,000 to £40,000. This change means that if your income is over the new limit, your basic child tax credit payment of £545 will be reduced progressively.
The extra amount of child tax credit for babies under the age of one (£545) is also being stopped. If you were getting this payment for the last tax year you won't get it any more, even if your child is still under the age of one.
The rate at which tax credits are reduced as your income goes up – "withdrawal rates"– will also increase to a flat rate of 41%, which means your tax credits payments may go down.
Separately, the amount of help you can get with childcare costs drops from 80% to 70% of the maximum eligible weekly costs: £175 for one child and £300 for two or more children. This means that the maximum help you can get through tax credits for childcare in 2011-12 will be: £122.50 a week for one child, down from £140 in 2010-11; and £210 a week for two or more children, down from £240 in 2010-11.
National insurance This is also going up from 6 April. Currently, you pay NI at a rate of 11% on everything you earn between £5,715 and £43,875, then 1% on everything earned above that.
From 6 April the starting point for paying NI will rise to £7,228, but you will pay 12% on everything you earn above that up to £42,484. On earnings above that you will pay 2%.
Child benefit This is being frozen at £20.30 a week for the eldest/only child, and £13.40 a week for each other child. From April 2013 child benefit will be withdrawn from households with a higher rate taxpayer