Let’s face it, trying to absorb the Chancellor’s full hour-long speech, working out what it will mean specifically to us and our families is something of an arduous task! Fear not, our case study families are here to help you…
Changes made in the Budget affect all of us in different ways; based on factors such as the amount of income we get, right down to how dependent we are on using our cars for shipping everyone around, how much wine we drink and so on.
In order to simplify things and give you better idea of how you may need to revise your family budget in light of the changes, we’ve laid out some typical case studies, with the help of accountants at PricewaterhouseCoopers (PwC). Hopefully you’ll be able to identify your family in one of these scenarios and get a better idea of how the key areas of the 2012 Budget will impact on your financial future.
1. The Williams: Income £10K
The Williams are a couple in their 40s, with a three year-old child. Mr Williams was made redundant two years ago and has been unable to find another job, so the family has been living on Mrs. William’s earnings of £10,000 and on benefits.
The Williams struggle to get by on their current family income, and although they welcome George Osborne’s Budget, they worry that the annual increase they’ll see will have little impact on their day-to-day-struggle with expenses.
As Mrs Williams’ income is so close to the income tax personal allowance level, the family have paid only £838 in tax and National Insurance Contributions this year. The good news is that this tax bill will go down even further in 2012/13 – to £666 – as a result of the increase in the personal allowance level. By 2013/14, their tax bill will fall further to £446 – although Mr Williams hopes to be back in work by then!
The family will also see a slight increase in their tax credits and benefits, which will go up from £7,348 in 2011/12 to £7,483 in both 2012/13 and 2013/14.
All in all, the Williams will be better off by £307 next year, and £527 the year after, as compared to 2011/12.
Take a look at this table for an at-a-glance look at how the Budget will impact the Williams’ household income.
2. The Browns: Income £25K
In their mid-twenties, the Browns have a three year-old girl and a little boy who’s just had his first birthday. Working over 30 hours a week, Mr Brown earns £25,000, while his wife hasn’t yet returned to work after the second baby. Juggling the family’s essential spend seems to be a constant challenge.
The Browns will definitely welcome George Osborne’s Budget, as they’ll see a small boost in annual income. Although it’s not a lot, it’s definitely something where before there was nothing.
With £25,000 household income, the Browns have nothing to fear from the announced child benefit reductions. In fact, the total income they’ll be receiving from tax credits and child benefit will increase from £4,449 in 2011/12 to £4,719 in 2012/13 and 2013/14.
So what does this mean in terms of overall income change? Well, next year (2012/13) they’ll be £442 better off than this year, and the following year they’ll be £662 better off, as compared to 2011/12. So maybe not enough for a family holiday, but it’ll definitely help with some of the essential household expenses!
3. The Evans: Income £40K
The Evans are in their late thirties and have two children, aged two and five. They both work, with Mr Evans bringing in a salary of £30,000, while Mrs Evans’ income is £10,000. Their household income is enough for them to get by, but the cost of bringing up two children means they always have to be careful to stick to a strict budget plan.
Although the Evans will see a drop in their annual tax bill next year, they will unfortunately see a sharper drop in tax credits – which means they’ll be slightly worse off.
In 2011/12, they paid £8,076 in tax and National Insurance Contributions. The changes in personal allowance levels mean they’ll pay £7,733 this year and £7,293 in 2013/14.
In terms of extra income from tax credits and child benefit, last year they received £2,297, whereas in 2012/13 and 2013/14 they will receive £1,752 per year.
Taken together, these changes mean that the Evans will be £202 worse off in 2012/13. But the good news is that by 2013/14, the extra drop in their tax bill will mean their overall income will go up slightly, so they’ll be £238 better off.
4. The Smiths: Income £55K
A married couple in their mid 30s, they have two children, aged eight and four. They have an overall household income of £55,000, work in the public sector and own one car, which they use for around 8,000 miles each year.
Crucially to millions of families, Mr Osborne raised the level at which child benefit will be withdrawn from the originally suggested figure of £42,475, to £50,000 for each member of the household from January 2013. This will then be reduced on a sliding scale thereafter.
The Smiths will thankfully not be affected by the withdrawal of child benefit as, at a combined salary of £55,000, they do not earn more than the current limit in place. This is something for them to take into consideration, however, should either of them receive a substantial pay rise.
Personal allowance is the amount of money a person can earn before they are required to pay taxes to the Government.
The individual personal allowance will increase by £630 from £7,475 to £8,105 from 6 April 2012 and again to £9,205 from 6 April 2013. This is great news for The Smiths, who will be better off by £344 in 2012/13 and £748 in 2013/14!
The coalition is also committed to increasing this personal allowance to £10,000 in the future.
The tax on petrol and diesel will increase, as planned, on 1 August 2012 after Mr Osborne opted to keep this hike in place. In addition though, he also announced a rise in vehicle excise duty (‘road tax’ to me and you), which will increase from 1 April this year. The effect of this on our family here will be a modest rise in car running costs of £22 per year.
Also, as public sector employees, (Mr Smith works in the NHS, Mrs Smith a primary school teacher), they should keep an eye on Government proposals to launch a geographic review looking at the discrepancies between public and private sector pay across different regions of the country. Watch this space.
5. The Jones: Income £68K
A couple in their late 20s, with two kids aged three and two. Mr Jones earns £50,000 a year, while Mrs Jones works part-time, picking up £18,000. They have two cars (an Audi A4 and a Fiat 500), both need to drive to work and also have a school-run to take into account. Both cars each cover at least 12,000 miles a year as a result.
As the highest earner in the household has an annual income of £50,000, the family will welcome George Osborne’s rethink on extending the income limit at which the child benefit will be reduced, and eventually withdrawn.
However, any increase in this top family salary will result in a reduction of the child benefit by 1% for every £100 earned over £50,000, with a total loss of the benefit when income hits £60,000 – this is potentially the most significant way in which The Jones will be affected in the future.
Taking into account the changes to personal allowance, The Jones will be better off by £344 in 2012/13 and £682 in 2013/14, which should provide a real boost.
With fuel duty taken into account, this family (who have a fairly average level of car usage) will notice a more considerable rise in car running costs of £68 per year.
6. The McDonalds
A couple in their late 20s, they have not yet started a family but are looking to save in order to do so. They are also looking to get on the property ladder for the first time as they are currently renting.
Our prospective first-time buyers are eager to get on the property ladder. As they probably already know, their first property purchase will cost 1% more than expected after 24 March 2012 when the stamp duty holiday for first-time buyers ends.
Stamp duty will be levied at 1% on all property purchases between £125,000 and £250,000. As a result, The McDonalds will be worse off by £2,500 if they purchase a property for £250,000 after 24 March 2012 – which by now they are resigned to.
They may, however, wish to consider purchasing a home under the Government backed NewBuy scheme. For new-build properties offered by builders and lenders participating in the scheme, they will require a just a 5% deposit for homes with a purchase price of up to £500,000!
As keen savers, The McDonalds be slightly disappointed more wasn’t announced on allowance limits to tax-free accounts. However, they will still benefit from the pre-planned increase in ISA allowances for each person from a maximum of £10,680 (half of which can be cash) to £11,280 (again, half of which can be cash), coming into effect for the new tax year.
Their savings capacity can be further bolstered by the changes to personal allowances, which will see them pay less tax on their income in 2012/13 and 2013/14 – money which can go towards preparing for the pitter patter of tiny feet.
Notes: All figures are based on predictions kindly supplied by PricewaterhouseCoopers.
The figures provided have been prepared to provide a general estimate only and do not constitute professional advice. You should not act upon the information included without obtaining specific professional advice. No representation or warranty (either express or implied) is given as to the accuracy or completeness of the figures, and, to the extent permitted by law, PWC does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone acting or refraining to act, in reliance of this figures or for any decision based on them.
For a quick view of the above case studies:
Other impacts of the Budget 2012: