MILLIONS of families face the biggest shake up in their income tax for at least five years next month, but there are a raft of unintended consequences.

Taxpayers are being urged to take action as soon as possible to take full advantage of the changes.

From April, the government will hand taxpayers a £8 billion cut when the basic rate of income tax falls from 22% to 20%.

This will be offset by the removal of the 10% starting rate of income tax, from which the Exchequer will raise £7.2 billion.

Meanwhile, the upper earnings limit for 11% national insurance contributions (Nics) will rise by £5,200 to £40,040 – meaning higher earners will pay Nics on more of their income.

However, accountants said this will be more than offset by the cut in basic-rate tax. For example, a married couple who are both working and have a household income of £100,000 a year will be £583 a year better off from April, according to figures from Blick Rothenberg.

The sting in the tail, as we reveal on the front page, comes next year when the upper earnings limit will be raised further. This will wipe out the benefit of the basic-rate tax cut, meaning anyone earning more than £40,335 will be worse off by up to £88 a year.

This is not reflected in our tables. They compare your net income in April 2008 compared with April 2009, whereas the Institute for Fiscal Studies looked at how much more we will pay compared with if the income tax and Nics changes hadn’t happened.

The biggest beneficiaries, in cash terms, from the April changes will be pensioners. Their personal allowance will rise well above inflation, meaning more of their income will be completely free from tax. The allowance for those aged between 65 and 74 will go up by £1,480 to £9,030, while that for over 75s will go up to £9,180.

A pensioner couple with a combined income of £40,000 will be £555 a year better off from next month.

John Vickery, 67, and his wife Den-ise, 59, are among the beneficiaries. They will be £117 better off because John will pay a lower basic rate of tax on his pension income next year and will also benefit from the higher allowance.

Mrs Vickery will not be affected, as her pension income is below the personal allowance, both in 2007-08 and in 2008-09.

Advisers are urging wealthy couples over 65 to split their assets to take advantage of the increase in their personal allowance.

David Heaton of accountants Baker Tilly, said: “It certainly makes sense to transfer a chunk of your investments to the spouse who has the smallest pension because that enables her to use up her personal allowance and basic rate band in full.

“Together, a pensioner couple aged between 65 and 75 has a £18,060 tax-free allowance.”

The personal allowance for pensioners is rising again in April 2009 and accountants said that by 2012 it will be £10,000 – meaning a couple who make best use of their assets will be able to keep as much as £20,000 of their income free from income tax.

However, millions of other taxpayers will lose out from April. The Institute for Fiscal Studies has calculated that anyone earning less than £18,000 will be worse off as a result of the changes – taking in many part-time workers.

Mothers who go back to work part-time after having children would be as much as £3,250 a year better off if they stayed at home as soaring childcare bills and government tax changes combine to penalise parents.

Those earning over £6,500 a year – which includes thousands of working mothers – will keep less than 40p in every extra £1 they earn as the rate at which tax credits are clawed back increases, bringing many workers’ marginal tax rate to 60%.

Helen Wilson, of Merseyside, Liver-pool, and her husband Neil have a combined income of more than £70,000.

Helen, who works part-time as a vet, has been caught by the abolition of the 10p tax rate and will find her income tax increases by £130.

Her husband, an IT project manager at an investment bank, will see his income tax cut by £788, but his Nics will increase by £496.

Angela Beech, of accountants Blick Rothenberg, said: “In effect Helen has received a 10p income-tax hike. With the cost of childcare she would be better off financially if she did not work.”

As a result of Neil’s income tax cut, the family’s tax bill has been reduced by £148.80. However, as their daughter will start nursery next month, the family face extra costs of £260 a week or £12,480 a year. This is partially offset by the £20 increase in child benefit and the rise in the child element of the child tax credit by £50 more than needed to match inflation.

Beech said: “Those on low incomes between £5,876 and £15,350 will take a hit to their bank balance of any-hting up to £158 a year when the changes take effect.

“Those on lower incomes are now even more reliant on tax credits to shore up their overall tax position.”

The other big losers are people paying into a pension. A basic-rate investor contributing £300 a month for 30 years would find themselves with £5,142 less in real terms in their pension pot because of the change to tax relief, if they did nothing.

To end up with the same pension in retirement they will need to increase their payments by £6 a month – £72 a year.

Hannah Eve Edwards of advisers Killick & Co said: “The reduction in the basic-tax rate means that to make a gross contribution of say £100 will now cost £80 instead of £78.”

Nick Arbin of financial planners Thinc added: “Most insurance companies ask investors to sign up for the gross contribution so the direct debit will probably be changed automatically. The saver will not need to do anything but will need to be aware that a higher contribution will be deducted from their bank account.”

Explore Money

• Property & Mortgages

• Savings

• Borrowing

• Investment

• Funds

• Insurance

• Consumer Affairs

• Tax

• Pensions

• Broadband