What a new government means for you

We show you how to cash in like an expenses-chasing MP!

After a closely fought General Election, we look set to have the first peacetime coalition Government in the UK since the 1930s.

As I predicted in How your vote could make you richer, the Liberal Democrats have become the kingmakers.

The Conservatives have 306 seats which, when combined with 57 LibDem seats, will give the Con/LibDem alliance a clear majority in the House of Commons, led by David Cameron with Nick Clegg as deputy Prime Minister.

In return for their support, the Lib Dems have demanded significant concessions. Details are still filtering through but, at the time of writing, decisions on three key tax policies seem clear:

1. The Lib Dems appear to have successfully stopped the Conservatives from increasing the threshold for Inheritance Tax
2. Similarly, the Tory plans to offer tax breaks to middle-income married couples appear to have been shelved
3. The Lib Dems also appear to have persuaded the Conservatives to raise the tax-free income tax threshold to £10,000.

George Osborne has been confirmed as Chancellor - it is not yet clear what role Lib Dem shadow Treasury spokesperson Vince Cable will play.

But the key question about the economy - namely, exactly which cuts in spending will be made by the new Government in an attempt to reduce the deficit - remains unanswered, and as yet there has been no word about Stamp Duty reform and the two parties' proposed changes to the banking and regulatory system.

So what do we know? And what does it mean for you?

The bitter truth

In terms of the economy, the changes at No. 10 and No. 11 Downing Street don't actually matter that much. That’s because our new PM and Chancellor have two gigantic black holes to tackle:

1. £890 billion -- the public sector net debt in March 2010 (if you like, our national overdraft); and

1. £156 billion -- net borrowing predicted for 2010/11 (our over-spend during the next 12 months).

The plain truth is that, since 2002/03, the UK government has been getting deeper and deeper overdrawn. Indeed, for every £3 the government earns, it spends £4, which is a recipe for long-term ruin.

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As things stand, we’ll be in the red by £1,046 billion -- more than a trillion pounds -- within a year. If we don’t do something to shrink this debt, then our creditworthiness will suffer. This would damage our international status and hit the pound and our government debt’s credit rating. If you need a frightening recent example, think Greece.

The only sensible way to dig the country out of this money pit is the old-school way: by cutting our expenses (reducing public-sector spending) and increasing our income (raising taxes).

What YOU can do

Of course, sorting out our national finances will require a colossal collective effort. Taxes will rise and spending will be cut. I can’t tell you exactly how you personally will lose out, but we will all suffer. In short, living standards could fall for several years.

While you can’t do anything about the state of the economy, you can take some simple steps to improve your own personal solvency. Here are a few tried-and-tested techniques for making money, paying less tax and getting better bargains:

1. Workers

Despite rising unemployment, there are 28.8 million people in the UK workforce. In 2008/09, these workers paid £156.7 billion in income tax and £97.7 Billion in National Insurance Contributions (NICs).

Together, these workplace taxes account for close to half (49.2%) of all tax collected. Therefore, any credible budgeting plan must have higher income tax and NICs at its heart, which is bad news for workers.

However, you can dodge future tax and NIC rises in various ways. For example, use salary sacrifice to boost your pension contributions while lowering your tax bill. Also, working parents with children can save up to £1,195 a year by claiming childcare vouchers.

2. Spenders

Another big contributor to HM Treasury’s coffers is Value Added Tax (VAT), which brought in £82.6 billion in 2008/09, or £1 in £6 of all tax collected.

At the start of this year, VAT returned to its usual rate of 17.5%, having been temporarily cut to 15% during 2009. However, there’s lots of talk that VAT is set to rise to 20% to bring it more in line with European sales taxes. Over time, VAT could even be extended to zero-rated goods such as food, books, etc.

The obvious way to pay less VAT is to pay lower prices for everything you buy. So, learn to haggle, and shop around making full use of price-comparison websites, vouchers and cashback websites. For more advice, read Three Ways To Grab Online Bargains.

3. Savers

For most of us, having an everyday savings account means losing a fifth (20%) of our interest to the taxman. For higher-rate taxpayers, savings tax is doubled to 40%. However, savers would not be happy were these taxes to rise to, say, 25% and 50% respectively.

To strengthen your savings, you must find the best possible interest rates that suit your savings needs, while paying zero tax if possible. One simple way to do this is transfer some existing savings into a Best Buy cash ISA. Here’s How to fill your ISA for free.

4. Borrowers

The Bank of England’s base rate has been stuck at 0.5% a year since March 2009. This is the lowest rate in the Bank’s 316-year history, which is great news for mortgage borrowers with big home loans.

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That said, interest rates aren’t uniformly low. Indeed, at 18.8% APR, the typical rate on a credit card is at a 12-year high. Thus, my advice to borrowers is simple: pay down your most expensive debts first. Normally, these will be an unapproved overdraft, a store card or credit card. To tackle your plastic problems, read these five ways to clean up your cards.

5. Investors

There are sure to be some attractive entry points for investors in the months to come. However, in order to ride out the ups and downs, you should be willing to take at least a ten-year view on stock-market investments.

Again, my tip here is simple: make maximum use of legal tax shelters when buying and selling shares, funds, bonds and the like. For example, if you haven’t yet opened a cash ISA this tax year, then you can pop up to £10,200 inside a stocks and shares ISA. Safe inside this tax shelter, your investments can grow free of capital gains tax (CGT) and income tax.

Likewise, if you’re saving for retirement, then check out the low-costs SIPPs (Self-Invested Pension Plans) on offer.

These enable you to build a retirement pot free of tax, while having the flexibility and freedom to choose your own investments.

Good luck!

Finally, I don’t envy George Osborne as he takes control of the public purse. Raising taxes and cutting spending without sending the economy spiralling back into recession would tax the combined genius of Albert Einstein, Stephen Hawking and Sir Isaac Newton!

More: Find super savings accounts today | Avoid these nasty savings catches | Three ways to pay less tax