Michael McCusker: Osborne's squeeze on household incomes is set to run and run

IN THE aftermath of the Budget the consensus is now clear: while it was neutral from a taxation and spending viewpoint, the increases in VAT and national insurance contributions (NI) from the 2010 Budget and the spending cuts starting in April 2011 will result in the first major squeeze in household post-tax incomes since the 1981 recession.

The estimated squeeze on the average household's annual real spending income has been calculated at 500 - before any potential future rise in interest rates is taken into account. So how do you avoid this?

Although the Chancellor confirmed his commitment to increase the personal allowance each year to take more people out of the tax net, raising it to 7,475 for 2011-12, not everyone will be smiling. Those earning between 100,000 and 114,950 will soon find that there is no reprieve, with a marginal tax rate of 60 per cent. As well as suffering the impact of the 40 per cent rate of income tax (on incomes above 37,400), they will also see a clawback of the basic personal allowance.

There is some light, however, for those affected by the 50 per cent tax rate, with the Chancellor suggesting there could be a reduction in this top rate once conditions are right.

For many of us it will be RIP to the RPI (retail prices index) as the minimum rates at which Isa allowances, annual capital gains tax exemptions and NI thresholds move to follow the consumer prices index (CPI). With CPI currently 1.1 percentage points below RPI inflation, over a longer spell this could mean people have a lot less in their pockets than they would have anticipated.

One route to protecting your post-tax income could be to ask your employer to consider a salary sacrifice option, with income converted into pension contributions. Structured well, it could save tax and NI.

And for the altruistic, the Chancellor is introducing relief from inheritance tax on gifts to charities, where at least 10 per cent of an estate is gifted. It doesn't benefit the estate much, but we may see a rise in legacies to charities - no bad thing.

• Michael McCusker is tax partner and head of private client business at PWC in Scotland