Nick Clegg wants government to raise the income tax threshold to £10,000 sooner than planned. Here we run through how the changes might affect your income

What is Nick Clegg proposing?

The deputy prime minister is asking the chancellor to bring forward plans to raise the amount you can earn before paying tax to £10,000. This amount, the personal allowance, stands at £7,475 in the current tax year, and the plan is to raise it to £8,105 in April 2012. The government is then expected to raise it each year so that it reaches £10,000 by 2015. However, Clegg is calling for the increase to be made much more quickly.

Why the rush?

Clegg says rising fuel and food prices and falling incomes mean "household budgets are approaching a state of emergency". Because of this he says "the government needs a rapid response".

He claims that in the early 1970s the personal allowance was worth approximately 28% of average earnings, but by 2010 that had dropped to about 20%. That isn't quite correct – in 2010 the personal allowance was £6,475, which is slightly less than 25% of the average salary of £26,200.

How much difference would the increase make?

Currently, someone working 40 hours a week on the minimum wage would earn £12,542 a year, on which they would pay £1,013 in tax and £638 in national insurance, says accountant Philip Donnan.

If the government was to increase the personal allowance to £10,000 in April, workers would be £505 a year better off than they are currently. If the national insurance threshold was also increased, they would benefit to the tune of an extra £333 a year.

Of course, the increase to £8,105 is already in the pipeline, and the difference between a personal allowance of £7,475 and £8,105 a year is a tax saving of £126 and a national insurance saving of £44.

Is it just those on the minimum wage who will benefit?

Clegg did suggest everyone earning up to £100,000 would benefit from his plans, and if he wants to appease that famous "squeezed middle" he will need to make sure they do gain something from this. At £100,000 tax starts to be tapered so wealthier workers will not benefit as much.

Will that offset rising bills?

It should make things easier. Energy companies have been cutting prices in recent weeks, but they are still much higher than they were in January 2011 and are expected to go up. Government figures suggest the average fuel bill in 2011 was £1,175 – £100 higher than in 2010.

Food prices have also been rising, and households have been facing inflation of about 5%. Although this is now easing, prices are still rising – just at a slower rate.

Pay has not been keeping up with inflation, though, and it has been suggested that for those on low to middle incomes it will not do so for some years to come.

Will the move offset tax credit changes?

Not for everyone. In March 2011, the Resolution Foundation calculated that some families could lose as much as £2,041 a year after tax credit changes. Further changes to tax credits set to be introduced in April 2012 are expected to cost families £100 a year.

Will there be a backlash if people on relatively good incomes still benefit?

Dr Stephen Barber, a political economist at London South Bank University, thinks not: "I don't think there will be political problems in the sense that the 'squeezed middle' will not complain". He adds: "This will most certainly help the lowest earners who have been hardest hit by inflation running at 5% last year. It is food and fuel which has led price rises – something which is much harder to absorb if you have less discretionary income."

Will some workers drop out of the high-rate tax band and keep child benefit?

Not necessarily – it depends how the government decides to structure the higher tax bands. If it does decide to narrow the lower tax band, that could keep as many taxpayers in the higher band, or even force more into it.

The government will need to tread carefully to make sure it doesn't push too many people into a tax bracket in which they will lose £984 a year through the removal of their child benefit.

How much will the plans cost?

Alex Henderson, tax partner at PricewaterhouseCoopers, says each £100 increase in the personal allowance costs the government at least £0.5bn, so raising the threshold from £8,105 to £10,000 would cost £11bn.

"If this is not paid for out of improved tax receipts from growth or from borrowing, there would need to be significant cuts in reliefs or tax rises elsewhere," he says. "To illustrate the scale of the measure, if VAT were increased to 22% this would just about meet this gap."