Budget 2012: Over-65s' tax-free income freeze

 

George Osborne: "No pensioner will lose in cash terms"

The amount of income that is not taxed will be frozen for those aged over 65, affecting the financial plans for those approaching retirement.

From April 2013, those hitting 65 will no longer receive a larger personal allowance than people of working age.

This will save the government £1bn by 2015, Budget documents have revealed.

The government said it wanted to "simplify" the tax system and spread tax relief across everyone, regardless of age.

But the National Association of Pension Funds said: "Over the course of this Parliament, pensioners stand to lose over £2bn in age-related tax allowance.

"This will come as a blow to millions of pensioners who have paid in to the tax system throughout their working lives. Pensioners with modest amounts of pension saving stand to be the biggest losers."

Key facts

  • The amount of income that is tax-free - the personal allowance - is greater at present for most people aged over 65
  • The system will be changed so eventually, everyone will have the same personal allowance
  • Some 4.41 million people will be worse off in real terms in 2013-14, losing £83 on average
  • Within that, 360,000 people aged 65 lose an average of £285

Source: HMRC

An accountant has warned that the change could cause difficulties for the UK tax authority's computer system and leave some people paying the wrong amount of tax.

"It is going to impact those least able to detect whether they are paying the wrong amount of tax," said Chas Roy-Chowdhury, of the ACCA tax body.

Major change

For those aged between 65 and 74, the personal allowance, the amount of income that is tax-free, has been set at £10,500 from April. For those aged 75 and over, the allowance will be £10,660.

Full Budget Documents

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This extra allowance gradually reduces for pensioners, whose taxable income is between £24,000 and about £29,000. It disappears for any pensioner earning more than £29,000. There is also a gradual withdrawal of the basic personal allowance for everyone with income above £100,000, regardless of age.

In a major shift in the way tax is calculated, already dubbed a "grannytax" on Twitter, Chancellor George Osborne has said that income tax personal allowances will change in the following way:

  • The under 65s' personal allowance will increase to £9,205 in April 2013 - that relates to people born after 5 April 1948
  • A personal allowance of £10,500 will be restricted to most people born after 5 April 1938, but before 6 April 1948
  • The personal allowance of most people born before 6 April 1938 will be £10,660

The change means that as people turn 65, they will not be entitled to the higher personal allowance set aside for most pensioners.

Instead, they will receive the same as everyone else. As time goes on, more and more people will fall into this group.

As a result, in 2013-14, some 4.41 million people will be worse off in real terms with an average loss of £83, HMRC said.

Dot Gibson, National Pensioners Convention: "Pensioners are very, very worried"

Within the total, 360,000 individuals aged 65 lose an average £285. Some 230,000 people will be brought into income tax.

So this will save the government £360m in the year it is introduced, rising to £1.25bn a year by 2016-17.

"This measure will support the goal of a single personal allowance for all taxpayers regardless of age, and spread tax relief fairly across working-age people and pensioners," said HM Revenue and Customs (HMRC).

Pension age

Although the tax-free income allowance is rising for the under-65s, HMRC has confirmed that 300,000 will be drawn into higher rate tax from 2013/14.

The change comes as a result of the higher rate threshold being reduced from £42,475 to £41,450 - the point at which people start paying 40% tax on their income.

Meanwhile, the chancellor confirmed that he would set up an "automatic review" of the state pension age to make sure it keeps on rising if people keep on living even longer, which means to 68 and beyond.

The state pension age is already scheduled to rise to 67, for both men and women, by 2026.

 

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  • rate this
    +1

    Comment number 25.

    If Mr Osborne had promised that the money he'd save by freezing the age related tax allowance would go to caring for the elderly it might have sweetened a bitter pill. The Dilnot Report last July suggested a cap of £35K on any care home fees. Today's announcement and the money thereby saved would go some way to achieving this.

  • rate this
    -19

    Comment number 24.

    Sorry, but I have little sympathy with pensioners on this.

    I, as a working person, am paying to keep those on state pension, why should they have a better tax allowance when they get other freebees such as bus passes, TV licences, winter fuel payments - not to mention 10% off days at B&Q!

    The change has made the whole system fairer - which is a novelty where Osborne is concerned.

  • rate this
    +16

    Comment number 23.

    David Cameron 2010

    It is fundamental to my values that people who have worked hard all their lives, and are now drawing their pension, deserve to be treated with respect. So that is what you will get from any government I lead. We will make sure that older and retired people get the dignity and quality of life they deserve.

  • rate this
    0

    Comment number 22.

    What a mess - no coherence, no sense - typical of a politician that never worked in their life ! When will we have a straight forward, plain, simple tax system, so we can ALL see what is being taken from us ! And calculate if the tax is set correctly ? HMRC seem incapable of dong so !!

  • rate this
    -2

    Comment number 21.

    For S Cook personal allowances my ars". 40% tax starts at £35k personal allowances be damned since when have they affected ordinary people. The erosion of this and the disgusting attack on the eldferly which is utterly shaneful will see more people lose homes and need help thereby exacerbating the cost to government - oh wait - they don't care!

  • rate this
    +5

    Comment number 20.

    So the only people to get their tax rate cut are the rich currently paying 50%!

  • rate this
    +4

    Comment number 19.

    well i hoped. another year helping my mother with her bills while the rich get a tax cut.

  • rate this
    +1

    Comment number 18.

    Is this going to be Osbore's 10p tax debackle?

  • rate this
    +5

    Comment number 17.

    It's not clear to me (aged 67) whether after April 2013 there will still
    be the 'claw-back' of the 'extra' personal allowance (which applies
    beyond the limit of £25,400 in 2012/13). It is this claw-back, which
    represents a marginal tax rate of 30%, which will eventually be
    eliminated by this 'wheeze' but, meanwhile, I continue to steer
    my taxable income to keep below the 30% threshhold.

  • rate this
    +2

    Comment number 16.

    For StevieP - the 40% is charged on taxable pay above (currently) £35k, figures quoted include personal allowance.

  • rate this
    +8

    Comment number 15.

    My first reaction to this Budget is that is is a thieving one and does little to commend itself to anyone. It will be a watershed for both the Conservatives and Liberals. And to think I voted for them - I should be sectioned.

  • rate this
    +11

    Comment number 14.

    If you voted Tory you only have yourself to blame, its the rest of us that I feel sorry for. Rich get rich and the Poor get poorer.

  • rate this
    +7

    Comment number 13.

    I have already emailed the appalling Osborne to comment on his appalling treatment of pensioners; I hope he will be inundated with protests and that no pensioner will vote Tory until the party stops robbing the poor to give to the rich

  • rate this
    +10

    Comment number 12.

    Well the Government needs to pay for the 50p tax cut for their rich pals somehow. Its a pity the rest of us and specifically the pensioners will bear the brunt of it. All in this together ehh......

  • rate this
    +10

    Comment number 11.

    The Chancer seems to have forgotten the majority of pensioners use thier vote. Roll on the general election.

  • rate this
    -4

    Comment number 10.

    I don't see a major issue with anyone paying tax when their income is above £10k, whether or not they are over 65.

    If a person under 65 can live off £9,000 a year tax free, then an extra thousand for those over 65 seems more than reasonable.

    How much of an allowance do people want? Surely it would be completely unfair to allow people to have a tax-free income of £30k+.

  • rate this
    +6

    Comment number 9.

    We're always told the government wants to help hard-working families.
    Single pensioners don't count.

  • rate this
    +8

    Comment number 8.

    Yet another example of civil servants and professional politicians who have never worked in the real world making decisions that affect their elders and betters. Even with AVCs on my state pension and two small private pensions I still have less than £10,000 income each year, but still have to pay tax on this. Now in future I will have to pay some more. Let the politicians try & live on this!

  • rate this
    +35

    Comment number 7.

    So ultra-high earners get their tax burden reduced, whereas the small extra personal allowance for pensioners is to be eroded.

    Says it all about this government's priorities.

  • rate this
    +26

    Comment number 6.

    Pensioners have successively had their interests eroded by governments. First of all the link to cost of living was removed and now over a short period of time they will lose the age related tax relief. Time for governments to realise that old people have a vote and will use it if they are discriminated against in this way.

 

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