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

PDF download Budget 2012[707 KB]

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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

    Comment number 45.

    The additional age allowance has not been rising in-line with the personal allowance for a number of years.
    The allowance for 2012-2013 of £10500 will be frozen but this does not mean that pensioners (such as I) will be paying more tax.

  • rate this

    Comment number 44.

    It is more than 50 years since I started paying tax and NI.
    Now my plans after retirement in July 2013 will have to recognise that HM Government are going to steal another £259 in tax.
    (£10500-£9205 x 20%) for those thicko's in the Coalition that think its fair.

    Roll on 2014. With an independent Scotland I'll be happy to pay extra.

  • rate this

    Comment number 43.

    I never really understand any budget and anything in your favour is always a year later, but if petrol goes up its straight away !

  • rate this

    Comment number 42.

    a person wich has payed 44 years of contributions has accumulated a weekly pension of £258 per week (according to london school of economics) yet he only receive £161 per week,i would like to know how the goverment does the calquletions.? why do they keep the difference and what explenation do they have.if anybody have the answer please tell me.in germany the money is payed in full.

  • rate this

    Comment number 41.

    What you've got to remember "ATNotts " is the likes of me have had to pay 45 years of NI to get a state pension. You will only need to pay 30 years. As for TV licence, I am 67 and still pay the full licence. I have always voted Tory. Up until now. All you pensioners out there remember this when the next election comes round. I certainly will not be voting Tory or Lib Dems come to that.

  • rate this

    Comment number 40.

    Why should a pensioner have a tax free allowance that is higher than the rest ? If this is in recognition of past military achievements isn't this called a war pension ? It is too simplistic to say that older people deserve more - winter fuel allowance, free bus travel and TV license are already not available to others.

  • rate this

    Comment number 39.

    Will the income limit for age related allowance be scrapped / changed to that of the normal income limit for personal allowance, (£100k), once parity has been acheived?

  • rate this

    Comment number 38.

    You can argue that not enough has been done to tax the wealthy and assist those on low and moderate incomes in this budget, but it doesn't really make a whole lot of sense to argue that a person of working age on a low income should pay more tax than a pensioner on the same low income, which is what happens at the moment.

  • rate this

    Comment number 37.

    #32 "All part of the Tory way. Attack the poorest, the oldest, the disabled, the sick, the out-of-work"

    You and many others here conveniently forget that those groups are all heavily subsidised by the higher rate tax payers. The top 1% pay 27% of all tax and the top 10% pay more than 5%. That is hardly the 'attack' you wish to mis-represent it as!

  • rate this

    Comment number 36.

    With the drop from 50p to 45p I breathed a sigh of relief with the chancellor's explaination that those who should pay the 50p tax rate found ways with their accountants to duck it. Of course these patriots wouldn't have a clue how to duck a 45p rate

  • rate this

    Comment number 35.

    It appears decision to freeze pensioners tax allowance has been made to help finance tax cuts for the better off. No longer believe 'we are all in this together'. Pensioners, often unable to find work to supplement income, are dependent on pension keeping up with cost of living and not eroded by future increased taxes. Coalition - why alienate the over 65's -ignore grey vote at your peril.

  • rate this

    Comment number 34.

    What was it Ed said "A budget for the millionaires not the millions"? Did anyone expect better from a government stuffed with millionaires who inherited their wealth?

  • rate this

    Comment number 33.

    If this happens to pensioners shouldn't the same also happen to working people on benefits? After all benefits are income too.

  • rate this

    Comment number 32.

    All part of the Tory way. Attack the poorest, the oldest, the disabled, the sick, the out-of-work. Reward those at the top of the income tree. Yep. All makes a sad sense . . .

  • rate this

    Comment number 31.

    I will be 65 in August 2013 and will fall foul of the new rules doing away with the higher tax free allowance given to the over 65's. So what. I fail to see why a person of 65 or over should be given a higher tax free allowance than someone who is younger and still working based purely on their age.

  • rate this

    Comment number 30.

    Retirement age is extended but pensions are frozen. Something's gone wrong, here.

  • rate this

    Comment number 29.

    The £10k tax allowance for pensioners is a joke. I am over 65 and theoretically get a tax allowance of £10500 a year.But, what happens? The tax man says "You get just over £6k a year State pension. Right, we will deduct that from your £10500 allowance" So, out of the £10k tax allowance, I am allowed to earn just over a mere £3k a year before paying tax!Is this right? I

  • rate this

    Comment number 28.

    I came from North America as a professional paying the higher tax band/NIC and wanted to retire here. Not likely now. My adivsor suggested I earn what I can, build up my pension, and move back as by then the pound will be higher, worth more in dollars and I will have a better retirement. So much for the UK wanting to retain the best. I think it very sad indeed.

  • rate this

    Comment number 27.

    Can only assume that the time has come for Pensioners to help out the people paying a high Tax rate.
    Think about it.These same Pensioners never once let this country down.Thousands of rellatives lost in keeping us free.
    And a Media and Politicians covered in shame.
    Trouble is..none of them are ashamed of themselves.

  • rate this

    Comment number 26.

    Good budget but as a 63 year old I will lose out. The trouble is whatever the chancellor does we will still have to pay as there aren't enough rich to go round. The blocking of stamp duty dodges by the rich, on their houses and the increase in stamp duty for the most expensive homes owned by the rich, are good - why was that not done years ago by the last socialist government?


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