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

    Comment number 145.

    @83.6346ellis - JSA is already taxed, right from the start. I've just confirmed that on direct.gov.uk - it gives a fulllist of which benefits are taxed.

  • rate this

    Comment number 144.

    We paid tax and NI all our working lives (43 in my case and 51 for my husband). Yes we get a pension increase this year but that will be wiped out by increased road tax (got to have a car if you live in Lincolnshire to get to doctor, dentist, shops etc), and the 3p fuel duty increase will hit us hard. And then my husband has his over 65 allowance frozen. Never ever vote Tory or Lib Dem again.

  • rate this

    Comment number 143.

    Well I have to laugh at Ossie standing there and saying he is denying money to pensioners because it's 'fair'. Since when did a Tory goverment ever think about doing anything fairly?

  • rate this

    Comment number 142.

    Before pensioners moan about the freezing of a tax allowance not received yet perhaps they should consider the benefits they have had. Early retirement sometimes in their 50s, final salary pensions, free healthcare and travel, plentiful jobs,free university and affordable housing. I am in my 50s and think mine and the previous generation have stacked the odds in our favour. This is fair.

  • Comment number 141.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • rate this

    Comment number 140.

    You cant lose something you never had! It make sense to simplify allowances - provided they rise with inflation for everyone AND they stop reducing the upper rate band limit. I'm all for reducing the tax on low incomes and I dont think the change will make that much difference to pensioners. That said, its a poor, meaningless budget unless you are rich!

  • rate this

    Comment number 139.

    From Nasty Party to Despicable Party.

  • rate this

    Comment number 138.

    I have done everything all governments have asked of me, worked, paid taxes, made sure I had saved enough for old age in fact never taken a penny from the state - did it pay - NO SO JUST PLAY THE SYSTEM -IT PAYS no government rewards you for doing the right thing - AND WHEN I AM DEAD THEY WILL TAX ME AGAIN - AND DONT GROW OLD BECAUSE THEY JUST DRAIN YOU DRY BECAUSE YOU ARE A SOFT TARGET!!

  • rate this

    Comment number 137.

    I listen in utter disbelief at today's budget. Just how do you justify cutting pensioners income and allowances not to mention the increase in fuel making it impossible for most of us to enjoy what we have left of our lives while you cut the tax due on Millionare's income! For 40+ years I have voted lib-dem but not any more you gutless wonders are being used as puppets by the cleggs of this world.

  • rate this

    Comment number 136.

    @111, 102: The harmonisation of personal allowances is arguably fair in the grand scheme (at least for those with decent private / occupational pensions). However if you are getting close to retirement the main issue is the constant tinkering with both private and state pensions (directly and indirectly). How is anyone supposed to plan for their dotage these days!

  • rate this

    Comment number 135.

    Well someone has to pay for the tax reductions for the rich - such as most of the cabinet - so why not pensioners and the poor?

    I am not serious. I think this is awful.

  • rate this

    Comment number 134.

    ............and this will plague George Osborne in the same way Gordon Brown was plagued after he abolished the Lower Rate Band of 10% some years ago. I thought State Pension would be made tax-free to compensate. An extra 5p tax in the £1 seems to matter for the very rich, but pensioners, it seems, should absorb these small amounts happily and without complaint.

  • rate this

    Comment number 133.

    Pensioners, like the NHS take the flak but who gives a toss.? The Liberals in tow with Tories, who actually voted for this? We, the British 'plebs' will just shrug our shoulders and sit back and take it whilst the bankes and their 'front-bench' cohorts (Ministers) just carry on as normal i.e. laughing all the way to the off shore accounts. Why are we, the public so placid?

  • rate this

    Comment number 132.

    Perhaps someone could explain to me why a pensioner should get more tax relief than, say, a single parent working for minimum wage.

  • rate this

    Comment number 131.

    For those of you who voted Lib Dem or Tory you now have the government you deserve...........

  • rate this

    Comment number 130.

    never vote tory never vote liberal...the labour party are non existant..who can we vote for.?..this is not a democracy....we just havnt got a credible choice...were all at the mercy of this incompetant lot.

  • rate this

    Comment number 129.

    I'm 65years old in October 2014 so will 'miss out' on an increased allowance of £10500, which to be honest I wasn't even aware of.
    As I will be getting an increased personal allowance along with everyone else of £9,100, so will be about £200 per year better off, but, I am apparently losing out on extra £100 (6 months)for 2013/14, not bothered, then £55 for 2014/15.
    Not a bad budget overall.

  • rate this

    Comment number 128.

    Rays A Larf pensions may not be frozen YET!But tax allowances will go down and the result will eventually be that people on lower incomes will start to pay tax.The sad thing is we can't vote the nasty party out for 3 years they changed the law when they got in,we're stuck with them until 2015!

  • rate this

    Comment number 127.

    Juliet 50.
    Mind you don't shoot yourself in the foot young lady. Pensioners are seldom well off these days because despite what you may think they are expected to help children and grandchildren financially. Many have faced redundancy or forced early retirement which can decimate pension plans. You have yet to realise what lies in store but remember my warning.

  • rate this

    Comment number 126.

    I'm a bit confused what all the fuss is about. Unless people have an extra pension other than from the state, it's unlikely they will be affected by this at all. Even if they have another pension, no-one already in receipt of this extra allowance is having it taken away. It's only when existing and new pensioners reach 65 that the allowance won't increase, bringing them in line with everyone else.


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