Thursday, 22 March 2012

The Facts About #GrannyTax

Following George Osborne's Budget Statement yesterday, the Twittersphere has been alive with the #GrannyTax hashtag - basically alleging that the Government has levied a stealth tax on pensioners.

They haven't, but that won't stop hardline Labour headcases - including the Leader of the Opposition - from demonising the 'SAME OLD TORIES'.

What has happened is as follows.

Currently, those aged over 65 get an enhanced personal allowance for Income Tax of £9,940. Those over 75 get £10,090. This is the amount that you can be paid before you have to pay tax on the excess. The current personal allowance is £7,475. So a 65-74 year-old can expect to get a discount on their tax bill of up to £493 a year. A 75-year-old can expect a discount of up to £523 a year.

It's also important to note that, for pensioners receiving more than £24,000 a year, these additional allowances are withdrawn at a rate of 50% in addition to the Income Tax rate of 20% until they fall back to the standard personal allowance.

It is also worth bearing in mind that pensioners generally do not pay National Insurance, as it is regarded that they paid that to pay for their State Pension and the NHS. Workers do, meaning that their rates of tax are effectively higher. And National Insurance contributions don't even begin to meet the full cost of providing the State Pension and NHS, nor are they exclusively earmarked for such provision any more...

But I digress. The point is, currently pensioners pay far less tax than your average worker.

Osborne has stated the following in the Budget:

  1. The 65-74 and 75+ allowances will increase in line with inflation in April 2012 as planned, to £10,500 and £10,660 respectively;
  2. From April 2013, the age allowances will be frozen and will not benefit from any further increases until they are overtaken by the standard personal allowance. Then they'll be abolished;
  3. Also from April 2013, anyone not already eligible for an age allowance won't get one, just the standard personal allowance, which will be £9,205 by then.
So, in summary:
  1.  No new tax is being introduced - some advantageous age allowances are simply being frozen while the rest of the population catches up;
  2. No one who currently has an age allowance will have one taken off them - it's just that no new ones will be granted as from April 2013;
  3. The new personal allowance is within striking distance of the age allowances, which largely compensates for the changes. The biggest possible difference is £5.60 a week, that some people will have to carry on paying instead of it being knocked off their tax bill;
  4. The Basic State Pension will increase by £5.30 a week, which will more than compensate for the change for most pensioners, reducing the maximum difference to 30p a week that some people have to carry on paying instead of getting it knocked off;
  5. The only effect is caused by fiscal drag, where tax allowances increase at a lower rate than earnings,  and therefore the tax on the value of an income increases. The freezing of the allowances amplifies the effect, but as discussed, it is very slight;
  6. Pensioners will still pay a rate of tax 12% lower than your average worker, as they will continue to be exempt from National Insurance;
  7. Once the personal allowance surpasses the age allowances, the age allowances and their associated tapered withdrawals, which produce marginal tax rates of 70%, will be abolished;
  8. Pensioners in receipt of Pension Credit do not receive enough to pay tax anyway, even on the plain vanilla personal allowance. As such, they will be completely unaffected by the change.
Of course, the policy is not beyond criticism: stopping age allowances for new claimants is a bit close to the knuckle. Freezing the allowances also falls into this category - the Chancellor could simply allow them to continue to increase in line with inflation, and let the personal allowance (which is increasing faster than inflation) overtake them naturally. If he did so, the age allowances would be abolished in 4-6 years instead of 3. But we're talking small differences here.

No pensioner will be worse off on a cash basis. Other policies the Government has announced go a long way to offsetting the effects of fiscal drag. Pensioners will still pay a lower rate of tax than almost everyone else. The poorest pensioners are completely unaffected by the change. And finally, in 3 years, a 70% tax bracket looks set to be abolished.

Granny tax my arse.