From the TUC

Pensioners hit by tax changes, while super-rich let off

21 Mar 2012, by in Pensions & Investment, Society & Welfare

All those who have said that pensioners are immune from austerity measures because they vote have been proved wrong today.

In the name of tax simplification, pensioners will be paying £1.25 billion extra in income tax a year by 2016 (p180 of the OBR’s Economic and Fiscal Outlook).

At present pensioners have an age-related allowance, which is bigger than that for those below the state pension age.  This means they can receive more income than younger people before they have to start paying tax.

But while the personal tax allowance for younger people is to go up to part meet the Lib Dem ambition of a £10,000 allowance, that for pensioners is now to be frozen. This is what the Chancellor said:

We should also simplify the age related allowances – which the Office of Tax Simplification have recently highlighted as a particularly complicated feature of the tax system.

The NAO points out that many pensioners don’t understand them.

These allowances require around 150,000 pensioners to fill in self-assessment forms, and as we have real increases in the personal allowances, their value is already being eroded away.

So over time we will simplify the tax system for pensioners by doing away with the complexity of the additional age-related allowances for anyone reaching the age of 65 on or after 6th April 2013 and I will freeze the cash value of the allowance for existing pensioners until it aligns with the personal allowance.

This will protect the existing level of allowance pensioners have, while introducing a single personal allowance for all.

It is a major simplification. It saves money. And no pensioner will lose in cash terms.

This argument is based on the idea that pensioners will be so grateful for a simpler system they won’t mind paying extra tax.

I doubt they will be  that stupid, whatever the Chancellor thinks.

Of course they won’t lose in cash terms. This is because pensions will rise each year. But it will mean that pensioner tax-payers will pay a bigger proportion of their income in tax.

Conor Ryan has done the sums:

In 2012/13, a pensioner over 65 has a tax-free allowance of £10,500 compared with £8,105 for other taxpayers. Someone over 75 would have a slightly higher allowance of £10,660. Even with the new tax allowance of £9,205 from April 2013, it still amounts to a loss in the allowance of £1295 for 65-74 year olds and £1455 for the over 75s.

It amounts to a £291 cut in potential income for older pensioners – or £5.50 a week.

Rumours of further limits or cuts to pensions tax relief have turned out to be one of the few budget rumours not to be true. Pensions and tax looks like another bit of the budget that is Robin Hood in reverse. We still hugely subsisidise rich people’s pensions, but are now expecting pensioners on quite modest incomes (though not the poorest) to pay more tax .

In other pensions news, it looks like we will get more news on the government’s plans for the £140 ‘flat-rate’ pension for future pensioners quite soon. But as the Chancellor once again emphasised that this would be done at zero cost, we will need to study the small print to see how it is being paid for. Lifting pensioners out of means-testing is a worthy and progressive aim, but hard to do without spending extra cash – at least in a fair way.

We now also face further increases in the state pension age to link it with longevity. I’m sorry but I thought that we had already had steep increases in the SPA particularly for women – to deal with longevity. It now seems that these did not count, and we are going to start again.