In March 2012 George Osborne announced the scrapping of Age-Related Allowances (ARAs) in his budget. Currently those over 65 can earn more than those under 65 before they get taxed. The coalition government has introduced the phasing out of this policy. For some it’s seen as an unfair punishment on older generations, others believe the outcry over the change has been over the top and disproportionate. This article will give an easy to understand guide to what the changes mean, who will be affected and what the actual consequences might be.
What is the “Granny Tax”?
First of all, the “granny tax” as it has been colloquially named, isn’t so much an introduction of a new tax, but a scrapping of a tax exemption. Winston Churchill first introduced the tax relief for pensioners as an acknowledgement of the fact that pensioners have been contributing national insurance and taxes their entire lives, and a lot of them are on low incomes. The ARA meant that anyone between the ages of 65-74 could earn an income (from pensions) of up to £9,940 without paying tax and those over 74 could earn £10,090 before being taxed. This is compared to those under 65 who can only earn £7,475 without tax.
At the moment if you earn over the £9,940 or £10,090 as a pensioner, the tax you pay is still means tested. This will change with the introduction of the new rules.
Who will it affect?
The tax changes are set to affect 4.4 million of the UK’s 11 million pensioners. On average, pensioners are set to lose £86 a year, but those hardest hit could lose up to £323 a year according toFiscal Studies.
The government are set to make up to £3.5 billion out of the change over five years and will use this money to introduce a simpler tax system. In the long run it will help the move to a £140 flat base weekly state pension. Unfortunately, however, existing pensioners are unlikely to gain from this change, set to be introduced in 2016. On top of this they’ll be feeling the effects of harsher taxation.
The rules about the tax changes are pretty complicated when it comes to the exact age ranges, more information can be found here.
Good Thing, Bad Thing?
On the face of it, the change in taxation can seem like a pretty harsh ruling for pensioners, especially when the original allowance was set in place to acknowledge the financial contributions pensioners have made their entire lives and allow retirement to hold its proper place as the most restful period of a person’s life. It will mean that pensioners, especially those on the lowest income, will have less to spend, so will have to draw up a tighter financial plan.
The government is planning to increase the threshold for tax-free personal income allowance for everyone, however, including under and over 65s. This means that by 2015 everyone will be able to earn £10,000 tax free, so all in all the government are making changes to put some tax reliefs in place for those on lower incomes, although the years in between these changes could be particularly hard on low earning pensioners. Some critics of the general response to the tax changes have highlighted the effectiveness of such a policy in raising a lot of capital. They claim that this amount of capital is being raised not by being especially harsh on pensioners, but simply because there are so many pensioners in the country.
If you’re due to retire in the next few years and are at all concerned as to how this tax may affect you, then it’s best to get in touch with a financial advisor who can give you robust and personal retirement advice.