Historically we have given people on lower incomes a higher personal tax allowance when they reach 65 years of age and move on to a fixed income.
But the Coalition government is gradually moving the basic personal allowance for the under-65s to £10,000, higher than it has ever been.
This raises the question whether there is still a rationale for the differential in tax allowances between people either side of 65 (or such higher pension age as will come in the future).
The government has taken the view that there is no need to do that.
The figures show in the estimates that the government have produced that they will spend some £3.29 billion less over 5 years than they would have done if they had kept the differential.
This is not an extra tax, it is merely the ending of an expectation that the age allowance will always be higher than the allowance for the under-65s. So this is why we think this characterisation is misleading and will panic pensioners into thinking that an extra tax is coming their way.
Current pensioners aged 65 or over
These pensioners will not notice any difference in their current situation. It is true that for 2013-14 and further years those on lower incomes might have expected their age allowance to rise.
These pensioners on reaching 65 will not get an increase in their personal allowance above the rate for those of 64 and under.
Elizabeth becomes 65 in May 2013 and could have expected her personal allowance to have increased from £9,205 to £10,500 in 2013-14. Instead it will remain at £9,205. If her income is less than that it will not matter to her. Similarly if she has an income of (say) £35,000 it won’t matter to her either.
However, if she has an income in between it could increase her tax bill by up to £259 over what she may have expected.
What we would have liked to see
The Chancellor claims to have drawn inspiration from the recent report on pensioner taxation by the Office for Tax Simplification (OTS), which cited the age allowance as one of the main sources of confusion for pensioners and listed 12 possible reforms. The OTS’s recommendation was that the age allowance should be a high priority in the second stage of their review and they would consider how it could be simplified.
The real question is whether, if the OTS had been allowed to continue with its review of age allowance simplification, they would have come up with the exact solution proposed by the Chancellor? We think that is unlikely.
Like the OTS we would have wished to have deferred this change of policy for further deliberation and would have hoped that some of the rough edges for those just coming up to retirement would have been more generously dealt with.
For the next few years the tax position of pensioners overall will be more, not less, complex and this might have been avoided with more thought.
We cannot however argue against the general direction of travel which will eventually simplify the system for pensioners and take many people out of the Self Assessment system.
The changes are not taking money out of the pockets of pensioners, because they never had it there in the first place. But we think some further changes to give extra help for those shortly coming up to retirement should now be considered. There is also a case for looking to give more inflation protection to low income pensioners if the trend in rising personal allowances stalls in the future.
Contact: John Andrews (please use form at http://www.litrg.org.uk/ContactUs)