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Millions of pensioners will soon be worse off as a result of changes to personal taxation unveiled in today’s Budget – in which Chancellor George Osborne put emphasis on greater fairness and simplification of the tax system.
The Treasury has confirmed that around 4.4 million of taxpayers over age 65 will be adversely affected by a freeze to age-related allowances (ARAs), which will be frozen in April next year at their 2012/2013 levels, signalling a steady withdrawal.
Amounts will be held at £10,500 for individuals born between 6 April 1938 and 5 April 1948, and at £10,660 for those with a date of birth prior to 6 April, until they align with the personal allowance of income tax – which will rise by £630 next month and by an additional £1,100 to £9,205 the following tax year (when the top rate of income tax will fall by five percentage points to 45%).
The measure taken on the personal allowance by Mr Osborne, who used the word ‘fair’ seven times in his 59-minute speech to the Commons, comes at an annual cost to the government of £3.3 billion – one third of which will be met by taxpayers aged over 65 as the ARA dissipates. By 2016/17, retirees will be paying additional tax of £1.1 billion, according to the figures in the main Budget document.
‘We are not sure this is the solution the Office of Tax Simplification might have envisaged when it observed that age allowances are an area of complexity for pensioners,’ said Robin Williamson of the Low Incomes Tax Reform Group charity.
Zoe Lynch, partner at Sacker and Partners a pensions-specialist law firm, remarked, ‘What George Osborne didn't mention in selling the idea of simplifying allowances is that freezing those same allowances for pensions is likely to tax pensioners more heavily than ever before’.
Her opinion was echoed by Ernst and Young tax manager Jane Scott, who said, ‘Simplification of the tax system is welcome, but simplification at the cost of removing allowances is perhaps a step too far’.
Her colleague Patrick Stevens, tax partner, said the personal allowance increase scheduled for 2013, which is expected to remove 840,000 people from the tax system, was ‘good news for many on low and middle incomes’, but would be ‘unlikely to help the poorest taxpayers, many of whom will lose in means-tested benefits what they gain in tax terms.’
