The Chancellor's granny tax: what does it mean?

You may have wondered what all the fuss was about with Georgie-Porgie's‘granny  tax’. The Chancellor of the Exchequer is going to take away the age-related tax allowance for people over 65. Here is what he said in the budget speech:

We should also simplify the age-related allowances, which the Office of Tax Simplification recently highlighted as a particularly complicated feature of the tax system. The National Audit Office points out that many pensioners do not 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.

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 6 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 new single personal allowance for all. It is a major simplification, it saves money, and no pensioner will lose in cash terms.

To read the speech go here: 2012 Budget speech; Hansard:  21 Mar 2012 : Column 801

It’s not surprising that a lot of people missed this, because it came between simplifying VAT on soft drinks and take-away foods and the promise to send every taxpayer a statement of what they owe – I thought we already got that, but the wonderful improvement is that they’re going to tell us what they’re spending it on. Presumably this will be like those little booklets you get from your local council explaining why they’re putting up your Council Tax. I think this is one thing the government could save some money by not doing. Presumably it means that what under Labour was a marketing budget for advertising on hoardings what they were doing, this will be the same thing but hidden in the HMRC budget (HMRC is the taxman).

It is this interpolation in a statement on tax reforms that led the press to say that that this was a cut that has been hidden in a tax simplification statement.

So what does it all mean?

This is what the government says in the Direct.gov Budget website:    

You can find this here: The Direct gov budget website This is the website for ordinary people.

The tax changes come first:

• The top rate of Income Tax will reduce from 50 per cent to 45 per cent in April 2013.
• The Income Tax personal allowance (the amount you can earn before you pay tax) will increase to £9,205 in April 2013.
• Age related allowances will be frozen from April 2013, moving towards a simpler, single personal allowance for everyone regardless of age

Then there is a section on pensions, which sets out the govenrment’s medium-term intentions:

• The government will reform the state pension system into a simpler, single tier State Pension for future pensioners. The new system will be introduced early in the next Parliament.
• Anyone reaching state pension age before the reforms are introduced will continue to receive their State Pension in line with current rules.
• The single tier will be set at a level above the basic level of the means test.
• The government has made it clear that it will recognise contributions that have been made to the current system under any reforms and will provide further detail in a White Paper in the spring.
• The government will commit to ensuring that the State Pension age is increased in future to take into account increases in life expectancy. Details of how this will work will be published this summer.
• There will be no changes to pension tax relief.

To look at the more formal statement, you have to dig into the Budget statement and documents. You can find the relevant paragraph here

The Treasury's budget documents

Here is the statement in the budget supporting documents:

Age-related allowances

1.199 The Office of Tax Simplification’s (OTS) interim report on pensioner taxation identified age-related allowances (ARAs) as a source of complexity in the tax system. Changes to the personal allowance made by this Government mean that the difference between existing ARAs and the personal allowance is reducing. In 2010 the difference was £3,015 and it will fall to £2,395 in 2013.

1.200 To support the goal of a single personal allowance for taxpayers regardless of age, and to spread the tax relief fairly across working age people and pensioners, from 6 April 2013 existing ARAs will be frozen at their 2012–13 levels (£10,500 for those born between 6 April 1938 and 5 April 1948, and £10,660 for those born before 6 April 1938) until they align with the personal allowance. From April 2013, ARAs will no longer be available, except to those born on or before 5 April 1948. The higher ARA will only be available to those born before 6 April 1938. These changes will simplify the system and reduce the number of pensioners in Self Assessment.

Where has this idea come from?

Since this refers to a previous, although only recently released, study we have to dig further back. The study referred to is:

Office of Tax Simplification (2012) Review of pensioners’ taxation: Interim report. London: author. published in March.

You can find it on the internet here: The OTS review of pensioners' taxation

Commentators on policy always look at a government report by starting from the organisation and people it has come from. The OTS is a Condem Coalition creation, associated with the attempts by the Coalition to have independent advice on myriad things to do with the Treasury; we are most familiar with the Office of Budget responsibility, which uses Treasury figures to calculate whether the Treasury is telling us the truth about various financial matters. This is clearly a Conservative think tank incorporated into the Treasury. You can see this from the Wikipedia account of the Chairman’s life history:

John Michael Jack (born 17 September 1946 in Folkestone, Kent, England) is the interim Chairman of the Office of Tax Simplification. Before he took upon this unpaid position that will be filled by a new appointment in 2011, he was a Conservative Party politician in the United Kingdom and was Member of Parliament for Fylde between 1987 and 2010, serving at various junior ministerial posts during the John Major administration.

It seems he got the job, because the OTS website, which you can see here OTS website gives a biography of him as chairman: 

Michael Jack served as the Member of Parliament for Fylde between 1987 and 2010 following a career in business. He served in a number of ministerial posts, including as Financial Secretary to the Treasury from 1995 to 1997. During his time as Financial Secretary he was responsible for establishing the Tax Law Rewrite project, which was tasked with rewriting the UK’s direct tax legislation in clearer and simpler language.

So what you have is a largely failed Conservative politician with a history in business. Not someone to be focusing on the interests of older people, although the report itself is well-sourced and had advisers who represented the older people’s organisations as well as business people.

The OTS report on pensioners' taxation

Basically, what this report says is that the pensioners' age-related tax allowance offends against the principles of having a good simple tax system because it is complicated to work out and people don’t know about it in advance; many probably don’t claim it. Therefore, it doesn’t help people preparing for retirement to know where they stand, and it doesn’t reliably get to the people who should be receiving it. It only affects pensioners in a middle band of taxation, who get more income, for example from private pensions or work, than the state pension rate. However, it tapers away, so it reduces as your income rises, this is also a problem, because it creates a higher rate of tax for people in this income bracket since they lose twice as much as they gain from any increase in income, until the whole allowance is tapered away.

The age-related allowance was a tax simplification in its time (when introduced by Denis Healey in 1974) and the aim was to help pensioners meet living costs. An example is the reality that a lot of annuities stay level and don’t increase with inflation; pensioners in this position get a gradually reducing real income because of inflation. Providing this sort of allowance is a judgement call, because younger people have increased living costs too, but for different reasons,. Also, pensioners living costs go up and down over time: they spend less once they pass the 75 years mark, because they tend to be less active then, and then their expenditure goes up as they become frailer and need more heat, specials food and so on. However, the very old (95+) tend not to need extra allowances. The question the paper asked was, should we be compensating a small group of pensioners through the tax system? It’s not well-targeted to those who might have particular needs.

Comment

The point is though that it is now being allowed to wither on the grappa-producing plants that means that those born before 5^th April 1948 will never get it (phew, I slipped in there). Notwithstanding what the government is saying about its medium-term aims, it is not clear that they are going to replace it with more generous help for people with very real needs – probably not, if their current attitude to spending anything is to be taken into account. But even though I might in principle get it, the taper will mean that it’ll be tapered away from me, and it’s not going to rise, so it will be worth less as I go on.

The OTS report actually includes a long list of things that the government could do, linking the whole thing up with marriage allowances and so on. Of course one of the things it might have done is to have a claiming campaign to make sure that everyone entitled was actually getting it. The possibility is mentioned, but I don’t see that in the Chancellor’s aims.

Incidentally, the OTS report is about far more than the tax-related allowance, so we can trawl through it to see what else they are going to do with older people's tax; presumably this is why the more general announcements were made that I quoted above from the Direct.gov website. Perhaps we'll be returning to this topic again.