George Osborne described it as a way to ‘simplify the tax system’ while critics have called it the ‘Granny Tax’. Whichever way you look at it this is the most controversial and talked-about measure to come from the Budget. Of course the economic climate means that few will have been surprised by a lack of good news in this Budget, but is this latest measure really fair?
What is the ‘Granny Tax’?
It is effectively a change to the personal allowance – the amount you can earn each tax year, tax-free. The allowance for those under 65 in the new tax year (starting from 6 April 2012) is £8,105. If you are 65 to 74 then from April your allowance is £10,500, and those aged 75 and over will get £10,660.
The change will mean that while the personal allowance for under-65s will go up in the following tax year (2013-2014) to £9,205, those aged 65 and over will have their personal allowance frozen at the 2012 level. And those who turn 65 after 5 April 2013, will not see an increase at all but will remain on the under 65 allowance.
Who will be affected by the changes?
It’s important to understand that no-one will physically have money taken away from them that they have already received, rather some will end up receiving less than they had anticipated. Those who reach 65 after 5 April 2013 will receive the same personal allowance as under 65s – £9,205 – less than they would have expected in previous years, while those who are 65 before 5 April 2013 will get a personal allowance of £10,500.
Fair or not?
The biggest problem, is that the so-called Granny Tax has been set against the background of a cut to the 50p tax rate – so in the simplest terms, this government has gifted the richest in our population a tax cut, while the elderly population who have been saving all their lives face a cut to their potential incomes. And not only that, but arguably it is these very people who have already born the brunt of the economic crisis – through a reduction in the value of their pensions, and a huge cut to savings rates.
On the other hand, older generations may not have a large disposable income, but are asset rich (mostly in the form of property) and this home ownership is something which ever-larger numbers of the younger working population are struggling to achieve. There is an argument that because of this situation it is fair for pensioners to be penalised by cuts in the Budget, as opposed to other portions of the population.
Some feel that pensioners have up until now escaped most cuts – they still receive help with their fuel bills – regardless of their income (which, it could also be argued, is unfair), and as mentioned, the value of their homes increasing puts them in a better financial position.
Looking simply at the measure itself, the question of fairness is a tough issue, since someone who turns 65 on 4 April 2013 will go on to receive a personal allowance of £10,500 whereas someone who turns 65 just two days later, on 6 April 2013 will get an allowance of only £9,205. Whilst that does seem incredibly unfair, you could argue that the cut-off point has to be somewhere, so there will always be someone who loses out.
What’s also problematic is that it’s the ‘middle income’ section of pensioners who will be worst affected.
Those who earn over approximately £30,000 will not be affected since they are not entitled to the extra personal allowance anyway, and those on a basic state pension and pension credits do not earn enough to pay tax, so they too will be unaffected. This leaves those who arguably are the ones who have done as they should – saved diligently, taken advantage of workplace pensions, and put aside enough to live a comfortable, but not extravagant lifestyle – out of pocket.
And it seems that is what makes this issue so contentious, that once again we find ourselves talking about ‘the squeezed middle’ – those who are neither rich or poor, who will bear the brunt of this change.
Do you think the ‘Granny Tax’ is fair?