Opposition to freeze on pensioner tax allowance
Labour have stated their opposition to the government’s plans to freeze the tax allowance for people over the age of 65.
Currently, people under the age of 65 are eligible to earn up to £8,105 per year, without having to pay income tax. Anything over this amount is subject to tax as normal. This figure has recently been rising and the government are aiming for the tax allowance to reach £10,000 by 2015.
Traditionally, once people reach the state retirement age, their tax allowance in increased and they no longer have to pay National Insurance, freeing up more money from their income. However, the boost to their tax allowance looks set to change.
The current tax allowance for people between 65 and 74 years old it £10,500 per year. This amount increases to £10,660 per year after the age of 75. The government are planning to freeze this rate from next April, which will see the tax allowance gradually move closer to the amount for working age people.
Furthermore, people who turn 65 after 5th April 2013 will no longer be eligible for the age related increase to their tax allowance and it will eventually be phased out.
Over 4 million pensioners are expected to be affected by the change and it is estimated that they will lose out on an average of £83 extra income for the year.
The move, which has been labelled the ‘granny tax’ by some is estimated to save the government £1 billion by 2015. The government argue that their plans to raise the basic state pension by over 5% will help to compensate for the loss and the Treasury indicate that the basic state pension had risen by £127 more than it would have under Labour.
Labour unsuccessfully tried to block the government’s plan to cut the top rate of income tax for earnings over £150,000, which they claim will cut £40,000 per year from the tax payable by each of Britain’s millionaires. But, subsequent attempts to block other parts of the the budget have seen opposition growing and they hope to block the plans for the over 65’s tax allowance.
Other critics point out that it will largely affect people who have saved most of their lives to finance a personal pension. One group suggested that the changes are effectively a ‘tax on prudence’ and that many pensioners feel that they’re a soft target.
The changes will come as a further blow to personal pensions which have already been hit hard by the Bank of England’s quantitative easement measures.
People looking to buy an annuity now not only have the prospect of their pension pot buying an annuity worth 25% less than it would have before the banking crisis, but the amount they receive will no longer benefit from the age related tax allowance.
A spokesperson for the Intergenerational Foundation argued that the changes didn’t go far enough, suggesting that pension incomes should also be subject to National Insurance.