Labour leaning think-tank IPPR backs Osborne on ‘granny tax’

George Osborne has received support from an unexpected source: the Labour leaning think tank, the IPPR.

In an article entitled “Why Osborne’s ‘granny tax’ makes sense“, Senior Research Fellow at the IPPR, Kayte Lawton says:

It is right for older people to contribute to deficit reduction…

Older people have been relatively protected from the spending cuts imposed by the coalition. The young have taken the brunt of the pain… Asking older people to contribute to tackling the deficit and shoring up the country’s tax base in the long-term is not unreasonable…

Osborne’s pleas of simplification have not played well, but he is right that age-related allowances add huge complexity to the tax system. This is important because it means that many pensioners do not even claim the higher allowance they are entitled to.

* George Kendall is the acting chair of the Social Democrat Group. He writes in a personal capacity.

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  • George

    I think anyone who looks at the numbers can see that there is a case to be made for changes to the financial arrangements for pensioners. In the past they needed more money as the pension had been eroded. Now we have to have some stability and perhaps some sharing of pain with others.

    On the detail, I am not sure that this is the right way to go and it would be easier to judge if it was part of some strategic view regarding pension (increasing the pension age etc. etc.)

    What was the problem is that the presentation was appalling and dissembling. This is what the media and opposition have picked up on. Osborne has done an appalling job (and I still think the 45p tax was fundamentally wrong and he deserves everything he gets) ad the fault should be laid at his door.

    There is also this weekends news on the cash for access to Cameron and I will wait and see the robust response from the LD to this – not just letting Cameron spin his way out and agreeing with him. There has to be a clear LD message on this, separate from the Government

  • “It is right for older people to contribute to deficit reduction…”

    But what happened this week looks more like older people contributing towards a tax cut for younger people.

  • Liberal Neil 25th Mar '12 - 2:42pm

    The presentation was so bad that the fact that the age related allowance went up by £450 last year and is going up by a further £560/£670 this year hasn’t been mentioned.

    Only after these two substantial rises, worth more than £200 a year to pensioner taxpayers, is the level being frozen.

  • Malcolm Todd 25th Mar '12 - 3:06pm

    @Liberal Neil.

    The rises you mention were simple indexation. The level, in simple cash terms, of allowances (and benefits for that matter) is not what matters, it’s the purchasing power that those levels represent. Otherwise, you’re just claiming credit for inflation.

  • George Kendal

    This is just one point of the budget which would not have been a problem if presented with the facts. It wasn’t though, it was presented as a simplification for those poor old dears – both patronizing and dissembling. The reality is important but the reality needs to be explained. It is also the reality that more people will be paying 40000 tax and that the numbers used to justify the 50p tax reduction were guesstimates

  • I must say that the conclusion in that report that this measure “takes much more from better off pensioners” is quite bizarre. Evidently it results from looking at households rather than individuals.

    Looking at individuals, it essentially takes an equal amount in cash terms from everyone with an income between the allowance and £24,000, and less from those with higher incomes. Therefore in percentage terms it takes most from those whose income is only just above the allowance.

    As far as the pensioners paying income tax are concerned, it’s a purely regressive measure.

  • Liberal Neil 25th Mar '12 - 7:32pm

    @Malcolm Todd – what were the indexed to, then? They are well ahead of inflation.

  • Liberal Neil 25th Mar '12 - 7:33pm

    @bazzasc – more people will pay tax at the 40p rate so that they didn’t benefit from the rise in the basic allowance aimed at helping low and middle earners. They don’t pay any more tax as a result.

  • Malcolm Todd 25th Mar '12 - 10:57pm

    @Liberal Neil — seems to have been the RPI, which is interesting: 5.6% rise in September 2011 and 4.6% in September 2010. (By contrast, of course, the general personal allowance went up 15.4% and 8.4%, and is going up by another 13.6% this year.)

  • Michael Seymour 26th Mar '12 - 8:31am

    My State Pension is currently just over £105 a week added to that I have a small annuity, the total of these two comes to £12,000 a year after tax. By freezing the state pension my income will diminish year by year with the inevitable rise in the cost of living.
    This budget seems to punish OAP’s like myself, whilst rewarding people with high incomes. Surely this is Tory thinking, shame on the Labour Party.

  • Matthew Huntbach 26th Mar '12 - 1:11pm

    Ian Sanderson (RM3)

    Some misunderstanding here. State PENSION continues to be increased using a formula that takes account of inflation.

    Indeed, Michael Seymour’s comment shows how misleading newspapers headlines bedevil attempts to get a fairer taxation system. I suspect most people did not look beyond the headline phrase “granny tax” and supposed a special tax on old people had been bought in.

    What is really happening is that Michael Seymour and others like him will be taxed no more than anyone else on the SAME income – but they won’t be taxed less than younger people (or at least it is being moved that way).

    This seems to me to be entirely sensible – if we feel that older people should be subsidised, then let it be done by direct payment through higher state pensions, rather than by higher tax allowances. Higher tax allowances only benefit those who have a high enough income for that to be an issue – isn’t it much better the same amount of subsidy goes to ALL older people, not just those who already have a little bit of extra income through an annuity or whatever?

  • Liberal Neil 26th Mar '12 - 1:55pm

    @ Malcolm Todd – that may seem to be the case, but in both cases the increase in the age related allowance was announced in the previous year’s budget, months before those figures could have been known.

  • Liberal Neil 26th Mar '12 - 2:13pm

    @Micahel Seymour: “My State Pension is currently just over £105 a week added to that I have a small annuity, the total of these two comes to £12,000 a year after tax.”

    That’s quite a reasonable annuity! Others have made the point that the pension is actually going up. On your level of income you will kep 80% of any rise in the state pension but have already seen the amount you keep go up due to the large rises in the age related allowance in the current and next tax years.

    For example, if you annuity is £7K your gross income in 2009-10, under the last Labour Government, would have been £11,941 and, after income tax, £11,451. In 2012-13, with the same annuity, your gross income will be £12,587 and, after income tax, £12,170. (Based on the age related allowance for 65-74 year olds and assuming your annuiaty income is fixed.) If your annuity is index linked you would obviously be better off than this.

    Now I’m not claiming this is a bonanza for pesnioners, and inflation reduces the real value, but it does show that they have been protected compared to most others and have certainly not been hit unfairly.

  • Malcolm Todd 26th Mar '12 - 2:23pm

    Of course, the suspicion that this was all about grabbing money off middle-income pensioners could be abated by a specific pledge to put the increased revenue from abolishing age allowances into increasing the state pension over and above inflation during the years of transition (a sort of ‘triple-lock-plus’).

  • Malcolm Todd 26th Mar '12 - 2:33pm

    @Liberal Neil. The tax allowance rates have, I think, been announced at the October “mini-budget” in recent years, based on the previous month’s RPI figures. The year-in-advance announcement of the personal allowance in the last couple of years has been possible because they were planning to put it up by considerably more than inflation so it didn’t matter what the exact RPI figure was going to be. Here’s what the HMRC website said in 2010:
    “Existing legislation requires the Government to increase personal allowances and rate limits by
    the annual percentage increase to the retail prices index (RPI) for the year to September
    preceding the new tax year
    . The Government made the Order to set the relevant amounts on
    2 December.
    The Government has announced that for 2011-12 it will over-ride the amounts set in the order
    for the personal allowance for those aged under 65 and the basic rate limit.”

    I think you must be mistaken about the age-related allowances being announced a full year in advance. (This year, of course, they have been because they’re being frozen!)

  • “The extra “age allowance” for income tax purposes won’t increase -it will be frozen. For comfortably off and well-off pensioners this makes no difference – they don’t get it anyway. People who don’t have much income in addition to a state pension will either not suffer or will benefit from the general increase in the personal allowance, including those who have a frozen age allowance.”

    No, that’s not correct. The total allowances for those over 65 on middle and lower incomes are being frozen. They won’t benefit from the present increase in the standard allowance.

    The people who don’t get the enhanced allowance are those with higher incomes – over about £27,000, I believe. Ironically, they are the ones who will benefit from the raising of the non-enhanced allowance. So the situation is just about the opposite of what you said.

  • Liberal Neil 26th Mar '12 - 6:03pm

    @Malcolm Todd – no I am not mistaken – I checked before I posted – the above inflation rise in the age related allowance for 2011-12 was announced in the June 2010 Emergency budget and the above inflation rise in the age related allowance for 2012-13 was announced in the March 2011 budget.

    There are numerous reputable online sources for this information.

    Now it may well be the case that, had inflation been higher than the ver6y generous rises, the Government would have had to revise it upwards, but they didn’t.

    It is worth reiterating that no pensioner will be any worse off in cash terms from this. They only pay more tax if their income goes up, and then at a rate of 20%.

  • Labour say they do not understand this defeat in Bradford. The Labour candidate, Iqubal something was towing the Labour line regarding troops in Afghanistan, saying on TV he supports efforts against all forms of radicalism. Galloway (the way to the gallows?) had a free mouth to pander to average Joe’s opinion that if British men and women are going to keep getting killed and injured in a seemingly thankless and probably impoassible task lets quit, and more significantly he was pandering to the Muslim voters, this he feels is his life work one must presme , who are not concerned about Afghanistan being taken over by the radical Taliban type mentality with all the accompanying terrors which will be inflicted upon the women of Afghanisatn, that is how Galloway won.
    I mean is this really that difficult for them to understand?

  • Regarding the so-called “granny tax”, not one of these comments made any reference to the much high rate of inflation for older pensioners – of the order of 17% rather than the 3.5% or so that it is currently for most workers.
    The cut-off point for enhanced personal allowance is currently £22,900 (HMRC lflt P800), well below median income. Some pensioners do actually receive more than this. They are the ones, perhaps previously working in finance, that are often seen out and about, giving the impression of pensioner affluence, but the vast majority receive rather less than this with the State Pension now worth around £7k.
    There are also a significant number of pensioners who survive below the ‘official’ poverty line (60% of average (=median?) income, which I take to be around £23k, so those receiving less than £14k are living in poverty. And this is without taking into account JRF’s Minimum Income Standard or the higher costs of living in rural areas. Many had retired to the country/coast when housing costs were less than in metropolitan areas, giving the high incidence of pensioners (21.8%) in the SW Region compared with the NE (19.6%). However, transport costs are much higher in the most rural areas, for both LAs and residents – by a factor of 3.0 or more compared with urban centres over a wide range of services.
    As for the £5 handout to raise State Pension to £7280 per annum, this was not the result of largesse, but a quirk of the dates when changes occurred. The consequential steep rise in the value of CPI (5.2%) was quite unexpected and made up for derisory increases in previous years.
    No. The average pensioner has not been sheltered, (s)he has been suffering in poverty for many years from a variety of causes, which the higher personal allowance (about 5.5% more cash) does only a little to correct. Averaging over all pensioners does a great dis-service to those life-long taxpayers who deserve more careful consideration than has been given here or by Labour in the IPPR.
    Not long ago, £7k was considered useful ”pocket money” for the wife of an average earner to pick up from a part-time job. You just try living on this as your sole income.

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