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The full magnitude of Chancellor's 'Granny tax' on pensioners emerges. 29/03/12

Around 700,000 people turning 65 next year will be hit the hardest from George Osborne’s reforms - losing £323 annually with the end of age-related income allowances.

Ros Altmann of Saga said: ‘Middle-class pensioners are outraged. My inbox is full of angry emails from those who did save for their future but are now hit.

The Institute for Fiscal Studies said the Chancellor should have given advance notice of his plan to freeze the £10,500 tax-free allowance for the over-65s.

Senior Tories have denounced it privately as the Chancellor’s biggest blunder, among them
Lord Tebbit who described it as an assault on pensioners who have put money aside.

Part of the justification for the move was the promise of a more generous state pension of around £140 a week.

But this is not expected to be introduced until 2016 – and even then only for those who hit pension age at the time.

That means that those who retired between these dates would lose both a higher allowance and the better pension – a double attack on their incomes.

This will affect around 2.8million pensioners – 700,000 a year for four years.

The IFS (Institute of Fiscal Studies) found that all pensioners with incomes of between £10,800 and £26,200 turning 65 next year would lose out on £323 as a result of the Budget. They will be part of the 4.4million to be punished, with average losses of £83. But in a rare boost for the Chancellor, the IFS said there was a justification for making cuts on pensioners because they had done better than younger people from the Government’s austerity measures.

Paul Johnson of the IFS said: ‘Our analysis shows that they have lost considerably less from recent tax and benefit changes than any other demographic group. And over the past decade and more pensioner incomes have risen faster than those of the working age population.”

David Cameron dismissed claims that pensioners were going to be hit, calling it a ‘fair Budget for all our people’.
‘And at the same time, the Budget also delivered a tax cut for 24million people in our country, and also we’ve now taken 2million of the lowest paid people out of tax altogether. It’s a good Budget for our economy and it’s a fair Budget for all our people.’
Defending the changes to pensioners’ tax allowances, the Business Secretary Mr Cable said the Budget was transferring £1.7billion to pensioners –against £360million taken away by the allowances changes.

Mr Cable accused Labour of failing to fix the state pension system, ensuring the value of the pension fell back further and further from incomes.

Mr Osborne stuck to a previous promise to increase the allowance to £10,500 for those aged 65, and £10,660 for the oldest pensioners. This meant the over-65s appeared to be gaining an extra tax break.

But what he didn’t make clear was that by freezing allowances after this, any pensioner who already pays tax will get only 80p for every £1 increase in their pension.

This is because the amount they can earn tax free will not change and, as a result, every extra pound in income above the allowance is taxed at the basic rate of 20 per cent.
If you need any help and advice on Inheritance tax, Capital Gains Tax, or any other implications of the 2012 Budget, contact Lavinia Newman, Stuart Coleman or Tonmoy Kumar to discuss how ABDS can help in all your financial planning.
ABDS Chartered Certified Accountants of Southampton.
Tel: 023 8083 6900  E-mail: abds@netaccountants.net

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