Up until lunchtime last Wednesday the term “Granny Tax” had rarely if ever been used, now everyone seems to have an opinion about it. “Granny Tax” was quickly trending on Twitter and with headlines like “Pensioners robbed”, “The great granny tax grab” and “Robbed”, there was no doubt what the newspapers thought.

But what is the “Granny Tax”? How will it affect you? How much will it cost you?

Read on to answer all these questions and more.

What has changed?

The changes were made to the age related Personal Allowance, which is the amount an individual can earn before paying tax.

Personal Allowance 2011/12 tax year 2012/13 tax year
Below the age of 65 £7,475 £8,105
Aged 65 – 74 £9,940 £10,500
Aged 75 and over £10,090 £10,660

As the table to the right confirms those people over the age of 65 are able to earn more income before they paid tax than someone below that age.

However, in the Budget two major changes were announced.

The first related to the Personal Allowance for people aged below 65, which will increase significantly to £9,205 for the 2013/14 tax year in line with the Coalition Agreement which states that the Personal Allowance will rise to £10,000 during this parliament.

The rise in the Personal Allowance will help reduce tax bills for the lowest paid, but the second announcement made by George Osborne will see tax bills for pensioners rise.

It was announced that the age related Personal Allowance for those people aged of 65 would be frozen at the 2012/13 level (£10,500) and that anyone turning 65 after the 5th April 2013 will not get the age related Personal Allowance at all, and will simply get the standard Personal Allowance, which is currently lower.

Our advisers can help you understand how the “Granny Tax” will affect you

The Investment Sense team of Independent Financial Advisers in Nottingham

Contact our team of advisers today:

0115 933 8433

info@investmentsense.co.uk

Online enquiry form

Who is most affected by the “Granny Tax”?

People turning 65 after 5th April 2013 will be hardest hit; they will get a Personal Allowance of £9,205 instead of the £10,500 they would have expected to get.

This will cost them just over £250 per year in additional tax, it will also mean many more people having to fill out tax returns, which would seem to be at odds with the Chancellors stated reason for the change of simplifying the system.

However people aged 65 or over before the 5th April 2013 will also be hit because the age related allowance will be frozen, meaning they will not benefit from the annual rises which had previously occurred.

These annual increases in the age related Personal Allowance were never guaranteed by the government, they had however become expected.

Figures from HMRC show that after inflation is factored in, the changes will leave around 4.5 million people an average of £83 a year worse off from 2013/14.

Are any pensioners not affected?

Yes, because of the way the age allowance is reduced for pensioners with higher incomes those people over the age of 65 and with an income above £30,000 each year will not be affected by the change, as they didn’t receive the age related portion of the allowance in the first place.

Pensioners whose income only includes State Pension and Pension Credit, about half of all pensioners, will also not be affected because their income is too low to pay tax.

Why has the government made such an unpopular change?

In his speech last week George Osborne said that the move was being made to simplify the tax system; about 3.2 million pensioners don’t claim the age related allowance, even though they are entitled to do so.

However, figures show it will also save the government a not insignificant £1.25 billion per year by 2016/17; much needed funds when other tax cuts, particularly for the lowest and highest paid need to be financed.

Was there any good news for pensioners?

It really depends on how you interpret previous announcements, for example the Institute for Fiscal Studies (IFS) calculate that because of other measures, for example the triple lock on the State Pension, losses will be about £60 per year from 2014 onwards, equivalent to 0.25% of the average pensioner’s income.

The majority of future retirees will also benefit from the news that a flat rate State Pension will be introduced in the future at a minimum level of £140 per week.

However many pensioners will undoubtedly feel unfairly treated, especially at a time when they have been hit by low interest rates and Annuity rates as well as rising prices.

In conclusion

Whichever numbers you look at it seems those pensioners who pay tax, but whose incomes are below £30,000, will face higher tax bills because of these changes.

Whether you think the additional tax burden is manageable is down to your own personal circumstances. it is however clear that if the press are to be believed the majority of pensioners are unhappy with the measure.

It remains to be seen whether the dissenting voices are loud enough to force a change, in the same way they did with the removal of Family Allowance from higher rate tax payers.

Our team of Independent Financial Advisers in Nottingham are experienced in developing retirement income strategies for clients the length and breadth of the UK. If you are approaching retirement or have already retired and would like to discuss how these changes affect you call one of our IFAs today on 0115 933 8433, alternatively enquire online or email info@investmentsense.co.uk