The Granny Tax Explained - And The Politics Of It

The Granny Tax Explained - What It Is And Isn't

"It was a difficult decision," a Treasury source told me shortly after the budget on Wednesday afternoon, but they insisted they'd anticipated the furore surrounding the so-called Granny Tax - a real terms pay cut for pensioners which will probably make most 65 - 74 year-olds about £100 a year worse off.

I say "probably" because a lot of it will depend on inflation, and because actually no money is really being taken away at all. What's happening is the personal allowance on 65-74 year-olds is being frozen, and not going up by the 4.75% it has tended to rise by in recent years.

"It's something that should have been done a long time ago," said the Treasury source. "The tax system needs to be simplified, and we've taken the tough decision to do it now," they told me, not exactly delighted about what they were doing, because it's clearly caused a big stink.

The backstory is that pensioners have traditionally had a much higher personal allowance before they pay tax than younger people. In the tax year 2011-12 the threshold for under 65s was £7,475, but for 65-74 year olds it was £9,940, and £10,090 for those over 75.

For tax year 2012-13 the rate for 65-74 year olds goes up to £10,500 (£10,660 for over 75s), but from then on it will be frozen. Next year most workers under 65 not paying a higher rate of tax will be significantly better off when the threshold rises to £9205.

But under plans to abolish the different thresholds altogether, pensioners' tax thresholds will stay the same. Had it risen in line with previous years, pensioners might have expected it to go up by 5%, to around £11,000.

The over 75s are on a slightly higher threshold, but will still see theirs frozen. What's clearly happening - and the Treasury is open about it - is a harmonisation of the tax thresholds, all part of a simplification of the tax structure George Osborne believes is a fair and transparent change.

Pensioners will have to wait a couple of years before their threshold rises again - because they will only begin to increase once the tax threshold for everyone else crosses the £10,500 mark.

For the time being an over 65 paying tax at 20% - which most do, will be worse-off than they might have expected to be by about £110 a year, and that's not allowing for the rising cost of living.

Given the threshold has just been hiked up significantly - and that the Lib Dems target is to get it only to £10,000, it seems unlikely that there'll be much tax relief for pensioners for the next couple of years - barring an unforeseen mass revolt forcing George Osborne to perform a u-turn.

Those on the higher rates will be significantly worse-off, but there aren't that many of those, and let's face it, a person of any age bringing in more than £40,000 is unlikely to garner much sympathy for being around £200 worse-off than last year.

The question you have to ask yourself is whether the term "Granny tax" is a misnomer, conjuring up images of very elderly people huddling over electric fires, shrouded in blankets? Some would argue that the threshold freeze actually targets over 65s with plenty of disposable income, not the genuinely impoverished elderly.

Actually, it could have been a lot worse, some Tories wanted the Chancellor to go even further and bring those pensioners who choose to carry on working after retirement age into national insurance. Some MPs see it as slightly odd that these people in effect get a 10% pay rise if they keep on working. They wanted the Chancellor to channel the extra National Insurance money into some kind of fund for young people.

It was something that quite influential Tory MPs were lobbying George Osborne about until quite recently - so things could have been a lot worse!


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