However, the so called ‘Granny tax’ is much more a political label than a raid on pensions. Current income tax allowance for those under the age of 65 will rise by £1,100 to £9,205. Those older than this threshold but under 74 currently receive £10,500, and those above 74 receive £10,660. From the 2013 tax year these allowances will be fixed, both in cash terms and eligibility. As such, those who belong to either of the two higher age cohorts will not receive additional allowance. The purpose of this is to keep these higher rates static in cash terms until the working age tax-free allowance catches up. From that point, there will be a single band of tax free allowance regardless of age. Is this really bad policy or just bad politically?
The political dialogue has jumped onto HMRC’s own assessment which reveals that 4.41 million people will be worse off in real terms come 2013′s tax year to the tune of £83. This represents 40% of all pensioners. Of the other 60%, 50% are not taxed, while the top 10% do not receive the additional allowance.
After a reverse calculation, the average income of this subgroup (the 40%) stands at 57% more than an individual receiving the maximum basic pension with pension credit. The Budget is not hitting the poorest pensioners by any means.
I don’t see why we should complicate the system with multiple tax allowances based on age. The simplification of the tax regime is a good thing, and that is only ever going to come with the closing of the gap between the different threshold limits. Any benefits associated with age should just be added to income. Simple. This measure was always going to be open to political attack regardless of which government proposed it – as closing the gap would mean that pensioners would be doing relatively worse off than the rest of the population.
The government could not justify a progressive bridging aid to make up the ‘shortfall’ for existing pensioners and those near-retirement without paying out to the bottom 50% who are not affected by this ‘cut.’ If they did, the Coalition would have been attacked for providing a tax break to Middle-England pensioners, which would have cost the Treasury around £1 billion a year.
What has been overlooked in this discussion is that HMRC’s calculations are compiled using the Retail Price Index, mainly because personal allowances are required to increase as a percentage of this index by law. The current Retail Price Index is 3.7%.
Going back to last year, public pensions were switched from being linked to the Retail Price Index to the Consumer Price Index. The government explained the reason for the change by arguing that the CPI was a better reflection of the basket of products that pensioners’ spend their money on. However, the major difference between the indices is that the latter does not factor in housing costs such as rent and mortgages. Indeed, the RPI excludes the spending habits of those dependant on state pensions in its calculation, reinforcing its credentials as a working-age index. The rational argument behind the adoption of the CPI revolves around the assumption that pensioners would have already paid off their mortgages by the time they retire.
The CPI is currently at 3.4%. The Office for Budget Responsibility believes that by 2016, the CPI index will be running half the rate as the RPI, so if this is what pensioners are spending money on, they will be relatively better off than the population as a whole. If we adjust for inflation from RPI to CPI, the loss to taxation by inflation is an average £76 for these pensioners, or £1.46 a week.
The row over CPI or RPI has been smouldering even as recently as this month, but the point is, if you’re linking pensions to an index because it is most appropriate, then there is no logical argument why the tax threshold for the same group should be measured by the other.
Building upon this point, do any of these indices actually mean anything in regards to pensioners? A better solution, and one that is advocated by the GMB, is for the creation of a specific index designed around pensioners’ spending habits, that will exclusively apply to pension calculations. The introduction of such an index could bring to an end the kind of political nightmares Osborne has found himself in.
Alex Adranghi is Chair of the Young Fabians Future of Finance Network