End of age-related personal allowances

Following the Chancellor’s statement in his Budget speech about the withdrawal of age-related personal allowances a veritable media storm has erupted. The Chancellor’s been accused of robbing from pensioners to help the rich pay less tax. But what is actually happening to age-related allowances?

For the tax year 2012/13, the personal allowance for someone aged less than 65 is £8,105 and is set to rise to £9,205 in 2013/14. For 2012/13, the personal allowance for those aged 65 and above is £10,500; for those aged 75 and above it’s £10,660.

From the start of the tax year 2013/14, those born on or after 6 April 1948 will no longer be entitled to the aged allowance. Therefore, for those who would have become entitled to a personal allowance of £10,500 (or more if a normal inflationary increase had been applied to the allowance) when reaching 65 during 2013/14, they will only get the continued benefit of the basic personal allowance of £9,250 for that tax year. Such taxpayers will end up paying more income tax if their taxable earnings exceed £9,250. Previously they would have received the benefit of an additional £1,250 of tax-free earnings.

But what about those who have already reached the appropriate age for the age-related allowances to apply by the time the 2012/13 tax year comes to an end? They will continue to receive the benefit of the age-related allowances, except that their allowance will be “frozen”, i.e. at £10,500 and £10,660 for 2013/14. These allowances will continue frozen until the basic personal allowance “catches up”. When it does, all taxpayers regardless of age will be on the same basic personal allowance.

The Liberal Democrats want to see the basic personal allowance climb to £10,000. The Coalition Government are working to that end with the above inflation increases introduced for 2011/12 to 2013/14. Although a personal allowance of £9,250 for 2013/14 is a step almost to £10,000, there is still may be at least another tax year before it will reach that level. And even when it does, there may still be at least another tax year before the basic personal allowance reaches £10,500. In the meantime, those existing taxpayers aged 65 and above will have missed out of what would have been the inflationary increases to their age-related allowances.

So yes, it’s fine to stress the “generous” £5 a week increase in the basic State Pension for 2012/13, but nevertheless older taxpayers will definitely lose out financially over the coming tax years. And those newly reaching “retirement” will lose out the most!