Susannah Simpson: Grannies grab Budget headlines

By SUSANNAH SIMPSON
Published on 25/03/2012 00:00

THE Budget statement was billed as one to “reward work and back business” – but what does it mean for individuals?

The Chancellor could be forgiven for hoping that the post-Budget headlines would focus on raising the personal tax allowance for the lowest earners from April 2013 – a win for around two million low-income individuals who will be taken out of the tax net entirely.

He might even have hoped that the big news would be the scaling back of the cliff-edge withdrawal of child benefit for higher rate taxpayers, or perhaps that the “Britain’s open for business” agenda would ring true in the mind of the man in the street to justify the 5p drop in the top 50p tax rate.

But with an ageing population in the UK, it is perhaps unsurprising that the freezing of the age-related personal allowance for pensioners was the biggest news.

The system of age-related personal allowances was designed to give pensioners an extra slice of tax-free income over and above the level of the normal personal allowance. The age-related allowance is now to be frozen at current levels from April 2013 and will only be available to those born before 6 April, 1948.

Age-related allowances were, in fact, already restricted for a large proportion of pensioners even before last week’s announcement. Those with income over £24,000 in the current tax year, for instance, have their age-related allowances restricted by £1 for every £2 of excess income, subject to a floor designed to ensure that they are always entitled to at least the same personal allowance as under-65s. Pensioners with income over £29,230 this year do not qualify for the age-related allowance at all, even before the new provisions take effect.

Those who will most feel the pinch of this measure are lower-income pensioners, who will be losing out in real terms compared with an expectation of age allowances increasing in line with inflation. However, they will see an opposite (positive) impact from both the increase in the general personal allowance and the increase in the state pension from April 2012 by £5.10 per week. So all of these things need to be considered in the round.

Workers in the “squeezed middle” are unlikely to feel that they are winners, because the increase in the personal allowance to £9,205 in April 2013 is accompanied by a drop in the level of income at which the 40 per cent tax rate kicks in. The effect is to pull around 300,000 more basic rate taxpayers into the higher rate tax bracket and to increase the amount of income on which 40 per cent tax is paid for those already within this bracket.

As a result, someone earning £50,000 in the year to April 2013 will only be £15 better off in income tax terms. Add to this the impact of the withdrawal of child benefit for higher earners and they may well feel they are even more “squeezed”.

The pre-announced cutbacks in child benefit are due to take effect in January 2013. The Chancellor announced that he will raise to £50,000 the income threshold at which withdrawal kicks in and replace the “all or nothing” cliff-edge approach with a gradual tapering away of the benefit. As a result, one earner in the household would need to earn £60,000 before child benefit is entirely withdrawn.

As ever, anomalies remain. Since the test is triggered by one member of a household earning more than the £50,000 threshold, if two earners each bring in just below the £50,000 threshold then child benefit would remain fully available. This means that a household with two earners on an aggregate income of £99,000 could still receive full child benefit.

The combined effect of the child benefit withdrawal and the changes in tax thresholds does mean that some working families could be noticeably worse off. A household of two earners with two children earning £60,000 and £50,000 respectively would be £1,079 worse off in aggregate from April 2013.

Finally, what of the other lower-profile taxes and duties which hit individuals’ pockets just as hard in the current climate as headline income taxes?

Fuel duty is set to rise again by 3 pence in August. Prices at the pumps look set to stay high in the short to medium term and will add to the pain of the current 20 per cent VAT rate inflating the price of a number of items in the average weekly shop.

Switches in tax thresholds and allowances do little to make the tax system simpler and more transparent for individuals and families.

What would make a real difference in people understanding measures that are introduced is a clear articulation of the medium-term policy and vision for personal taxation (and pensions saving), in the same way as we now have a stated policy vision for business taxation (that Britain needs to be “open for business” and be able to compete internationally for talent and investment).

The Chancellor did, though, at least commit to look at measures to simplify the system. With the stated aim of increasing transparency, he undertook to provide taxpayers with a statement setting out what their tax receipts are being spent on.

It remains to be seen whether knowing the destination of tax revenues will ever make paying them an easier pill to swallow.

• Susannah Simpson is head of personal tax at PwC in Scotland