Pensioners to face ‘granny tax’ woe

The state pension is to rise by just 2.5 per cent to �110.15 next month, an extra �2.70 a week. Picture: Getty
The state pension is to rise by just 2.5 per cent to �110.15 next month, an extra �2.70 a week. Picture: Getty
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PENSIONERS with modest savings will see their incomes shrink from next month as the government presses ahead with the so-called “granny tax”.

The controversial freeze in the personal allowance for retirees, coming into force on 6 April, is to be debated in the House of Commons after an e-petition demanding a rethink collected more than 100,000 signatures.

But the government is unlikely to back down, leaving millions of pensioners paying hundreds of pounds more in tax.

The measure, announced in the Budget last March, was quickly dubbed the granny tax, even though it isn’t a tax and the reality is that far more male than female pensioners will be affected.

So what’s happening? The change is to the personal allowance, to which all individuals are entitled. The allowance is the amount of income an individual can receive before it is liable for income tax. The threshold is currently £8,105, rising to £9,440 next month.

Pensioners can earn more before their income is taxable, thanks to the age-related allowances introduced by Winston Churchill in the 1920s. The allowance is £10,500 and £10,600 for over-65s and over-75s respectively.

The added allowance is gradually withdrawn from pensioners with a taxable 
income above £25,400, with those earning more than around £29,000 not getting any increased allowance.

But while the personal allowance for under-65s will increase next month, the age-related allowances will remain at their current levels before being phased out entirely. The step is part of government plans to equalise the personal allowance for all ages at £10,000 or more.

The freeze, combined with the effects of inflation, will result in 4.4 million pensioners losing £83 on average in the 2013-14 tax year and some £500 more in tax in the following year.

Richard Johnston, chartered financial planner at Murray Asset Management, said: “Those who have already reached 65 by 5 April, 2013, will not lose out in cash terms, and so one might argue that the government is giving 
to the under-65s rather than taking from the over-65s.

“The cost of living increases each year, however, and so over-65s may experience a larger proportion of their income becoming subject to tax.”

Hardest hit will be people who turn 65 just after the changes take effect next month, as they won’t be entitled to any age-related allowance. So if you turn 65 on 5 April, you’ll be able to earn £10,500 before paying tax. If you turn 65 a day later, you’ll continue to pay tax on income above £9,205.

The changes are expected to affect around four in ten pensioners. Roughly half of pensioners have income below the allowance, while a small minority have too much income to benefit from age-related allowances.

The anger arises from the fact that the granny tax means the pensioners who will have to pay more tax are those on modest earnings that have nevertheless managed to set savings aside for their retirement. It has no impact on wealthy pensioners.

Logan Steele, general manager of Age Scotland Enterprises, said: “We firmly believe there need to be fairer tax incentives to encourage people on modest incomes to save for a pension, so we would like to see some of the savings made from reducing the annual lifetime allowances being used 
to encourage people on lower incomes to save.”

The impact of the freeze will be exacerbated by other measures taking effect that will eat into pensioner incomes. The state pension is to rise by just 2.5 per cent to £110.15 next month, an extra £2.70 a week.

The freeze also comes at a time when low savings rates are having a devastating impact on pensioner saving pots. Millions of retirees rely heavily on the income from their hard-earned savings to supplement their state pension, yet no conventional savings account currently pays a return above inflation.

So what can you do to offset the impact of the granny tax? Here are a few options:

Use other allowances

If you’re managing to save money, make sure you take advantage of your annual tax-free individual savings account (Isa) allowance. This is currently £11,280, including £5,640 that can be saved into a cash Isa, rising to £11,520 (£5,760 in cash) on 6 April.

Claim what you’re entitled to

Of the £7 billion in state benefits that is left unclaimed each year, pension credits account for £2.4bn, according to the Tax Action report from To check 
what you’re entitled to, use the benefits calculator at or call the charity’s helpline on 0808 802 2000. Your local Citizens Advice Bureau can also advise on this.

Tax clawback

If you have income of more than £25,400 you may be able to rearrange your finances to take you below the allowances cut-off point.

Johnston said: “If you’re over 65, it is important to make the most of the age allowance whilst it still exists. Small changes to your financial affairs could be implemented to prevent the allowance being clawed back, as those between 65 and 75 pay a marginal rate of tax of 30 per cent on income received between £25,400 and £30,190.”

Share the spoils

If you’re married or in a civil partnership, you can transfer savings and assets between you to ensure you each use your tax allowances (although the actual allowance can’t be transferred).

Check your code

Millions of people have paid the wrong tax because their code hasn’t been updated. Pensioners are among the most likely to be affected, usually where they have recently started drawing the state pension or have several sources of income. Visit for more details.