Who will be affected by the 'Granny Tax'?

"Labour to vote against 'Granny Tax' as new figures show pensioners on modest incomes will be hit"

Ed Balls, Labour Party Website, 19 April 2012

Yesterday the Labour Party failed in its bid to block the freeze in age-related allowances, the so called 'Granny Tax'.

Earlier that day the Shadow Chancellor Ed Balls released figures from a House of Commons Library study that showed pension changes being implemented by the Government would affect pensioners on modest incomes most and that those workers who are about to retire could lose up to £323. 

These figures were used by Labour MPs throughout yesterday's debate and have been mentioned on the BBC website, the Guardian, the Telegraph and the Daily Mail.

Analysis

Following the changes in the 2012 Budget, the personal allowance (what you can earn before income tax starts to kick in) stands at £8,105, up from £7,475 in the previous year. If your income is above £100,000 your personal allowance is reduced by £1 for every £2 you are over the £100,000 mark. So at around £116,000 your personal allowance disappears altogether.

If you are aged 65-74 then you have a higher personal allowance of £10,500, while if you are aged 75 and over then your personal allowance is £10,660. However once your income hits £25,400 you begin to lose the extra money (at the same rate, £1 for every £2 over) until your personal allowance is back to the £8,105 level. From then on the same £100,000 limit applies. For more information on personal allowances see the HMRC website.

Under the changes introduced in the Budget, the age-related allowances are to be phased out until there is a single personal allowance for everyone. Those who turn 65 after 5 April 2013 will no longer be entitled to the age-related personal allowance but will instead be entitled to the same personal allowance as those under 65, which will be up to £9,205 by April 2013.

For those over 65 the age-related allowances have been frozen. This means that, for those aged 65-74 on 5 April 2013, the age-related allowance will remain at £10,500 and for those aged 75 and over on 5 April 2013 the age-related allowance will remain at £10,660.

In the press release on the Labour Party website Mr Balls refers to a report produced for the Labour Party by the House of Commons Library. We contacted Mr Balls' office and they were kind enough to provide us with the House of Commons Library report.

In the press release Mr Balls made several claims regarding how the changes will affect pensioners:

"Someone turning 65 after 5 April 2013 will be hit if they have an occupational or personal pension of as little as £67 a week, while existing pensioners with an occupational or personal pension of just £92 per week will be affected, according to the House of Commons Library figures."

The first figure of £67 is taken from the report which calculates that, for someone turning 65 after 5 April 2013 (who would therefore only receive the personal allowance of £9,205) to be adversely affected by the Government's changes, they would need a minimum additional taxable income of £3,472. This works out at around £67 per week.

The figure of £92 is taken from the calculation that, for someone who is aged 65-74 on 5 April 2013 (who would therefore receive the age-related allowance of £10,500) to be adversely affected by the Government's changes, they would need a minimum additional taxable income of £4,767. This works out at around £92 per week.

However, this figure of £92 per week refers to those aged 65-74 in the report while Mr Balls simply refers to "existing pensioners". According to the report those over 75 on 5 April 2013 would need a minimum additional taxable income of £4,927 to be adversely affected by the changes, around £95 per week.

When we work out a figure for all those aged over 65 by 5 April 2012 then we are left with a figure of £4,847 or £93 a week. This is only a slight difference to the figure of £92 mentioned by Mr Balls.

The main claim made by Mr Balls is that the Government's changes will hit pensioners on modest incomes:

"Labour is also releasing new figures from the House of Commons Library showing that "well over half" of the pensioners affected by the 'granny tax' will be well below the average taxpayer income — contradicting the Government's claims that wealthy pensioners will bear the burden of the change."

To Mr Balls' credit, the report states this exactly:

 "well over half of those affected by this policy will be below median taxpayer income."

This is mainly because, according to the report, the median income for the over 65's is £16,000 while the median income for all taxpayers is approximately £20,000. 

As mentioned, due to the nature of the age-related allowance, those with incomes above £25,400 have their age-related allowance reduced by £1 for every £2 that their income is above this limit. So you can have a high enough income that you no longer qualify for the age-related allowance.

The report calculates that this number is £29,400 for those aged 65-74 (for those over 75 it is £29,720). Someone with income of £29400 would be £4,000 over the income limit and would have £2,000 deducted from their age related allowance leaving them with £8,500. As this is below the £9,025 personal allowance threshold it is a personal allowance.

Based on these figures and the level of age related allowances that will be introduced we can calculate the income of those who will be affected:

• Anyone who turns 65 after 3 April 2012 will be adversely affected by the charges if their income is between £9,025 and £24,900 as they would have previously benefitted from the age-related allowance.
• Anyone who is aged 65-74 on 3 April 2012 will be adversely affected by the changes if their income is between £10,500 and £24,900 as their age-related allowance has been frozen.
• Anyone aged 75 and over on 3 April 2012 will be adversely affect by the changes if their income is between £10,660 and £29,720 as their age-related allowance has been frozen.

Those with incomes higher than these bands will not lose out under the changes as they would not have qualified for the age-related allowance anyway while those with income lower than these bands will not be affected as they will not have any taxable income.

Those who fall within these bands will be affected and the report claims that over half of those affected will be those with median incomes, though the report is uncertain how many over half.

So, Mr Balls is accurate to say that the changes will affect pensioner with below the average taxpayer income, however he fails to mention that pensioners have a lower average income anyway.

Conclusion

Mr Balls is broadly accurate when he claims that the Government's changes to age-related allowances will impact pensioners earning as little as £67 if they turn 65 after 5 April 2013 or £92 for existing pensioners.

He is also right when he says that "well over half" those affected will be below average income, though he does point out that pensioners already have a lower average income than taxpayers as a whole.

We are though unable to verify his claim that the Government said the changes would only affect wealthier pensioners. If they did says this we would need to verify what exactly they meant by 'wealthier' before making a judgement.

Update 23/04/12

Since writing this factcheck Mr Balls' office have been in contact with us and they have kindly given us examples of the governing parties saying that the 'granny tax' would only affect wealthier pensioners.

"When they do carp, they seem to be carping on behalf of some rather strange interests. They want the top 10% of households to keep their child benefit. They want the better-off pensioners to keep their age-related allowances. Indeed, they want the super-rich to go on enjoying"

Michael Fallon, Hansard, 22 March 2012, Column 978

Michael Fallon is a senior Conservative MP, but not directly a member of the Government.

"When we look at the pensioner population, we of course see big differences. There are 5 million pensioners who do not pay tax, many of whom are poor, and who are not, of course, affected by the changes at all. There is a small group of people—frankly, my contemporaries—who have high retirement incomes and considerable asset wealth, and it is right in principle that they should pay a bit more. There is a group in between, as the shadow Chancellor rightly said, of people who are not wealthy and do not have particularly high incomes, but who could be affected to a limited extent, as a result of inflation eroding the value of the allowances—inflation is currently estimated at 2.5%. Those people will benefit enormously from the increase in the basic pension." [emphasis added]

Vince Cable, Hansard, 22 March 2012, Column 965

The section highlighted in bold is the quote that Mr Ball's office referred us to. On its own it implies that the 'Granny Tax' will only affect wealthier pensioners, but the very next sentence says that there is a group of pensioners who do not have high incomes who will be affected.