‘Granny tax’ passes Commons

20 Apr 12
MPs have voted through the government’s controversial plan to freeze tax-free allowances for pensioners.
By Richard Johnstone | 20 April 2012
MPs have voted through the government’s controversial plan to freeze tax-free allowances for pensioners.Tax-return---ISTOCK.jpg

People aged over 65 can currently earn more before having to pay tax than working-age people. However, Chancellor George Osborne announced in the March 21 Budget that these allowances would be frozen from 2013/14 until they match those for people of working age, and scrapped altogether for new pensioners.

The move, which will eventually remove age-related allowances altogether, has been criticised by charity Age UK, which has warned that it could hit those with modest pensions and savings for their retirement. For the current financial year, the allowance is £10,500 for 65–74 year olds with incomes under £24,000, compared with the working age allowance of £8,105.

Labour forced a vote against the plan, but lost by 298 to 231.

Shadow chief secretary to the Treasury Rachel Reeves said it was ‘very disappointing’ that Conservative and Liberal Democrat MPs had ‘failed to stand up for pensioners in their constituencies and voted to push through the “granny tax”’. She said the proposals could cost pensioners up to £323 next year.

However, the move was backed by the liberal Centre Forum think-tank, which said it would level the playing field between pensioners and non-pensioners. The group also called for the government to impose national insurance contributions on wealthy pensioners' income.

Chief economist Tim Leunig said: ‘The removal of age-related tax privileges is to be welcomed. That said, limiting tax-free pension lump sums or reducing the National Insurance exemption would have been much more progressive options.’

Another tax change announced in the Budget has also come under fire today.

In last month’s speech, Osborne announced plans to cap the income tax relief that can be claimed in one year, limiting it to 25% of an individual’s income from 2013/14.

Charities have warned that this could make large donors to charities, whose donations qualify for tax relief, less likely to give. The Charities Aid Foundation has called for the government to reconsider the plan to ensure it still offers support for charitable giving.

The coalition has said that it will consult on the details of the cap. A poll today for the CAF found that more than half of voters – 55% – want the government to reconsider. Less than a quarter of those asked, 24%, think the cap as planned is right.

CAF chief executive John Low said: ‘Fewer than a quarter of the public believe the government should stick to their policy of capping tax relief on charitable donations. This is not an argument about saving tax, it is about encouraging wealthy people to contribute to the public good.

‘Claiming that tax relief simply subsidises wealthy people's personal interests is demeaning to those who put their hands in their pockets and pay for projects which support public services and help vulnerable people. At a time of deep cuts to public services, we should be praising people who help fill the funding gap, not deriding them as self-interested tax avoiders.’


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