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Gordon's tax grab - 220307
Thousands of older people will pay more tax from April 2008 as a result of Gordon Brown’s eleventh – and most complex – Budget, writes Paul Lewis
By scrapping the lower 10p rate – which he introduced in 1999 – he will increase the tax paid by many people under 65. The people affected will have an income of less than £19,000 and work part-time, have a low pension, or live with a partner who has a higher income. Unless these reforms are changed, women in their fifties and early sixties will be the big losers in 2008/09.
The problem arises because the Chancellor had to find the money to make a headline-grabbing cut in the basic rate of tax. From April 2008 that will fall from 22p to 20p at a cost to the Treasury of £8 billion. So he decided to get most of that money back by scrapping the starting rate of 10p tax on pensions and earned income. In other words on the first £2230 of income the tax will double – from 10p to 20p in the pound. That will bring in £7.3 billion.
To show how the arithmetic works I have used the rates from 2007/08. On the first £5225 income you pay no tax. On the next £2230 your tax will double from 10% to 20% costing up to £223. On the next £32,370 of income your tax rate will fall slightly from 22% to 20%, saving up to £647. Take off the loss on the first £2230 means a maximum gain for an individual is £647-£223=£424. The break even point – where the loss of the lower rate is balanced by the cut in the basic rate – is an income of £18,605. By the time the changes begin in 2008/09 the exact figures will be different but the principle is the same. Everyone with an income below £18,605 is a potential loser.
For example, a woman aged 62 with a state pension of £5000 a year and a private pension from her job of £5000 will pay £172.10 a year more tax from April 2008 under these proposals.
To reduce the impact on some people the Chancellor announced a one-off rise in 2008/09 in the age allowance for people over 65 and an even bigger increase in the starting point for tax credits. In both cases, the gain from those rises will be worth more than the losses described above. But people under 65 do not get the age allowance. And many of those under 65 are not entitled to tax credits. They include people working fewer than 16 hours a week – including those who are not in employment. Another big group cannot get tax credits because they are based on the income of a couple rather than an individual. So many wives, husbands and partners who have an much lower than their other half will be excluded from tax credits and will pay extra tax from April 2008.
The Chancellor did keep the 10p rate for the first band of savings income. That will benefit people with earned income or a pension which is around the level of their personal allowance and some savings income on top of that. But they are few in number.
This article was created: 22 March 2007.
This article was last edited: 27 March 2007.
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