Paul Lewis
The detailed figures, announced in time for Christmas, confirm that people under 65 will get a record £1,000 rise in their annual tax-free personal allowance, which will go up from £6,475 this year to £7,475 in 2011/12.
Most people over 65 will get less than half this rise. Their allowances will go up by £450, to £9,940 for those aged 65 to 74 and to £10,090 for people of 75 plus.
The higher allowance is reduced for anyone with an income above a certain level. This year the level is £22,900 but it will rise to £24,000 in 2011/12. Once annual income reaches this limit, the allowance is cut by £1 for every £2 above it and it falls to the allowance for the under 65s once income reaches £28,930.
In 2011/12 those with an income between £22,900 and £24,000 will get a rise in their tax free allowance of between £450 and £1,000. And those with an income of £24,000 or above will see their tax-free allowance rise by the full £1,000.
These higher allowances are given if your 65th or 75th birthday falls at any time in the tax year – so anyone born before April 6, 1947 or before April 6,1937 should benefit. However, in the first year, the Revenue will not apply the allowance unless the taxpayer asks for it. So anyone whose income is below £28,930 should do so to get it as soon as possible.
Married couples where at least one partner was born before April 6, 1935 get an extra tax allowance of £7,295. It is paid by knocking a tenth of that (£729.50) off your tax bill. It is available to any married couple or civil partnership where at least one partner is at least that age. But it has been widely miscalculated recently by HM Revenue & Customs. So if you qualify make sure you have got the right amount.
The Government decided that people well off enough to pay the higher 40% rate of tax should not benefit from the big rise in the personal tax allowance, which also involves changes to National Insurance. So the threshold at which higher rate tax starts has been cut by £1,400. From 2011/12 it will apply to income above £42,475 compared with £43,875 this tax year. The Treasury says that will mean an extra 400,000 people will pay the 40% tax. Further reductions in the threshold cannot be ruled out.
The Inheritance Tax limit will be frozen at £325,000 (which means £650,000 on the death of most widows, widowers and bereaved civil partners) until 2014/15. The annual allowance for Capital Gains Tax is expected to rise from £10,100 to £10,600 next year.
That figure, and more details on others, will be announced in the spring Budget on March 23, 2011.
Benefits - in 2011/12 the Government intends to save more than £1 billion by restricting the annual increase in state benefits and public sector pensions. In the past they have risen each April in line with the rise in the Retail Prices Index (RPI) from the previous September. But from the week of April 11, 2011 the Government will instead use the Consumer Prices Index (CPI).
Measuring inflation – the rising cost of what we buy – is not an exact science. And no one can say that the CPI is any better or worse than the RPI. But it is worked out differently and is nearly always lower. Last September the RPI rose by 4.6% but the CPI went up by just 3.1% – which is 1.5% less than RPI.
However, the previous government was intending to raise benefits by 1.5% less than RPI this year, as it had 'borrowed' that amount to raise benefits last year when inflation was negative. So most benefits will rise by much the same as they would have done anyway.
One big exception is the state pension. The basic pension will rise with the RPI in April and go up from £97.65 to £102.15 a week. In future years the state pension will rise with earnings or CPI or 2.5%, whichever is the higher. That will almost certainly mean it will be lower in 2012/13 than it would have been if it was calculated using RPI.
Other parts of the state pension – SERPS, graduated pension and extra pension earned for deferring your claim – will go up with the CPI from next April. For a typical pensioner with £30 of these extras it will mean a rise in April 2011 that is 45p a week lower than it would have been.
This two-tier rise in the state pension will make it more difficult for HM Revenue & Customs to know how much an individual's pension will be and could lead to errors in tax codes.
Bereavement and widows' benefits will no longer be linked to state pension and will rise by 3.1% to £100.70 a week.
Pension credit – the means-tested top-up to the state pension – will rise by the same cash amount as the state pension. No one over the female state pension age (currently about 60) should have to live on an income of less than £137.35 (single) or £209.70 (couple), unless they have savings above £16,000.
You can claim pension credit if your income is less than £188.65 (single) or £277.43 (couple). More than 1.5 million people who could claim fail to do so. Once you get pension credit you will also be entitled to a £25 cold weather payment for each seven day period the temperature in your area is at or below 0C – or if it is forecast to be that low. So it is well worth claiming pension credit, even if you get very little, because it unlocks those cold weather payments. One call is all that is needed: 0800 99 1234.
People with children will suffer from the total freeze in child benefit, which will last until 2014/15. So a family with two children will get the same £33.70 a week they got this year. If child benefit had risen by the RPI they would have got £1.05 a week more.
There will also be cuts in housing benefit for some people especially those in privately rented accommodation.
Further information
Benefit rates: dwp.gov.uk/docs/benefitrates2011.pdf
Written by Paul Lewis, this article was first published in the February 2011 issue of Saga Magazine. Paul's views are his own and for general information only. Always seek independent, professional, financial advice.
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