What exactly is happening with age-related allowances?

At the Budget, George Osborne announced that, as well as increasing the personal allowance, he would freeze and over time work to remove the age-related allowances as a way of simplifying the tax code. Since then those changes have become known as the "granny tax" and it appears they may be the most controversial measure announced today.

But many of the figures that are being thrown around are a little nebulous and don't really make clear how different people are going to be affected.  I've tried to get the facts straight, though we will keep trying to exactly nail this down further and any corrections would be appreciated. Two groups are affected quite differently, those who are 65 already or turn 65 in 2012-13, and those who turn 65 in 2013-14 or later:

Those who are 65 already, or turning 65 in 2012-13

Those born on or before 5 April 1948 will still get a special age-related personal allowance. It will be frozen at £10,500 for those born between 6 April 1938 and 5 April 1948. And £10,660 for those born before 6 April 1938.  Those people are worse off than they might have expected to be, in that the allowance won't rise with inflation. That is unfortunate given the pressure on savers already but they aren't actually having their allowance cut from the existing rate.


Those turning 65 in 2013-14 or later

Those born on 6 April 1948 or later won't get an age-related personal allowance. In 2013-14, they will get the same personal allowance as everybody else - £9,205 - instead of £10,500 if they had been born earlier. That implies they will get £1,295 less in personal allowance than they would under the current rules, which means they are about £259 worse off at the basic rate of tax.

They will only receive the same treatment as those who have already reached 65 when the personal allowance, which the Government are expected to keep increasing, catches up with the frozen age-related allowances.

The Chancellor of the Exchequer made a powerful case in his Budget speech, which I've copied below, that removing the age-related allowances would produce a simpler tax system. But, particularly for that group now not getting an age-related allowance who expected to get it, that simplicity is being achieved at the expense of a substantial rise in taxes for many struggling elderly people, from what they would have expected to pay.

That won't affect the many pensioners who don't earn enough to exceed the Personal Allowance anyway. But for some it will be quite tough. It might have been fairer to either keep increasing the age-related allowances in line with inflation, and let the working age Personal Allowance catch up because it is increasing above inflation. Or just freeze the age-related allowance and let the increase in the working age Personal Allowance erode the difference without cutting it off for new entrants.

"We should also simplify the age related allowances – which the Office of Tax Simplification have recently highlighted as a particularly complicated feature of the tax system.

The NAO points out that many pensioners don’t understand them.

These allowances require around 150,000 pensioners to fill in self-assessment forms, and as we have real increases in the personal allowances, their value is already being eroded away.

So over time we will simplify the tax system for pensioners by doing away with the complexity of the additional age-related allowances for anyone reaching the age of 65 on or after 6th April 2013 and I will freeze the cash value of the allowance for existing pensioners until it aligns with the personal allowance.

This will protect the existing level of allowance pensioners have, while introducing a single personal allowance for all.

It is a major simplification.

It saves money.

And no pensioner will lose in cash terms."

Under this Government, pensioners next month will receive the largest ever cash increase in the Basic State Pension of £5.30 a week.
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