This piece first appeared in Saga Magazine in May 1999
The text here may not be identical to the published text

No, Gordon, Everyone's NOT A Winner


The Budget is not as generous as it seems


The headline in The Sun newspaper said it all - Everyone's a Winner it proclaimed the day after the Budget on March 9, putting in three words what had taken Chancellor Gordon Brown 9000 words and 65 minutes to deliver. But the euphoria was shortlived. The more the Chancellor's 1999 Budget was examined, the plainer it became that the winners excluded new widows, self-employed people, home-owners, married couples under 65, smokers, drivers, people in the transport business....the list goes on. And even among the people who will end up paying less tax, there is no doubt among accountants that the tax system has never been so complicated as it is in 1999/2000 - the first tax year to enter the new millennium.

The good news
The Chancellor had two new social security announcements that affect older people.

First, Every pensioner household will get a £100 payment this winter. Although the Chancellor called this a 'Winter Allowance' the Department of Social Security was adamant it is in fact an increased version of the Winter Fuel Payment - currently £20 per household or £50 for those on income support. It was planned to reduce this to £20 for all pensioners households in the winter of 1999/2000. Instead, it has now been raised to £100. Details of how it will be paid, when, or exactly to whom have yet to be announced. But it will go to every pensioner household and it will not be means-tested.

Secondly, the level of income support - or the minimum income guarantee as the Government now likes to call it - will be raised in April 2000 by more than the rate of inflation. It will keep up with rising earnings. The Government had already said it hoped to be able to do that and it has now promised to do so next year.

Then the Chancellor moved on to more normal Budget fare - tax allowances. Your annual personal tax allowance is the amount of money you can have before you pay any tax at all. Normally these increase each year by the rate of inflation - 3.3 per cent for 1998. But for people over 65, they were increased by nearly 6pc and for people aged 75 or over the rise was closer to 7pc. The Chancellor said "200,000 more pensioners will not have to pay income tax. In total, two thirds of pensioners will now not pay income tax."

And then the Chancellor came out with his tax double whammy. The first half, a lower rate of income tax of 10p in the pound from this April, had been carefully and partially leaked to selected journalists in advance. The second half - a cut in the basic rate of tax in 2000/01 from 23p to 22p in the pound - had been hidden with all the secrecy reserved for headline-grabbing and popular Budget measures.

The 10p rate of tax was not as generous as it seemed at first. Last year the first £4300 of income on top of the personal tax allowance was taxed at 20pc. This year, although the rate has been slashed to 10p, it only applies to the first £1500 of income on top of the personal allowance. Income on top of that is taxed at the full basic rate of 23pc. Nevertheless, it represented a cut in tax of at least £66 for most taxpayers. What the Chancellor failed to mention was that this new 10p rate does not apply at all to the interest paid on savings. That will continue to be taxed at 20pc, even the first £1500. So someone with £1500 income on top of their personal allowance will pay £300 tax if it is interest paid on savings in a bank or building society, but only £150 tax if that money comes from earnings or a pension. It is a bit hard to square that with the Chancellor's description of his Budget as one which encourages fairness - a word he used six times.

The Chancellor also rather skated over the downside of two other announcements. Married couple’s allowance was to be abolished from April 2000, except for people who were already 65 at the time. And with it went the tax relief on maintenance payments - except for people over 65 - and the two year tax allowance for bereaved wives, with no exceptions for older widows.

And it is in the detail of these changes that the problems for older people begin.

Bad news - widows
The Chancellor is taking away the tax allowance which newly-bereaved widows get in the year they are bereaved and the following tax year. This allowance - which has been heavily cut over the last few years anyway - was worth £285 in 1998/99 and is being cut to £197 this year. Women who are bereaved from April 6 2000 will not get it at all (though anyone bereaved in this tax year will normally be able to keep it next year as well). The Inland Revenue has apologised for an error in a statement it made on Budget Day that widows would be compensated for the loss of the tax relief by an increase in a social security benefit Bereavement Allowance. That is a one-off lump-sum payment, currently £1000 paid to some newly bereaved women, which will rise to £2000 for bereaved women and men. But the new rate will not start until April 2001 - a year after the tax allowance ends. And it will not help most of the women who currently gain from the widow’s bereavement allowance because it will not normally be paid to any woman who is already over 60 when her husband dies (unless he is under 65 or not getting a retirement pension.) The Inland Revenue admitted that while 220,000 women use the allowance each year, half of them are over 65.

Bad news - home-owners
MIRAS - the tax relief on the interest on the first £30,000 of a mortgage - ends from 2000/2001. The change will cost on average around £130 a year though it will cost some people up to double that amount.

Bad new - couples
The Chancellor is also abolishing the married couple’s allowance for most couples from April 2000. This allowance is also worth just £197 in 1999/2000. But he is keeping it for any couple where one or both partners was born before 6 April 1935. So new pensioners will not get it in the future. The only concession is that couples who marry after April 2000 will still get the allowance as long as at least one spouse was was born before that date.

Older couples have also been protected from the cut in married couple’s allowance this year. In 1998/99 tax relief was given on it at 15%. This year it is cut to 10% before disappearing altogether from April 2000. But the level of married couple’s allowance has been raised for older people to compensate for this change. Last year the married couple’s allowance for a 65 year old was £3305 and tax relief on that was given at 15% making it worth a reduction of £495.75 in the income tax due. This year the allowance has been raised to £5125 but tax relief is only given at 10%. So the allowance is worth a cut in tax of £512.50, an increase in line with inflation of 3.3%. But younger couples are not given this protection. The allowance has been raised from £1900 to £1970. But its value has been cut from £285 to £197. Next year it is lost forever.

Threshold
The Chancellor puzzled many couples when he said

"Older pensioner couples who both use their personal allowances to the full will now not pay tax until they have income above £15,000."

This statement is one of those Budget classics - it is not untrue but it is very misleading. Most older couples will start paying tax on much lower joint incomes than £15,000. The Chancellor's mythical couple are both over 75. She has an income of £5980 - the maximum allowed to a 75-year-old before tax is due - and her husband has an income, all from earnings or a pension, of £9086, again the maximum allowed in those circumstances before tax is due. So between them they have an income of £15,066 and no tax is due. But if either is younger, if her income is less, or if a substantial part of his income is from savings, then they can pay tax on far less joint income than £15,000. For a couple aged 74, where she has the basic state pension for a married woman and they rely on interest on his savings to top up their pensions, tax can be due on as little as £10,360, or £200 a week. For younger couples, both under 65 but still retired, tax can kick in when the husband's income reaches barely £100 a week.

Contrary to many predictions, the Chancellor did not make inheritance tax more onerous. In fact he raised the limit for the tax to be paid to £231,000 leaving only three estates in 100 due to pay it - fewer than 20,000 a year. And he also raised the limit for capital gains tax to £7100. Gains of less than that in a year are tax free. Good news for the 180,000 who pay it, especially the 10,000 of them who will now be exempt.

Left out
There was one thing that the Chancellor did not announce in his Budget. There was no compensation for the 300,000 older people who will lose £25mn this year because they can no longer get a repayment of income tax which has already been deducted at source off their share dividends. (See Saga Magazine July 1998 and March 1999). Their refunds have been modernised away by a Government bent on pursuing tax reform even at the expense of poorer and older people.

May 1999


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