e-mail Paul Lewis on paul@paullewis.co.uk
Gordon Brown’s fourth Budget was supposed to be "a Budget for all the people" and the Chancellor did not forget pensioners – altogether he mentioned pensions and pensioners 18 times – even more often than he used the words prudent and prudence (12 times between them).
First the good news. The Winter Fuel Payment (which the Chancellor insists on calling the Winter Allowance) will be increased to £150 this year. The Department of Social Security claims that will pay for around four months’ fuel bills for the average pensioners household. And the higher amount will of course be paid to every household where someone aged 60 or more lives. The qualifying date has not been announced but will probably be sometime in September.
The Chancellor also announced an increase in the savings limits that stop many older people claiming extra help from income support. At the moment anyone with more than £8000 savings cannot claim income support at all and anyone with savings of £3000 or more has their income support reduced. From April 2001 the upper limit will be raised to £12,000 and the lower limit will be doubled to £6000. The Department of Social Security claims that will help 500,000 pensioners, allowing them to claim income support for the first time. Altogether around 600,000 older people are currently prevented from claiming income support because their savings are above the current limits even though their income is below the level at which it starts.
The rises, though welcome, are not as generous as they may seem. The lower £3000 limit was introduced in 1988 and the upper limit was last raised in 1990. Simply to keep up with inflation over those years, these amounts should be raised to £4800 and £10,800 respectively.
There was no mention of the capital limits for people in residential care homes – which are £10,000 and £16,000, nor of any change in the limits for people claiming housing benefit or council tax benefit to help with their rent or council tax. They currently stand at £3000 and £16,000. Knowing the Government’s skill at announcing good things three times, we shall probably have further announcements on those in the next few months.
But the Chancellor did hint that these rules may well be changed completely in future if Labour wins again at the next General Election. His colleague Alastair Darling will publish a consultation paper on developing what the Chancellor called
"a new pensioner’s credit - designed not only to lift the poorest out of poverty, but also to do more for those with modest occupational pensions and savings who should not be penalised for having worked hard all their lives and saved for their retirement. Under the framework on which we will consult, an older pensioner with income, for example, of less than £100 a week, or a couple with less than £150 a week, would qualify for a pension credit to raise their income."
The Government has already introduced what it calls ‘credits’ for families with children and some working disabled people. These payments are made not by the Department of Social Security but by the Inland Revenue and are a form of what is called ‘negative income tax’. In other words if your income is below a certain level, the Inland Revenue makes you a payment, instead of the other way round. In this way the Government hopes to get over the stigma that a lot of older people still feel about claiming income support – even under its new unofficial name ‘minimum income guarantee’ which is now used by both the Chancellor and the Secretary of State for social security Alastair Darling.
The Chancellor also put some figures on his promise that the minimum income guarantee would be raised in April 2001 in line with earnings rather than prices. That will make it £82 a week for a single pensioner aged 60-74 and £90 for one aged over 80, and £127 a week for a couple, rising to £137 a week if one of them is over 80. Further details on all these social security changes will be given in November.
So good news as far as it goes. But the Chancellor did not announce any change in the way the basic state retirement pension is increased each year. This April it went up by a tiny amount – 75p in line with the rise in prices measured last September when the rate of inflation was at its lowest for almost forty years. So while the levels of income support for the poorest pensioners rise in line with earnings – 4.5% at the moment – the rise in the basic state pension is still linked to the much smaller rise in prices. After budget rises in the duty on tobacco, 75p will buy you about three cigarettes, or two first and one second class postage stamps.
TAX
The Chancellor’s tax measures were modest by comparison with previous years. The big change was the cut in the basic rate of tax from 23p to 22p. This was no surprise, it had already been announced a year ago. He had also announced before – in November 1999 – that the lower tax rate of 10p in the pound would apply to savings income as well as other income. This change is backdated to April 1999. However, banks and building societies will continue to deduct tax at 20pc from the interest earned on savings. So anyone whose income is low may find that too much tax is being deducted. They should reclaim it at the end of the tax year, otherwise they may pay up to £152 more tax than they should.
He also announced very modest increases in the rates of tax allowances. These all go up raised by around 1.1%, based on that lowest rate of inflation in September 1999. The Chancellor has been lucky this year. Tax allowances and social security benefits are increased each April. But the rate of inflation used to set the amount of the increase is always the one from the previous September. The rate of inflation in September 1999 was 1.1% - its lowest level since May 1960. Already, by February the annual rate of inflation had more than doubled to 2.3%. So the tax allowances, the amount you can have before you pay tax at all, and the bands of income where different rates of tax apply, were changed by very little.
In 2000/01 no tax is due on income below £4385 a year for people under 65. If you are 65 to 74 then you are allowance £5790 and if you are over 75 then the allowance is £6050. But these higher rates are reduced if you have income above £17,000 and are cut back to the basic allowance of £4385 if your income is more than around £20,000. The lowest rate of tax, 10p in the pound, then applies to the next £1520 of income above that amount. Basic rate tax, cut to 22p in the pound, is charged on the next £26,880 of income and any income above that is taxed at 40p in the pound. All these amounts are around 1.1% up on their levels in 1999/2000.
However, if you have a home income plan the rate of tax relief will not be cut to 22% - it will remain at 23% and that change is permanent even if income tax rates fall again in the future.
The limit for inheritance tax has been raised by a similar percentage – up by £3000 to £234,000. All estates worth less than that are completely exempt from the tax. There is also a slight improvement on capital gains tax. You can have gains of up to £7200 before any tax is due. Gains above that level are in effect added to your income and then taxed at the appropriate rate of income tax.
The Chancellor did nothing to reverse his decision to abolish married couple's allowance from 6 April. The only exceptions are those people who were already 65 before that date – in other words people born before 6 April 1935. If either a husband or wife is that old then married couple's allowance will still be due. And the value of the allowance was raised to £518.50 in the year if the younger partner is aged 65-74 and to £525.50 if either partner is aged 75 or more during the tax year, that is by April 5 2001. Widow’s bereavement allowance is also abolished though it will remain for just one further year for women widowed in 1999/2000.
Finally, one rather naughty piece of sleight of hand. The Chancellor assured us that because the price of oil had been rising strongly and that had put up petrol prices, he was not going to raise the duty on petrol above the rate of inflation. Instead they would rise only "by the automatic inflation rise of two pence a litre". Now it does not take a mathematical genius to divide 2p into the cost of a litre of unleaded petrol – around 75p – to get a 2.7% rise. But it is even worse than that that. The duty on a litre of unleaded petrol is now 48.82p, a rise of 1.6p which is an increase of 3.4%. That is the rate of inflation predicted for NEXT September 2000. So when taxes go up, a rate of inflation of 3.4% from NEXT September is used. But when taxes go down, by raising our tax free allowances, a rate of inflation of 1.1% from LAST September is used. No wonder Gordon Brown still has a big surplus in his coffers to fight the next General Election!
A few days before the Budget, the Government announced that it was delaying plans to cut the pensions paid to women who were widowed after 5 April 2000. Under plans introduced in 1986, a woman whose husband died after that date would inherit only half his earnings-related SERPS pension instead of all of it. As we have reported in Saga Magazine the Department of Social Security had failed to tell people of this change and many couples were unaware of it. The Government has now decided to postpone the change for two and a half years - until October 6, 2002. Any woman who is widowed before that date will keep all her late husband’s SERPS. Women widowed after that time will normally get just half their late husband’s SERPS. But if a widow can show she or her husband were misled by the Department of Social Security then the full 100% will still be paid. Anyone with worries can ring a special helpline 0845 600 6116.
May 2000
e-mail Paul Lewis on paul@paullewis.co.uk