Capability Brown

Gordon Brown’s fifth Budget on March 7 2001 was not aimed at older people. Instead, he said it was "a Budget that puts families first". And by that he meant families with children. Of course, older people can look forward to a number of positive changes from April such as the £5 a week on the state pension – but they were almost all announced in the Pre-Budget Statement on November 8.

Tax
One new tax cut announced in the Budget was the extension of the band of income which is taxed at the lower rate. In 2000/01 the first £1520 of income above the personal tax allowance was taxed at 10p in the pound. Gordon Brown extended that for 2001/02 to the first £1880. The saving for most of the 25 million taxpayers who will benefit will be £43.20 a year or 83p a week.

He also confirmed that someone aged 65 to 74 will be able to have £5990 (£115 a week) in 2001/02 before they have to pay any tax at all. For someone aged 75 or more in 2001/02 the figure is £6260 (£120 a week). Thes amounts compare with the £4535 (up from £4385 in 2000/01) which a person under 65 can have before tax begins to be charged.

These rises in the tax allowances for older people were simply in line with the Chancellor’s obligation to raise them in line with the rate of inflation. However, he reiterated his promise that from 2003/04 the personal tax allowance for people aged 65 or more would go up by more than inflation and after that would rise each year in line with earnings not with prices.

However, he failed to make any major changes in the means-test that is applied to these higher personal tax allowances which results in older people on very modest incomes paying tax at 30% or more on some of their income. The higher tax allowances will be reduced for people whose total income is above £17,600 in 2001/02 (up from £17,000 in 2000/01). Every pound of income above that amount reduces the allowance by 50p. That means that if someone aged 65-74 has an income of £20,510 or more, their tax allowance is reduced to the £4535 given to a younger person – it never goes below that level. Someone aged 75 or more has their allowance cut back to that of a younger person if their income is £21,050 or more.

The effect of this rule is that for a certain band of income, the tax charged is in effect either 30 or 33 per cent on each extra pound of income. What happens is this. Each extra £1 of income above £17,600 brings the tax allowance down by 50p. That means that not only is tax paid on the £1 but another 50p of income is brought into tax by the cut in the allowance. So an extra £1 of income creates a tax on £1.50. The basic rate of tax is 20 per cent on interest on savings or 22 per cent on earnings or pension. So the tax on £1.50 is either 30p or 33p. This higher tax rate of 30p or 33p in the pound applies to extra income between £17,600 and the upper limit where the age allowance disappears altogether. In 2001/02, people aged 65 to 74 face paying this tax rate on up to nearly £3000 if their income is above £17,600. For those over 75 it can apply to nearly £3500 of income. Table 1 shows the level of tax that will be levied on each slice of your income in 2000/01 and 2001/02.

Married couples
A married men can still get an extra tax concession if he or his wife was born before April 6, 1935. The married couple's allowance, abolished for younger people, is worth around £540 a year off the tax bill – up from around £520 in 2000/01. But that allowance is reduced if the husband’s income rises above £20,510 (older spouse is under 74) or £21,050 (older spouse aged 75 or more). And if his income goes above £27,100 (or £27,780 for those over 75) then it falls to £2070.

The other major tax change announced in the Budget was the increase in the children’s tax credit. Although most people over 50 will not benefit from this new tax allowance which begins in April 2001, some will. Anyone with a dependent child aged 16 or less living with them will get the credit – and that could apply to many people over 50. It does not matter if you are the parent or grandparent or some other relative as long as the child lives with you and is dependent on you. In the Budget the credit was raised to £520 a year – £10 a week – off your tax bill. The Government estimates that around one million people who could get it have still not applied. If you think you may be eligible ring the Children's Tax Credit Helpline on 0845 300 1036. However, there is a means-test on this credit too. It will not be paid where the better off partner has a income higher than £41,000 a year.

Vices
It was a better Budget than usual for smokers, drinkers, and drivers. Tobacco duty will rise by just the rate of inflation, adding 6p to a packet of 20 cigarettes. Duties on alcoholic drinks will not rise at all. And the duty on unleaded and the new low sulphur petrol and diesel was cut by 2p a litre on Budget day. That should help motorists. Another change for car owners will help cut the cost of motoring. Any vehicle which has an engine of 1549cc or less will get a rebate of £55 on the car tax backdated to November. So next time you tax your car, you could get a rebate towards the next year’s tax. And cars first registered from March 1 2001 will be taxed in a different way. Those which emit the least carbon dioxide (CO₂) will be taxed at a lower rate than those which emit more carbon dioxide.

Spending
The Budget is not just about what the Chancellor gives us in tax cuts. It is also about how he spends the money he takes from us. The Chancellor’s announcement of £1 billion more for schools and the same amount for the National Health Service over the next three years will be welcome to many Saga readers. Health and education were two of your priorities highlighted in the Saga/MORI poll (see Polls Apart pp.165-166). And it is good news that inflation is low, and will stay low for the foreseeable future.

Check your tax code
One thing the Chancellor did not mention in his Budget was that thousands of pensioners will be charged too much tax this year. If you pay tax on earnings or a pension from your job your tax code may be wrong in 2001/02. Saga Magazine has already revealed that the retirement pension will rise by two different percentages in April 2001. But now we have learned that the Inland Revenue will be taxing some people on a pension rise they have not received, assuming that the whole pension will rise by 6.5 per cent when parts will rise by as little as 3.3 per cent.

The problem will affect several thousand of the three million people over 65 who pay income tax. If you have a pension from your job, or a personal pension, then it is very important you check the notice sent to you by the Inland Revenue explaining your tax code. You will see that there is a figure in the right hand column which is the Inland Revenue’s estimate of your state retirement pension. If that figure is higher than the state pension you think you will actually get in 2001/02 tell your tax office or you will pay too much tax. The problem is particularly likely to affect people who have a tax code ending in a letter ‘T’, but it may affect others too. You should also check your tax code if you get married couple's allowance.

April 2001

e-mail Paul Lewis on paul@paullewis.co.uk