Win some, lose some

The Chancellor’s Budget in April divided Saga readers into two. Those over pension age did very well, though you have to read the small print to find out why. Those under pension age did less well - unless they have dependent children or are working on a low income.

The headline was, of course, higher tax. The Chancellor raised nearly £8 billion by adding 1% to the National Insurance paid by employees, employers, and self-employed people. But by putting the 1% rise on National Insurance contributions rather than on income tax directly, Gordon Brown made sure that most older people will not be hit by the rise in taxes.

At the moment, employees pay 10% of their earnings between £4628 and an upper earnings limit, currently £30,420 a year. No national insurance is charged on earnings above that. From next tax year, 2003/04, they will pay 11% from £4628 to the upper limit and 1% on all income above that. The level of the upper limit for next year has not yet been announced but it could be around £31,000. Self-employed people, who currently pay 7% NI will see that raised to 8% and they will also pay a further 1% on income above the upper limit.

These changes, which do not start until next tax year, will mean that almost everyone in work will pay the extra tax. However, most Saga readers will be exempt. First, National Insurance is charged only on earnings. Income from savings and investments is not subject to National Insurance and so will escape the new tax. That will help all Saga readers who depend at least in part on income from their hard-earned savings and make sure that those who do not work do not pay it at all.

Second, even those who do work will be exempt from the extra National Insurance if they are over pension age. National Insurance is not paid by men over 65 or women over 60.

There was good news too for all taxpayers over the age of 65. This year, the amount of money people over 65 can have before paying tax rose by £110 and next year, 2003/04, it will rise by much more. The tax-free allowance for people over 75 will rise by £370 and for people aged 65 to 74 it will go up by £510. That is an increase of nearly 8%, well above the rate of inflation which is expected to be less than 2%. And in future these tax allowances for older people will rise in line with earnings - not with prices. People under 65 did rather less well - in 2003/04 their personal tax-free allowance will be frozen at this year’s level of £4615.

That will hit women aged 60-64 very hard. Their retirement pension will rise next year by around £2 a week - but with their tax allowance frozen all of that extra will be taxed. On the other hand, pensioners over the age of 65 will have the whole increase in their pension paid tax-free as their allowances will rise by much more than the expected £2 a week pension rise. Details in Table 1.

One of the problems of getting to grips with the Budget this year was that many of the changes will not happen until next tax year - 2003/04. Tax changes for 2002/03 were partly announced last November (see Saga February 2002 for details) and the Chancellor announced the rest in April. Generally the allowances rose in line with inflation, so there was a little bit more tax relief for blind people and a rise in the relief for capital gains tax allowance as well as a slightly above inflation increase in the limit for paying inheritance tax - details in Table 2.

There was also a modest increase in 2002/03 in the levels at which higher rates of tax begin. The lower rate of 10% will now be charged on the first £1920 of income on top of the personal allowance, up from £1880, and higher rate tax will start on incomes which exceed £29,900. That amount is also on top of the basic personal tax allowance, so the higher 40% rate will start on incomes that exceed £34,515, compared with £33,935 last year.

The Chancellor announced important new help for low paid people without children. At the moment low paid people with children can get help from the Working Families Tax Credit. But people without children are excluded. That will change next April when the new Working Tax Credit starts. That will top up the incomes of people in low paid work whether they have children or not.

A tax credit is a kind of negative income tax. We are all familiar with the taxman taking money off our wages or pension. Tax credits are the mirror image of that - people whose income is low are given money back by the Inland Revenue. From next April people over the age of 25 who are low paid will get a boost to their low incomes through the new Working Tax Credit. There will be more generous rates for people aged 50 or more who return to work under the New Deal 50 Plus - a government service which helps people in their fifties return to work.

The full details will not be known for some time - the Tax Credits Bill is still going through Parliament - but on the information we have now it will work like this.

The new tax credit is intended to make sure that people who return to work, particularly in their fifties, will always be better off than if they had stayed on the dole or income support. The Working Tax Credit begins in April 2003 and is means-tested, so it will suffer from the same problems as other means-tested benefits such as income support and jobseeker’s allowance - many people who are entitled to it will not claim it and will miss important help from the Government.

A big change in the way the state gives money to people with children also begins in April 2003. At the moment, someone who gets retirement pension or widow’s pension can also get extra pension called a child dependency increase of £9.65 a week for the first child and £11.35 for each of the other children. These amounts are paid on top of Child Benefit and are not means-tested. But from April 2003 they are being scrapped and replaced by the Child Tax Credit.

Anyone with an income of less than £50,000 a year will get the basic credit which is worth £10.45 a week. However, only one credit is paid however many children there are. So people with two or more dependent children will be worse off. Lower income parents may get up to another £27.75 for each child but many pensioners and widows will not qualify for this extra means-tested amount.

People who are already getting a child dependency increase when the new system starts in April will not have it taken away. But no new claims will be allowed. Pensioners and widows with dependent children will in future have to claim child tax credit instead - some will get less, others will get more.

The credit will begin in April 2003 and has to be claimed from the Inland Revenue on a form which will be available later this year. People in work will get the credit paid by a deduction off their income tax. Others will get it by a direct payment from the Inland Revenue, normally made straight into their bank account. The exact details of how the process will work have yet to be decided. Child Benefit is not affected by these changes.

June 2002

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