Tax and benefits changes 2011/12

People under 65 on lower incomes will do best out of changes to tax which start in 2011/12.

People aged 65 or more will get less than younger people from tax changes  which start in 2011/12.

The detailed figures, announced in time for Christmas, confirm that people under 65 will get a record £1,000 rise in their annual tax-free personal allowance which will go up from £6,475 this year to £7,475 in 2011/12. But the figures reveal that most people over 65 will get less than half this rise. Their allowances will go up by £450, to £9,940 for those aged 65 to 74 and to £10,090 for people aged 75 or more.

One group of over 65s will get the full £1000 rise in their tax-free income. They have an annual income of £24,000 or more and will benefit from the £1000 rise in the personal allowance. 

That is because the higher allowance is reduced for anyone with an income above a certain level. This year that is £22,900 but it will rise to £24,000 in 2011/12. Once annual income reaches this limit the allowance is cut by £1 for every £2 above it and it falls to the allowance for the under 65s once income reaches £28,930. In 2011/12 those with an income between £22,900 and £24,000 will get a rise in their tax free allowance of between £450 and £1000. And those with an income of £24,000 or above will see their tax-free allowance rise by the full £1000 rise in the standard personal allowance.

These higher allowances are given if the 65^th or 75^th birthday falls at any time in the tax year – so anyone born before 6 April 1947 or before 6 April 1937 should get this higher tax free allowance. However, in the first year the Revenue will not apply it unless the taxpayer asks. So anyone whose income is below £28,930 should always do so to get it as soon as possible.

From 2010/11 the standard personal allowance has been cut for anyone with an income above £100,000. It is reduced at the rate of £1 for £2 of income and in 2011/12 will disappear as income tops £114,950. Anyone with an income between those two rates faces a marginal tax rate of 60%. There are around 275,000 lucky people with an annual income above £150,000 and their tax rate is 50p in the pound.

Married couples where at least one partner was born before 6 April 1935 get an extra tax allowance of £7,295. It is paid by knocking a tenth of that (£729.50)off your tax bill. It is available to any married couple or civil partnership where at least one partner is at least that age. But it has been widely miscalculated recently by HM Revenue & Customs. So if you qualify make sure you have got the right amount.

The Government decided that people well off enough to pay the higher 40% rate of tax should not benefit from the big rise in the personal tax allowance which also involves changed to National Insurance. So the threshold at which higher rate tax starts has been cut by £1400. From 2011/12 it will apply to income above £42,475 compared with £43,875 annual income where higher rate tax begins this tax year. The Treasury says that will mean an extra 400,000 people  will pay the 40% tax. Further reductions cannot be ruled out in future years with a corresponding rise in the number paying 40p of every extra pound they earn in tax.

The Inheritance Tax limit will be frozen at £325,000 (which means £650,000 on the death of most widows, widowers and bereaved civil partners) until 2014/15. The annual allowance for Capital Gains Tax is expected to rise from £10,100 to £10,600 next year. That figure, and more details on others, will be announced in the spring Budget on 23 March.

Benefits
In 2011/12 the Government intends to save more than £1 billion by restricting the annual increase in state benefits and pensions. In the past benefits have risen each April in line with the rise in the Retail Prices Index (RPI) from the previous September. But from the week of 11 April 2011 the Government will instead use the Consumer Prices Index (CPI). Measuring inflation – the rising cost of what we buy – is not an exact science. And no-one can say that the CPI is any better or worse than the RPI. But it is worked out differently and is nearly always less than the RPI. Last September the RPI rose by 4.6% but the CPI went up by just 3.1% - which is 1.5% less than RPI.

However, the previous government was intending to raise benefits by 1.5% less than RPI this year as it had ‘borrowed’ that amount to raise benefits last year when inflation was negative. So most benefits will rise by much the same as they would have done anyway.

One big exception is the state pension. The basic pension will rise with the RPI in April and go up from £97.65 to £102.15 a week. In future years the state pension will rise with earnings or CPI or 2.5% whichever is the higher. That will almost certainly mean it will be lower in 2012/13 than it would have been. Other parts of the state pension – SERPS, graduated pension and extra pension earned for deferring your claim – will go up with the CPI from next April. For a typical pensioner with £30 of these extras that will mean a rise in April 2011 which is 45p a week lower than it would have been. This two tier rise in the state pension will make it more difficult for HM Revenue & Customs to know how much any individual’s pension will be and could lead to errors in tax codes.

Bereavement and widow’s benefits will no longer be linked to state pension and will rise by 3.1% to £100.70 a week.

Pension credit – the means-tested top up to the state pension – will rise by the same cash amount as the state pension. No one over the female state pension age (currently about 60½) should have to live on an income of less than £137.35 (single) or £209.70 (couple) though if their savings are above £16,000 these amounts may be less. Anyone over female state pension age should be able to get some pension credit if their income is less than £188.65 (single) or £277.43 (couple). More than 1.5 million people over pension age who could claim pension credit fail to do so. Once you get pension credit you will also be entitled to a £25 cold weather payment for each seven day period the temperature in your area is at or below 0C – or if it is forecast to be that low. So it is well worth claiming pension credit if you can, even if you get very little per week, because it unlocks those cold weather payments. One call is all that is needed 0800 99 1234.

People with children will suffer from the total freeze in Child Benefit which will last until 2014/15. So a family with two children will get the same £33.70 a week they got this year. If child benefit had risen by the RPI they would have got £1.05 a week more.

There will also be cuts in housing benefit for some people especially those in privately rented accommodation.

Further information:

Tax rates and thresholds: http://www.hm-treasury.gov.uk/d/rates_thresholds_tables.pdf

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