Gordon's tax grab
Thousands of older people will pay more tax from
April 2008 as a result of Gordon Browns eleventh and most complex Budget.
By scrapping the lower 10p rate which he introduced in 1999 he will increase
the tax paid by many people under 65. The people affected will have an income of
less than £19,000 and work part-time, have a low pension, or live with a partner
who has a higher income. Unless these reforms are changed, women in their
fifties and early sixties will be the big losers in 2008/09.
The problem arises because the Chancellor had to find the money to make a
headline-grabbing cut in the basic rate of tax. From April 2008 that will fall
from 22p to 20p at a cost to the Treasury of £8 billion. So he decided to get
most of that money back by scrapping the starting rate of 10p tax on pensions
and earned income. In other words on the first £2230 of income the tax will
double from 10p to 20p in the pound. That will bring in £7.3 billion.
To show how the arithmetic works I have used the rates from 2007/08. On the
first £5225 income you pay no tax. On the next £2230 your tax will double from
10% to 20% costing up to £223. On the next £32,370 of income your tax rate will
fall slightly from 22% to 20%, saving up to £647. Take off the loss on the first
£2230 means a maximum gain for an individual is £647-£223=£424. The break even
point where the loss of the lower rate is balanced by the cut in the basic
rate is an income of £18,605. By the time the changes begin in 2008/09 the
exact figures will be different but the principle is the same. Everyone with an
income below £18,605 is a potential loser.
For example, a woman aged 62 with a state pension of £5000 a year and a private
pension from her job of £5000 will pay £172.10 a year more tax from April 2008
under these proposals.
To reduce the impact on some people the Chancellor announced a one-off rise in
2008/09 in the age allowance for people over 65 and an even bigger increase in
the starting point for tax credits. In both cases, the gain from those rises
will be worth more than the losses described above. But people under 65 do not
get the age allowance. And many of those under 65 are not entitled to tax
credits. They include people working fewer than 16 hours a week including
those who are not in employment. Another big group cannot get tax credits
because they are based on the income of a couple rather than an individual. So
many wives, husbands and partners who have an much lower than their other half
will be excluded from tax credits and will pay extra tax from April 2008.
The Chancellor did keep the 10p rate for the first band of savings income. That
will benefit people with earned income or a pension which is around the level of
their personal allowance and some savings income on top of that. But they are
few in number.
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