This piece first appeared in The Daily Telegraph on 20 March 1999
The text here may not be identical to the published text

Calculate on a confused old age

The new 'tax-free' regime for pensioners is hugely complicated

The Chancellor surprised many of the 3.5 million people over 65 who pay tax when he said in his Budget speech "Older pensioner couples who both use their personal allowances to the full will now not pay tax until they have income above £15,000." Many couples with incomes much less than that pay tax. So what did Gordon Brown mean?

In fact, after the Budget changes introduced by Mr Brown, married men and some married women aged 65 or over will be faced with an almost impossible calculation when it comes to working out if they should pay any tax in 1999/2000. The tax threshold - the level of income at which tax starts - will depend on whether their income comes from interest in the bank or from other sources such as a pension, earnings, or rent. And it will depend too on whether some of the married couple’s allowance is transferred from the husband - who normally gets it automatically - to his wife. Only in very special circumstances will a joint income of £15,000 generate no tax bill at all.

The mythical couple in Gordon Brown's calculation are both aged 75 or more, they both have an income which is just the level each to avoid paying tax, and his income at least is from a pension or earnings. Otherwise the arithmetic does not work. Gordon's calculation works like this.

Her tax threshold is simple. Her personal tax allowance is £5980 in the year 1999/2000 and as long as her income is at that level or less she will pay not income tax. His tax threshold is more complex. On top of his personal tax allowance he gets a married couple’s allowance of £5195. In 1999/2000 the married couple’s allowance is worth tax relief at just 10pc. The way it works in the calculation is as a straight deduction of 10pc of the allowance - £519.50 - from the tax bill. So to reach the maximum income where not tax is due, he has to have income which, before deducting the married couple’s allowance, would generate at tax bill of £519.50. First, he can have his personal tax allowance free of all tax - £5980. The first £1500 above that level will be taxed at 10% next year, generating a tax bill of £150. So he is still £362.50 short of £519.50 tax. The next slice of income is taxed at 23pc. So he will need £1576 income to create another £362.50 tax. Adding up these three amounts £5980+£1500+£1576=£9086. Without the married couple’s allowance that generates a tax bill of £519.50, exactly cancelled by the deduction made because he gets the married couple’s allowance. So his tax threshold, the highest possible income before tax is payable, is £9086. Added to the £5980 she can have before any tax is due that makes a tax-free total of £15,066 between them.

But in other circumstances the arithmetic is different and tax would be due on £15,066 a year. If all the income was his, then he will pay tax of £1375. Similarly, if the money is split equally so both have an income of £7533, he will pay no tax but she will pay tax of £162. The tax bill changes with the source of the money. If his income was still £9086 but £3200 of it was not from a pension but was interest on savings, then he would face a tax bill of £101. And the Chancellor is only right if they are both over 75. If they are both 74, with a total income of £15,066 split as above, then he would pay tax of £66 and she would have to cough up £26.

In fact. the joint tax threshold for a pensioner couple can vary by nearly £2000 - from £14,002 to £15,914 - depending on the age of the partners and the source of the income.

There is one opportunity for couples to save tax. Part of the married couple’s allowance can be transferred from the husband - who normally gets it - to the wife. The choice has to be made in writing before the start of the tax year. So there is not much more than a week to get the form into the Inland Revenue. The wife can take all the basic married couple’s allowance of £1970 with her husband's permission and she can take half of it - £985 - without his say so. So she can get a deduction off her tax of £197. That is clearly worth doing if his income is below his tax threshold and she is a taxpayer. And it goes further than that as accountant Mike Warburton of Grant Thornton explains

"The conclusion is that if the husband hasn't got enough income to utilise the whole of the married couple’s allowance and his 10pc band then give some of his married couple’s allowance to his wife. The money's will be saved if they’ve both utilised the £1500 band where earned income is taxed at 10pc. So transfer married couple’s allowance to ensure that both incomes are being taxed at 10pc rather than 23pc."

One thing is clear. With four basic rates of income tax - and several others in more complex circumstances - tax calculations, even for people with relatively low incomes, now need more than the traditional back of an envelope.

20 March 1999

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