Granny Tax 2: Storm In A Teacup

There's a splendid bit of misinformation in The Daily Mail:

Advisers to George Osborne are calling for a new ‘granny tax’ that will fuel public anger at the Government’s treatment of the elderly. The Chancellor will be presented with plans to tax the basic state pension at source which could leave many pensioners with a cash flow problem.(1)

Some six million pensioners pay tax. But the state pension, which has just risen from £102.15 to £107.45 a week, is currently paid before tax is deducted.(2) The Office of Tax Simplification (OTS), which advises the Treasury on tax matters, is calling on the Government to take tax when the state pension is paid.(3) That would reduce it for those paying basic rate tax to £85.96 a week and to £64.47 for those on the 40 per cent rate.(4)

1) Nope, deducting tax at source (to the extent that this is mathematically possible) will make life a lot easier and if anything it will ease cash flow problems.

2) The current rules are that the basic and second state pension is paid gross. It counts as taxable income and so uses up the personal allowance. I don't know if the full basic state pension plus maximum SERPS/S2P can ever exceed the personal allowance of £10,500 or more (it is a while since I've done a pensioner's income tax return) - for nine of ten, the state pension will be less than the personal allowance so no tax could or would or could be deducted. If the total state pension is less than the age-related personal allowance is then offset against other regular pension income (via the PAYE code used for that other pension) or can be claimed on a Self-Assessment tax return if the pensioner has other income with tax deducted at source.

3) I've skim read the OTS review of pensioners' taxation and see no mention of it, but maybe it came up in conversation.

4) Nope, see (2). If somebody had £11,000 a year total state pension, then the excess of a few hundred quid above the age-related personal allowance would have 20% tax deducted. So a £210 a week pension would have about £2 a week tax deducted, somebody with a pension of only £107 a week pension would not have any tax deducted.
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They're still doing it all wrong.

a. IDS has come up with (well he nicked it off me and I in turn nicked it off the Lib Dems, long story) the bright idea of a Citizen's Pension ('CP'). Good start. That's the government giving pensioners money, nice and simple. Then along comes the government, in the form of the taxman, and takes some back. Can't the two departments or ministers concerned have a little chat and iron out their differences?

b. Surely it cannot be beyond the wit of mankind to align the CP with the age-related personal allowance ('APA'), so that every pensioner gets the CP paid gross, no tax deducted and all other income (mainly bank interest, ha, and other pensions) just have 20% tax deducted at source - but without a significant number of pensioners ending up better or worse off?

c. For example, if the CP is increased, that costs the government money £1 for £1 paid out; if the age-related personal allowance is reduced, that saves the government money 20p for every £1 of reduction. So instead of a CP of (say) £7,500 per annum and an APA of £10,500, they could have a CP of £8,000 (so every pensioner gets extra £500 a year) and an APA of £8,000 (so wealthier pensioners have an additional £500 extra basic rate tax deducted at source). Poorer pensioners end up a bit better off and wealthier pensioners end up the same.

d. While we're at it, let's get rid of the residual savings rate band of 10% and the 30% stealth rate band for pensioner income between £25,400 and (about) £30,000. Scrapping the 10% band would mean a few people with a low-ish pension and quite a lot of interest income lose up to £271 a year; scrapping the 30% stealth band would mean a few people with pretty decent pensions would gain up to £240 a year. The two cancel out, and seeing as pensioners at the bottom end are £500 a year better off from c, I see no need for any further measures.

e. Finally, let's get rid of the age-related married couple's allowance where one spouse or civil partner was born before the Canadian science fiction writer Douglas Arthur Hill while we're at it, which is an extra £296 a year (or up to £770 if you are in some bizarre marginal rate band). That figure is per couple, so also not worth replacing with anything.

f. Again, there will be squealing and wailing involved, but it's a one-off thing and people will get used to it, let's round things off by rounding up the CP from £8,000 to £8,105 per person, to align the CP/APA with the normal personal allowance of £8,105, then even better. If the whole exercise ends up too expensive, then we can just scrap the winter fuel allowance or free TV licence, free bus pass or something to keep it fiscally neutral.

g. It will save the Chancellor the hassle of announcing all the updated amounts for the state pension and the personal allowances and bands separately, he can just increase the general personal allowance, and the CP/APA moves up in line; and very few pensioners will have the hassle of doing a tax return.

NOW That's what I call simple!