Friday, March 23, 2012

The 'Granny' Tax

Because the last Government left us with no money, and we are weighed down by massive deficits and debts, the Chancellor had no scope to reduce taxation on Wed., and no option but to deliver a fiscally 'neutral' budget. This blog outlines what I saw as the significant taxation announcements within this 'neutral' budget - of which there are three biggies. I do not include the reduction in the top rate of tax from 50% to 45% (from 2013), because it has almost no impact on taxation receipts. The 50% tax rate makes no economic sense at all. Gordon Brown set it as a political 'trap' for the incoming Government when he realised he was going to lose in 2010. So its no surprise that Labour are seeking to make a big deal of it. Personally, I do not think this will concern most people - because they are not daft. There are several more important changes.

The three 'biggies' are personal taxation allowances, corporation tax, and the freeze on age-related allowances (so-called Granny Tax). My aim is to be factual rather than partisan in my commentary because I've been surprised by the lack of knowledge that I've encountered. I'll be willing to be more opinionated in any comments.

The decision which dominated the Budget was the raising of the personal tax allowance from £8105 to £9,205. This took another 840,000 people out of the tax system altogether (42,000 in Wales). The allowance was £6475 when the Coalition Gov't came to power. Since then 2 million people have been lifted out of the tax system. This is a dramatic change in how Gov't raises taxes.

The second big change is the reduction of Corporation Tax by an extra 1p. This tax is being reduced from 26% t0 24% this year, adding to previous reductions and with further reductions to come. The aim is to encourage business to locate in the UK, and the decision by GlaxoSmithKline to confirm its £500 million, 1000 job investment on the back of the budget was great news. This change is the Chancellor's main weapon to create jobs

The third big decision is more controversial, and has been much criticised. I've had several protesting emails over the decision to freeze age-related tax allowances. At present the age-related tax-free allowance is £10,200, (while the general personal allowance is being increased to £9205. There is no 'cash' reduction to the tax free threshold - but of course its 'value' will be lessened by inflation. Also, the impact of the decision is ameliorated by an increase of 5% in the state pension. It will remain at £10,200 until the personal allowance catches up. The intention is that personal income tax allowances of everyone should be the same, irrespective of age.

Because this third change is so controversial, I've had to think about it a lot. I don't pretend its easy, or that I like it, or that its popular, or that its not negative for the pensioners it effects. But my experience of talking to constituents is that the people under greatest financial pressure are young people with children. We have to ask ourselves whether we can justify a system of tax allowances which discriminates against them. The underlying issue facing the Chancellor is that he has to produce a 'coalition' budget - and there is simply no money to introduce the required changes in priority. The overall taxation product cannot be reduced. Tough decisions. Certainly not a budget for votes, but a budget that supports our poorest citizens and is right for the nation. Now I am being political, I suppose.


Anonymous said...

840,000 not 840 Glynn I assume....Sean_f

Anonymous said...

We are not really in such dire straights if the amount of money given to the European Union has increased by £1.8billion since last November.

It seems we can afford £32 Billion on a railway between London and Birmingham £16 Billion on Crossrail and £20 odd Billion every year to the EU.

Surely this would be better spent on keeping pensioners happy and raising the tax allowance for everyone to £10,600

Glyn Davies said...

With thanks to Peter Black for spotting error, which made the post look silly.

Anonymous said...

Unfortunately the 'Granny' tax is hitting the Conservative core vote,especially those in my age bracket. Albie