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LITRG queries whether the coalition has a tax policy for pensioners in the light of recently announced personal allowances and tax rate bands for 2011/12.

New government, new policies

Much was made of the coalition policy to increase personal allowances towards a target of £10,000 for those under 65. Less has been said about the tax policy towards pensioners. With the announcement at the end of last week of the personal allowance figures for pensioners, we can see that unless a new tax strategy is put in place the advantages given to pensioners, as compared with the working population, will be eroded.

Tax rates for 2011/12

On 2 December the Government announced the personal allowance rates that will be in force for 2011/12 and all these rates can be seen in the Tax Rates and NIC section on the LITRG website. Although we are pleased by the increase of £1,000 to the basic tax allowance (particularly for women pensioners who are 60-64) there is no similar increase for those 65 and over.

A Government with limited resources has to make choices and perhaps the erosion of tax differentials between the working and retired population is regarded as a matter to be left for the next few years.

Allowances for pensioners

There were increases for pensioners of £450 a year in the main age-related allowances for those aged 65 and over. From 6 April next year a pensioner aged 65 to 74 will be able to have a tax-free income of £191 a week and those 75 and over, £194 a week.

Also that diminishing band of older couples entitled to the Married Couple’s Allowance will have their tax rebate increased from £13 to £14 a week.

There is no getting away from the fact that the differential tax advantage of being a pensioner has narrowed and will continue to narrow every year of this Parliament if the coalition succeeds in its ambition of raising the basic personal allowance to £10,000 (or £192 a week). But it may be that the Government is working away as we write to produce a new strategy for pensioners?

A new strategy?

A new strategy could be to let the basic personal allowance catch up to the age-related allowances for pensioners on the basis that it will provide tax simplification. It could be argued (but not by us) that the world of work and the world of retirement is blurring as people live and work longer so that there is no need for the current distinction.

No distinction might be attractive to the Government as it struggles to implement the new Universal Credit, an instrument that might not provide a seamless transition between the world of work and the world of retirement. HMRC may also find the operation of Real Time PAYE less than straightforward with the pensioner tax regime.

Rather than let these things happen on an ad hoc basis, it would be good to have a major and open debate about how the tax and benefits systems fit together for the pensioner population as we move forward.

LITRG calls upon the Government to start that process as soon as possible.