Pensioners lose out as age allowance rise is clawed back

Pensioners lose out as age allowance rise is clawed back

It is not that the government wants to punish this group - who are, in fact, only drawing an income at around the level of the average wage of £23,800. It is more that the Heath Robinson tax system we operate has not been fine-tuned enough in this area. And few people understand it well enough to get a campaign going for reform. Campaigns tend to focus on very obviously unfair issues - such as the 10p tax rate, people who have lost their pensions or big Council Tax surges.

The problem is the age allowance. Older people get a tax-free personal allowance over and above the £6,035 younger people receive. This extra allowance takes the 65- to-74-year-olds up to a tax-free threshold of £9,030 in 2008/09 and the over-75s to £9,180. But the allowance is clawed back for pensioners whose taxable income exceeds £21,800. They lose £1 in age allowance for every £2 of taxable income they have, with the net result that they are paying tax at 30 per cent for this part of their income, and that the age allowance is eaten away completely.....continued below

Advertisement starts

Advertisement ends

Experts were aware of the issue but not greatly exercised by it. But in April the problem got worse as the age allowance was increased to a threshold of £9,030 from £7,550 for 65- to-74-year-olds (and to £9,180 from £7,690 for older pensioners) to compensate them for the ending of the 10p tax rate. This has exposed an even greater slice of income to the depredations of the clawback.

However, most financial advisers and tax experts would agree that people in this income group are still suffering from high marginal tax rates.

There are ways that people can avoid this unwelcome tax bill. If, instead of having taxable income, they have non-taxable income (from non-taxable Isas or Premium Bonds, for instance), they can avoid having to pay tax at this stage. This would mean putting some money into Isas, for instance, or other products that get no tax relief on the sums put in but are largely or fully tax-free when cash is taken out. For pensions, by contrast, there is tax relief on the contributions paid in but plan-holders are potentially subject to tax on income received as a pension.

Someone who was going to have taxable income of £21,800 'would be better in most cases to do Isas rather than additional voluntary contributions [the standard pension top-up for people in company pension schemes]', says independent financial adviser Donna Bradshaw of IFG Group.