As MPs debate George Osborne’s budget, the National Pensioners Convention lobbies parliament over cuts to older people’s tax allowances.
The NPC, Britain’s biggest pensioner organisation, had called on the chancellor to withdraw his plan to freeze age-related allowances.
However an attempt on Thursday by Labour MPs to block the freezing of age-related allowances failed. The so-called “granny tax” was passed by 299 to 230 – a majority of 69.
Speaking in the Commons, the Shadow Treasury Chief Secretary Rachel Reeves attacked the Chancellor, saying: “His single-minded focus, his overriding priority, was getting through his millionaires’ tax break and he was willing to fund this by cutting the incomes of pensioners.”
For the government, Exchequer Secretary to the Treasury David Gauke said: “Are pensioners disproportionately affected by Government policies? The answer is clearly no.” He added: “At some point, someone needs to face up to the fact that we are going to increase spending on old age pensions by almost double between now and 2040,”
The NPC says it has been inundated by complaints from pensioners that those on modest incomes will have to contribute more, while people earning more than £150,000 a year will see their top rate of tax cut from 50p to 45p. It says there is a perception that pensioners are being asked to bail out the super rich, which is unfair.
Labour has released figures suggesting that “well over half” of the pensioners affected by the tax have incomes far below the average taxpayer, in spite of the government’s claim that the better-off will shoulder the burden.
Labour MP Katy Clark called for households to be given sufficient time to cope with the planned changes: “This is quite a substantial drop in income for people on modest and medium incomes at short notice.”
The “granny tax” was the biggest revenue-raising measure in the budget. Some four million pensioners over 65 will have their personal tax allowances frozen.
At the moment, people over this age are not taxed on the first £10,500 of their income. This allowance will be frozen from April 2013 for existing pensioners, which means it will not be uprated in line with inflation.
It will only increase once the tax allowance for the working population – £9,205 from April 2013 – rises above £10,500. For those reaching 65 after April 2013, the allowance will always be in line with the working population.
Almost half of pensioners will be affected by the changes, which will raise more than £1.25bn a year for the government by 2016. The average pensioner affected will lose £83 a year.
The five million people with no source of income apart from the state pension will not lose out.
Currently, if a pensioner has an income above £24,000, they lose a proportion of their age-related allowance on a tapered basis – with those on over £29,000 only receiving the allowance working people are entitled to.
The change will save the Treasury £360m in 2013, £670m in 2014, more than £1bn in 2015 and £1.25bn in 2016 – as it seeks to cut the budget deficit.
A Treasury spokesperson said: “”It is sensible to have a single tax-free personal allowance for everyone, especially when we have just announced the largest ever cash increase. Nobody will pay more tax in cash than they do today.
“The poorest half of pensioners are unaffected by this change and will still pay no tax in 13/14. In addition, all pensioners will benefit from the basic state pension rising by over £5 a week, the biggest ever cash increase.”
Mr Osborne is under fire over several measures in his budget. On Wednesday, the Conservative-led Treasury select committee challenged his estimate that the cost of reducing the 50p rate of tax would be £110m.
The committee said: “The cost and benefits of reducing the additional tax rate to 45p are both highly uncertain, and could be significantly more or less than the cost included in the budget.
“We recommend that HM Revenue & Customs publish in due course a comprehensive assessment of the effect on the exchequer of the new 45p rate.”
MPs also called for savers, many of them pensioners, to be compensated because of the effect low interest rates are having on their investments.
Amid the storm over Mr Osborne’s plan to cap tax relief on charitable donations, the committee said the Treasury had failed to make a convincing case for doing so.
Mr Osborne’s justification is that wealthy people are avoiding paying their fair share of income tax by making big donations to charity.