Wealthy pensioners are set for generous tax cuts worth almost £1,500 a year as a result of this week’s Budget tax changes.
People with pension incomes of £43,000 or more stand to benefit from the biggest reductions in their tax bills, while those living off other income from £1m-plus share portfolios and building society savings could gain as much £1,000 annually.
The surprise Budget winners contrast with criticisms that for many people the chancellor’s 2p in the pound giveaway is being clawed back by increased National Insurance deductions and other tax changes.
The tax windfalls, due to start coming through from April 2008, reflect that these groups are not subject to NI on their incomes. “Not getting the NI hit means they stand to benefit from greater tax savings,” said Patricia Mock, director of Deloitte, the accountants. “I don’t believe the chancellor thought through who would benefit.”
“It’s strange that a chancellor like Gordon Brown has chosen a tax strategy that favours unearned income,” added Mike Warburton, senior tax partner at accountants Grant Thornton, noting how high earners instead face NI increases of almost £1,000 which in effect wipe out their tax cuts.
Wealthy pensioners do particularly well because they tap into both the reduction in the basic rate of income tax to 20 per cent from April 2008 and the increase in the higher rate tax threshold to £43,000 the following year. Those with incomes of £43,000 or more gain 2p in the pound across the widest possible band of income as well as around a further £1,000 a year because of a hike in the higher rate tax band from April 2009.
By contrast, those living off income from building society savings won’t gain any additional benefit from the headline tax cut from 22 to 20 per cent because savings interest is already taxed at 20 per cent. But those with hefty account balances of around £1m or so will reap rewards because less of their interest payouts will be subject to higher rate tax.
Calculations from Deloitte show that for a 65-year-old with an income that is half savings and half share dividends, the tax gains range up to £1,040 in 2009/10 compared with the current year.
By contrast, less well-off pensioners only stand to gain a few hundred pounds from the Budget tax changes.
Many of these will benefit from big increases in personal allowances announced by the chancellor. These allowances are set to rise over coming years to as high as £10,000 by 2011 for someone over 75, meaning the first £10,000 of annual income will be tax free. This will offset the scrapping of the 10 per cent rate of income tax – which confusingly is also being retained for savings for those on low incomes.
While the rich and the poor may do well, some in the middle ground could lose out overall.
According to Deloitte, some pensioners with incomes of £20,000 to £30,000 could be overall losers from the tax changes because of complicated rules that reduce these personal allowances for people on higher incomes.
Tom McPhail, head of pensions research at Hargreaves Lansdown, the financial adviser, said that the Budget tax changes broadly make pensioners 2 to 3 per cent better over the next few years. “It has taken 11 attempts but the chancellor has actually made pension saving more attractive,” he said.
He said that while higher rate taxpayers would still benefit from upfront tax relief of 40 per cent on pension contributions, in future they stood to benefit from less tax “on the way out” – when they came to retire. The hike in NI for high earners also strengthens the case for taking advantage of employer-based “salary sacrifice” arrangements which allow NI savings on pension contributions.
