One of the more contentious measures in the Budget, along with cutting the top rate of income tax to 45p, was the scrapping of the age allowance for older people.
The age-related personal allowance is being frozen for existing pensioners and removed for those reaching age 65 from 6th April 2013.
This measure comes into force on 6th April 2013, for the 2013/14 tax year onwards.
It could result in the elderly being left an average of £259 a year worse off, with some critics calling the move an “outrageous assault on pensioners”.
Under current rules, people aged 65-74 receive a higher income tax personal allowance than those 64 or younger.
In the 2011/12 tax year, the personal allowance for people aged 65-74 is £9,940, compared with a personal allowance of £7,475 for younger people. This additional £2,465 of personal allowance means that those in retirement see less of their income subjected to income tax.
Once you reach age 75, this age allowance increases further still, to £10,090 for the 2011/12 tax year.
The gap between the personal allowance and age-related personal allowances had already been closing, as the coalition government worked towards their target of a £10,000 personal allowance for everyone.
This gap had closed from 33.4% in 2010/11 to 24.8% in 2011/12. It is due to close further still to 22.8% in the 2012/13 tax year, when the age allowance at age 65 will be £10,500 and the personal allowance will be £8,105.
Age allowances currently reduce by £1 for every £2 of income above an annual limit. This income limit for age-related allowances is £24,000 in 2011/12 and will be £25,400 in 2012/13.
Those entering retirement need to be careful not to fall into an ‘age allowance trap’ by generating additional taxable income which reduces the age allowance, resulting in a very high marginal rate of income tax.
Photo credit: Flickr/Images_Of_Money
