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The 30% Granny Tax Trap Osborne Could Set for Labour

Well, Conservatives can take heart that at least incompetence isn’t restricted only to their own side, as a top Labour spin-doctor admits that they screwed up when they failed to vote against the cutting of the 50p tax rate.

However, it may well be too late now to repair the damage done by the incompetent handling of the gradual withdrawal of the age-related allowance (ARA) – the so called ‘granny tax’. The incompetence, however, was not to decision to withdraw it; it was a sensible move given that the significant increases in the standard personal allowance is making the ARA redundant. No, the incompetence is to miss the biggest win resulting from the move: the abolition – not imposition – of a granny tax.

The biggest negative side-effect of the ARA was the abatement mechanism: the gradual withdrawal of the allowance as the pensioner’s income approached the income limit (currently £24,000 for 2011/12). With £1 of allowance being lost for every £2 in extra income, the abatement added an extra 10p effective marginal tax rate on top of the existing 20p.*

Yes, George Osborne last week abolished the 30% granny tax.

However, thanks to the government’s slow-witted spin operation, it became regarded as the imposition of a tax. How useless does a PR operation at the highest level of domestic government have to be to manage such a disastrous inversion of the message?

Those pensioners who are only on the state pension will not be affected by the ARA withdrawal, as they will be nowhere near that abatement band. Those on more than £24k would similarly be unaffected, as they will not be benefiting from the ARA anyway. Those in the middle are being relieved of a 30% marginal tax rate. What’s not to like?

There is, at least, an opportunity here to salvage what little advantage may be left, to embarrass Labour and perhaps belatedly shore up some of the wavering support among the age bracket that is most likely to vote.

Labour will surely be tabling amendments on the ‘granny tax’. If the government spin-doctors can remove their shortest digits from their posteriors for a few minutes, then this could be legitimately presented as Labour trying to re-impose a penalty on age, a slap in the face for those who spent their working lives … blah blah blah…

I wouldn’t bank on it though. Frankly – and I shudder just typing this – Mandelson would have done a far better PR job.

* (It’s the same effect that creates a 60% rate, plus NI, between £100,000 and £114,950.

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2 responses to “The 30% Granny Tax Trap Osborne Could Set for Labour

  1. botzarelli March 28, 2012 at 5:28 pm

    The thing is that no-one much noticed or understood the £100-115k issue so the 30% granny tax reduction would also probably have been too complicated for public debate. Everything has to be capable of being written in crayon by a semi-numerate primary schoolchild.

    Giving Osborne the benefit of the doubt, I think the biggest bombshell could actually be the reduction of the 50p rate to 45p. Because of the timing of when the figures for the tax take for 2013-14 will be available (about 2 months before the General Election) and the near-certainty that people earning over £150k will already be looking at how they can defer as much of 2012-13 income into the following tax year, it’ll make Osborne look like some sort of magician, at least at the level of current economic debate.

    http://botzarelli.wordpress.com/2012/03/27/making-a-mantrap-out-of-a-molehill/

  2. Pingback: Restoration of Age Related Tax Allowances « seachranaidhe1

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