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The Spring Budget delivered on Wednesday was squarely aimed at those in work, economists have said, with pensioners coming out as net losers from changes in taxation. They have, however, made gains via state pensions through the triple lock.
The two national insurance cuts by the current government make for a tax cut worth up to £1,500 a year for higher rate taxpayers and over £1,000 a year for those on just above average earnings, according to thinktank the Institute for Fiscal Studies.
However, as the NICs cuts affect only earnings, those reliant on other forms of income, such as pensions, have not benefitted.
“Pensioners will be substantial net losers,” said IFS director Paul Johnson, speaking at a webinar on Thursday, with “well over” 60% of pensioners now paying income tax – a significant increase over the last 15 years or so.
However, he welcomed the fact Jeremy Hunt again chose to cut national insurance rather than income tax: “It's better targeted on those in work of working age and it reduces the wedge between taxes on different sorts of income."
Most pensioners will be about £650 a year worse off by 2027 and over £3,000 a year worse off if they are higher rate taxpayers, he explained, and stressed that they also did not benefit as much from increases in the personal allowance in the 2010s.
Gains in eliminating pensioner poverty were made mainly in the 2000s, noted Johnson, rather than the 2010s, but added that older people have benefitted from asset gains after 2010.
Thomas Wernham, a research economist at the IFS, illustrated the impact of tax changes on workers versus pensioners since 2010, based on an income of £25,000.
"The employee has seen significant falls in their real tax liabilities and today's prices, despite recent freezes, because we had increases to the personal allowance and cuts to the higher rate threshold. Whereas pensioners have actually seen their taxes go up slightly,” as a result of personal allowance changes.
In 2010, workers on £25,000 a year still paid more than twice in tax than pensioners on this amount, while now it is about a third higher.
Employees on higher incomes have seen smaller falls in tax liabilities because the system has become more progressive, as pensioners have seen a bigger increase.
“In both cases we see a sort of shrinking of the difference in treatment between employees and pensioners,” Wernham observed.
However, tax is not the only factor affecting disposable income. Wernham added: “Now it's important to note this is a tax specific thing. There are other ways in which pensioners have been relatively advantaged by policy.”
He cited benefit entitlements as an example, where the state pension has increased more than working age benefits, with the state pension rising much more quickly and now worth more than double working age benefits.
