Saturday, 18 April 2015


The Conservative manifesto for the 2015 general election promised to "pass a law to ensure we have a Tax-Free Minimum Wage". The promise formed the centrepiece of David Cameron's presentation of the manifesto in Swindon on 15 April. It's a good sound bite. But between 400,000 and 500,000 people on the minimum wage will pay tax even under the Conservative plans.

Tax-free now
At the moment the adult rate of the National Minimum Wage is £6.50 an hour. That will rise to £6.70 from 1 October 2015. The personal tax allowance is £10,600 a year or £203.85 a week. Over the whole tax year - half the time at one rate, half at the other - 30 hours work at minimum wage would bring in £10,296 which is below the personal allowance so no income tax would be due. Another hour a week would sneak over the limit by £39.20 and about a penny a week income tax would be due.

So those working 30 hours a week or less already have a tax free minimum wage. And the promise in the manifesto is already fulfilled. People aged 18-20 could work 38 hours on the £5.30 rate and be below the personal allowance and 16-17 year olds could work 52 hours on the £3.87 rate.

Tax-free in future
"In the next Parliament, we will [raise] the tax-free Personal Allowance so that those working 30 hours on the Minimum Wage pay no income tax at all." (pp. 25-26).

The manifesto also says the party is committed to "a Minimum Wage that will be over £8 a week by the end of the decade." A minimum wage of £8.01 for 30 hours a week would produce an income of £12,495.60 in a year. And guess what? The manifesto also promises a personal tax allowance of £12,500 by the end of the next parliament.

So a tax-free minimum wage - on the manifesto definition at least - has already been achieved and would be achieved every year of the next parliament.

What is full-time?
The Office for National Statistics does define full-time work as 30 hours a week or more in its Annual Survey of Hours and Earnings. And the latest report of the Low Pay Commission, which fixes the minimum wage, estimates that 60% of the 1.4 million workers on the minimum wage work part-time, less than 30 hours a week, and 4% work 30 hours. So that leaves 36% - up to half a million - who work more than 30 hours and will earn enough to pay income tax.

The estimate is approximate as some working on the under 21 rates will be below the level to pay tax even if they work more hours. The actual number is probably between 400,000 and 500,000.

National Insurance
Income tax is not the only tax on earned income. National Insurance is 12% and begins at a much lower level £8060 or £155 a week. To escape NI you must work fewer than 24 hours a week on minimum wage. On average people on minimum wage work 26.2 hours a week and would pay £2.46 a week NI.

The Conservative manifesto makes no mention of raising the National Insurance threshold. Nor do those of any other major party.

18 April 2015
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The three biggest parties – Conservative, Labour, and Liberal Democrats – are all committed to preserving the Triple Lock for the State Pension. The lock guarantees that the basic state pension, currently £115.95 a week, will rise by prices, earnings, or 2.5% whichever is the highest.

The Institute for Fiscal Studies says the triple lock cost £4.6 billion in 2015/16 alone compared with the cost of using earnings as the index to raise the pension from 2012. That represents a major transfer of state support from younger people to older ones. Over the next parliament the cost of the triple lock compared with raising the pension in line with prices will be much more.

The Office for Budget Responsibility (OBR) predicts that inflation will be just 0.2% this year. But under the triple lock the basic state pension will rise by at least 2.5% in April 2016. The OBR forecasts that the rate of CPI inflation will be below the 2.5% floor of the triple lock in every year of the next parliament.

So we know that the state pension will rise from the present £115.95 by at least 2.5% a year to reach at least £131.20 from April 2020. If the pension rose with CPI instead of 2.5% then it would be just £124.30 from April 2020. And that £6.90 a week extra will mean a cumulative extra bill for the state pension of £12 billion over the next parliament and another £4.6 billion in the year 2020/21 to be paid by the next but one government.

And it gets worse – or at least more expensive. The third ward of the triple lock is earnings. Over the last five years that has never been an issue as earnings have been outpaced by either prices or 2.5%. But earnings are already outpacing inflation and the OBR forecasts that average earnings will grow, as they have in the past, by around two percentage points above inflation. OBR predicts average earnings to rise by 3.1% in 2016, 3.7% in 2017, 4% in 2018, and 4.4% in 2019. So it will be earnings not the floor of 2.5% which will be used to raise the state pension after 2016. That implies a pension of £138 a week by April 2020 which is more than £13.50 a week above the level needed to keep up with prices alone.

There are about 13 million pensioners and that number is not expected to fall – in fact despite the rise in women’s state pension age the number receiving a state pension has risen in just about every quarter since women’s pension age began to creep up from April 2010. Then the number of state pensioners was 12.5 million, now it is around 13 million. So let us assume it will be 13 million on average for the next five years. The minimum extra cost of the state pension rising by 2.5% instead of prices will be £12 billion over the next parliament. And if the earnings figures turn out to be true the extra cost will be £17 billion. 

These are back of the envelope figures. Two factors mean they are too high. 

1. As their state pension income rises, pensioners will be floated off means-tested benefits such as pension credit, housing benefit and council tax support, saving the Government money.

2. Not everyone gets the full basic state pension. Some get less, some more. Any extras on top of the basic are not protected by the triple lock and rise just with prices inflation. So the triple lock only affects a maximum of £115.95 a week. 

But a third factor means the estimate is too low.

3. From April 2016 the new state pension for those reaching pension age will be a lot more than the basic state pension – probably at least £154 a week. As things stand it appears that new pension will be fully protected by the triple lock. So as each new wave of pensioners arrives the triple lock will cost more compared with prices indexation.

Whatever savings there are from (1) and (2) may well be offset by (3). So it may be back of the envelope. But it is not wide of the mark. And whatever the final figure of the cost of the triple lock over the next five years, it seems unlikely to me that the same commitment will make it into the party manifestos for the 2020 election. 

A final note on whether this comparison is a fair one at all. Before the 2010 election the three main parties were committed to raising state pensions by earnings rather than prices. So the extra cost calculated above using earnings as the index would have occurred anyway if that policy had continued. Comparisons with 'would have beens' or 'counter-factuals' as they are now called, are always difficult and needs choices to be made. My choice is to ignore this earnings link and compare the Triple Lock with a rise in prices, the standard way of increasing benefits and pensions for many years until 2010. However, even that assumes that the index would have changed from the RPI to the CPI. That, as I have noted in Triple Locked Down, did have a considerable effect on the level of the state pension at the end of the Coalition Government.

18 April 2015
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This blogpost is a corrected and updated version of my Money Box newsletter 17 April 2015. Subscribe to future newsletters 

Monday, 13 April 2015


In an election period government departments are reluctant to answer any questions that could be politically sensitive. They call it ‘purdah’ – a term which in fact describes the practice of some religions to hide women from the public gaze, especially that of men from outside their families.

So when I asked HMRC on 8 April for some figures which it had already made public through Freedom of Information requests I perhaps should not have been surprised when it refused to send them to me, citing ‘purdah’ for refusing. In Civil Service language purdah clearly means hiding facts from the public gaze just when men and women outside the political family need to see them most - when they are making decisions about political matters!

These now redacted figures cast light on non-doms - the 100,000 or so people who live and often work in the UK but are not ‘domiciled’ here. Hence non-dom(iciled). 

I learned about the existence of the numbers when some were published in a letter to the Financial Times on 8 March by a Mr Mark Davies. I wanted to check them with HMRC and that is when it drew the veil of purdah over them. Fortunately Mark himself was more forthcoming. Though I should say right away that Mark Davies Associates is a firm of tax advisers with the website Guess what it advises on! So Mark is not a disinterested party. 

What is a non-dom?
The figures later. But first what is a non-dom? The concept of domicile is a strange – and strangely British – one. It dates back to 1799 when the first income tax was imposed by Pitt the Younger to raise money to fight Napoleon. Under the Duties on Income Act 1799 (39 Geo. III c.13) the tax was 10% on all income above £200 a year with lower rates on income from £60 to £200. 

From the start the tax applied to all residents on their income arising in the UK or elsewhere and on non-resident subjects on any income on property that arose in Great Britain. At the time many people from the UK lived, worked, invested in, and profited from countries around the world that were part of the British Empire. It was seen as reasonable that money brought to the UK would be subject to the new tax. But overseas earnings which were spent and invested abroad should not be caught, even if the individual spent much of their time in the UK. The notion of ‘domicile’ was born. 

Nowadays, domicile is where you call home. Your original domicile is the country that your father (or your mother if they were not married) called home when you were born. That stays with you unless you choose to change it. To do that you must live somewhere else and call that place your home, probably plan to die there. Once you have changed your domicile that stays with you wherever you travel or stay unless you change it again. So UK citizens can change their domicile and keep that foreign domicile even if they return to live and work in the UK. HSBC Chief Executive Stuart Gulliver does just that – born in Derby his domicile is Hong Kong where he worked for many years and where he says he will return when his work in the UK is done.

For a registered non-dom any income (or capital gain) from outside the UK is taxed where it arises and is only taxed in the UK if it is brought here. That means the complex rules on domicile can be exploited by wealthy UK residents with worldwide income to reduce their UK tax liability. 

The idea of taxing non-doms further was first proposed by George Osborne, then shadow Chancellor, in 2007.In his speech to the Conservative Party conference on 1 October he promised "a flat annual levy of around £25,000 for those who register for non-domicile status".The idea was taken up by the Labour Government and from April 2008 a flat rate non-dom tax charge was introduced by the Chancellor Alistair Darling at £30,000 for non-doms who had lived in the UK for seven out of the last nine years. 

A higher band of £50,000 for those here for 12 out 14 years was introduced by George Osborne as Chancellor in the Coalition Government of 2010-2105. The higher charge began on 6 April 2012. And from 6 April 2015 a new maximum charge of £90,000 is levied on those who have lived here for 17 out of the last 20 years. 

Even after the change the Government said the system “remains a very generous tax regime.” Not least because in the first seven years of UK residence no charge is made. 

Non-doms and what they pay
So, the numbers. The figures provided by HMRC under the FoI request of Mark Davies show that out of the 110,700 UK resident non-doms in 2012/13, 64,000 of them chose not to take advantage of their status and were taxed here on their worldwide income. The remaining 46,700 chose to be taxed on foreign income only if it was remitted to the UK. And of those only 5000 actually paid the flat-rate charge. Which implies the other 41,700 had been here for less than seven out of the last nine years. Altogether those 46,700 paid £4.6 billion in income tax in 2012/13. Which indicates an average taxable income in the UK of around £240,000. The remaining 64,000 who avoid the flat-rate charge by paying their tax normally handed over average income tax of £24,687 – suggesting an average taxable income of around £87,000.

Those are the figures that HMRC decided to veil from the public gaze just at the time when that same public was trying to decide whether scrapping the concept of domicile would raise – or cost – the UK money. Thanks a bunch. 

I should add that the figures that HMRC was willing to reveal were slightly different giving the number of UK resident non-doms in 2012/13 as 114,800. That could be because the FoI figures relate only to those who complete a self-assessment tax return. But until after the election I shall not be able to clarify that.

13 April 2015
Version 1.01

This blogpost is a longer version of the introduction to my Money Box newsletter of 11 April 2015. Keep up to date by subscribing to future Money Box newsletters

Monday, 30 March 2015


The basic state pension would be £1.15 a week higher from April 2015 if the Coalition Government had not changed the rules which the previous Government used to increase it. 

Under the previous Labour government the state pension was increased each April by inflation or 2.5% whichever was the higher. The measure used for inflation was RPI, the Retail Prices Index.

This rule was announced to Parliament by Chancellor Gordon Brown in his Pre-Budget Report on 27 November 2001.

"the Secretary of State for Work and Pensions and I have decided future, the [basic] state pension will rise by at least 2.5 per cent...or more if inflation is higher." (col. 836-837)

The rule was confirmed as government policy by the Secretary of State for Work and Pensions on 15 June 2005 and again in the Pre-Budget Report on 9 December 2009 and was used for nine pension upratings from April 2002 to April 2010.

Brown's 'double lock' rule was a response to the embarrassment in April 2000 when the the basic state pension went up by just 75p – from £66.75 a week to £67.50. At the time the pension was increased each April by the rise in prices the previous September as measured by the RPI. The April 2000 rise in the pension was in line with this rule. At the time inflation was low and the pension was increased by 1.1%, the RPI in September 1999. But when this rise was announced in November 1999 it was widely condemned both in the press and among pensioners, some of whom felt so insulted they sent 75p - which was less than the price of three first class stamps - to Gordon Brown.

The Coalition
Before the May 2010 General Election the three main parties - Conservative, Liberal Democrats, and Labour - had all committed themselves to raise the state pension by the rise in earnings rather than prices and the understanding was that the rule would be earnings or prices whichever was higher, although that was not always specifically stated. Historically earnings have nearly always risen more rapidly than prices, though from early 2008 that stopped being the case and from 2010 earnings rose barely at all and even fell on some occasions.

The Liberal Democrat party went further and proposed in its manifesto (p.18) to raise the pension by earnings, prices or 2.5% whichever was the higher. That policy of a 'triple guarantee' was adopted by the Coalition government (p.26). The phrase 'triple lock' was in use by 6 July 2010.

However, the value of the triple lock was weakened by the Coalition Government's separate decision to change the index used to measure prices. Its June 2010 Budget announced  (para 2.32) that it would change the index used to raise benefits each year from the RPI to the Consumer Prices Index or CPI. Although the CPI was preferred by statisticians, the maths it uses ensures it is nearly always lower than the RPI by around one percentage point.

That cost-saving measure began for most benefits from April 2011 but was delayed for the basic state pension (para 2.33) until April 2012. But then for four upratings 2012, 2013, 2014, and 2015 the basic state pension was increased by the highest of earnings, CPI, or 2.5%.

In two of those years CPI was below 2.5% so 2.5% was used instead. But under the Brown 'double lock' rule the RPI would have been used for four years and the 2.5% floor only in 2015 when RPI was lower than 2.5%.

Source: ONS, DWP and Paul Lewis calculations using September indices and official uprating and rounding rules.

The result is that the basic state pension would have been higher for four years of the Parliament. And by April 2015 it would have been £117.10 a week instead of £115.95, an extra £1.15 a week or £59.80 a year. The total loss to a person receiving the full basic state pension is £163.80 over five years of Coalition upratings. The loss is due entirely to the change in price uprating from RPI to CPI.

Government response
The Coalition Government has claimed that Labour would have raised the state pension only by earnings. On 9 December 2014 Andrea Leadsom, Economic Secretary to the Treasury, told a Conservative MP that the triple lock had benefited pensioners by £560 compared with the Labour policy. That claim is based on Labour's 2010 Manifesto which states "we will restore the link between the basic state pension and earnings from 2012" (p.6:4) with no mention of prices or the 2.5% floor.

The Labour promise is the same as that in the Conservative Party Manifesto for the 2010 election which committed the party to "restoring the link between the basic state pension and average earnings" (p.12). It is implausible that a Conservative or Labour government would not have used an alternative price measure if that was higher than earnings and unlikely that either would have abandoned the 2.5% floor.

In any case this note compares the actual Coalition Government policy with the actual policy of the previous Labour Government and does not speculate about what would have happened if the 2010 General Election had turned out differently.

30 March 2015
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Sunday, 22 March 2015


The major savings revolution in George Osborne's final Budget of this Parliament was a promise to scrap the automatic deduction of tax on interest earned on savings from April 2016.

At the moment banks and building societies take 20% off our interest and pass it straight to the Treasury. In 2013/14 that raised £1.8 billion. But a chunk of that tax is taken from interest earned by non-taxpayers. They have to go through a complex two-form process to claim it back and then stop it being deducted in future. Many do not do that and Her Majesty's Revenue & Customs has estimated that £200m a year is taken from them and never reclaimed. From April 2016 all that will end. Interest will be paid gross without tax deducted for everyone.

The new rule will apply to any interest earned on money in savings or current accounts including fixed rate savings bonds and the 65+ National Savings Guaranteed Growth Bond. Any payment that arises in 2016/17 or later will be paid without tax being deducted.

The rule was changed because 95% of people will no longer pay tax on the interest their savings earn thanks to a new savings tax allowance which begins at the same time. For basic rate taxpayers the first £1000 of interest on savings will be free of tax from 6 April 2016. The maximum tax saving will therefore be £200. 

That saving will only be achieved by those with high five figure sums earning interest. For example £71,400 in the top instant access account paying 1.4%. Or £192,300 in the average which pays just 0.52%. A three year fixed term bond paying an average 1.94% would need £51,500 to earn £1000. So it is only those with considerable savings who will benefit to the maximum. 

For the five million (one in six) taxpayers who pay higher rate tax the allowance will be only £500 so they will hit the maximum saving with half those amounts. Those paying the top rate of 45% tax will not be given the allowance.

All other savers will gain - though often not much. Someone with £5000 in a savings account paying 1% will save a tenner a year. But if you saw a ten pound note on the floor would you bother to bend down and pick it up? Of course you would. And ending the hassle of claiming back wrongly deducted tax will help hundreds of thousands of people. Tax breaks always benefit the better off the most. But everyone with savings will get see some gain from these changes. 

The allowance is per person so a couple gets one each and the rules leave the way open for couples with unequal incomes to maximise their tax saving by moving money from one to the other, as they can now if one pays no tax. 

Anyone with savings which earn interest which totals more than £1000 (or £500 for a higher rate taxpayer) will have to pay tax on the excess. That will be collected through PAYE from 2017 or self-assessment. Those not in either system should contact the Revenue in 2016/17 to find out how to pay.

The allowance applies to any interest earned in a bank or building society so the interest paid on current accounts will be paid gross and count towards the £1000 total. It makes the Santander 1-2-3 account which pays 3% on up to £20,000 and the 5% paid on some balances by Nationwide and TSB seem even more attractive. 

The new regime will also apply to the 65 plus Guaranteed Growth Bond from National Savings & Investments and any interest arising after 5 April 2016 will be paid gross, though NS&I has yet to set out the full details. It will still be taxable in the year it arises and the interest on the three year bond will have to be paid each year by all taxpayers, including those on basic rate due to pay tax.

The savings tax allowance begins in 2016/17 and is separate from the new £5000 savings tax band which begins in 2015/16 where the interest is taxed at 0% for those with incomes below £15,600. That band is explained in my Taxfree Savings blogpost.

22 March 2015
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Friday, 20 March 2015


From 6 April 2015 there will be three distinct and separate tax breaks for those who are married (a word I use to encompass civil partnerships, and ‘spouse’=‘civil partner’). One is new. Another is being phased out and the third is not well known at all. 

Marriage Allowance
The new tax break is called Marriage Allowance and applies to a married couple where (a) one partner has an income below the personal tax allowance – which will be £10,600 in 2015/16 (b) the other partner does not pay higher rate tax, which means they have an income no more than £42,385 and (c) neither was born before 6 April 1935. 

If a couple qualifies then the non-taxpayer can transfer up to £1060 of their unused personal allowance to their spouse. That will save the taxpaying spouse basic rate tax on that amount which will save them £212 a year (£17.66 a month or £4 a week) in income tax. In future years the Marriage Allowance will rise as it is fixed at 10% of the personal tax allowance. So on present plans it will be £1080 in 2016/17 and £1100 in 2017/18.

To get the allowance you must register with HMRC. At the moment you can only do that online. Once you have registered you will be invited to apply for the allowance and then sometime after May the adjustment to the tax code of the taxpayer will be made. The saving will be backdated to 6 April and then applied each month in future. 

The procedure for those without access to a computer is much less clear. Sometime in the summer - when all the online folk have been dealt with - more details will be published about how the not onliners can get their rights. When I pointed out to HMRC that 10 million adults did not have easy access to a computer the reply was 'That's astonishing isn't it?'. To which I replied that what was astonishing was that HMRC was putting them at the back of the queue and making no provision for them to claim now.

The Marriage Allowance is very much a Conservative Party policy. If Labour, Lib Dems, or the SNP have a say in the next Government it may well be scrapped or allowed to wither, though it is probably safe for at least 2015/16.

Married Couple's Allowance
The Marriage Allowance does not apply to a couple if either partner was born before 6 April 1935 because they can already get a bigger tax break called Married Couple’s Allowance. That is a hangover from a concession that all married couples used to get until it was scrapped from 6 April  2000. But an exemption said that anyone aged 65 then (ie born before 6 April 1935) could still have the allowance. In 2015/16 it is worth up to £835.60 off one partner’s tax bill. If income exceeds £27,700 the allowance can be reduced but it can never be less than £322. It can be claimed by a member of a couple now if one of them meets the age criteria. So an 83 year old marrying a 55 year old can claim it. It is normally given to the spouse with the higher income and part of it is transferable to the other spouse. If you can claim it then get it backdated for up to four tax years if you were eligible then. More information.

Blind Person's Allowance
There is a third allowance that a married couple can transfer between them. The Blind Person’s Allowance is £2290 in 2015/16 so is worth £458 to a basic rate taxpayer. However, if the blind person cannot make use of it all – has an income below £12,890 in 2015/16 – the unused portion of it can be transferred to their spouse. To qualify for Blind Person's Allowance in England, Wales, and Northern Ireland you have to be registered with your local councils as blind or severely sight impaired. In Scotland you qualify if you cannot do work that requires sight. If both partners qualify they each get one allowance. More information

20 March 2015
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Thursday, 19 March 2015


The biggest income tax cuts from the 2015 Budget will be enjoyed by the better off. Anyone with an income between £43,300 and £120,000 will see a cut of £487 in their income tax in 2017/18 compared with 2014/15 . People with incomes between £11,000 and £41,865 will see a cut of less than half as much - just £200 in 2017/18. And those with an income below £10,000 will see no change as they pay no income tax anyway.

Year by year over the next three tax years 2015/16 to 2017/18 the biggest cut in income tax will be enjoyed by the better off sixth of taxpayers - about 5 million out of around 29 million income tax-payers. Only above £150,000 - the top 1% - do the better off pay more in 2017/18 than in 2014/15 (indicated by a negative cut in the table). Incomes not included in the left hand column will see tax cuts between the amounts in the row above and below.

Income tax cut on previous year
                Tax year 2015/16 2016/17 2017/18 Total cut 2017/18
£10,000 and below £0.00 £0.00 £0.00 £0.00
£11000-£41,865 £120.00 £40.00 £40.00 £200.00
£43,300-£120,000 £224.00 £103.00 £160.00 £487.00
£150,000 plus £16.00 -£23.00 -£80.00 -£87.00

The tax cuts follow from the increases in the personal tax allowance and the threshold at which higher rate tax is paid announced in Budget 2015.

2014/15 2015/16 2016/17 2017/18 Total increase
Personal tax allowance £10,000 £10,600 £10,800 £11,000 £1,000
Higher rate threshold £41,865 £42,335 £42,700 £43,300 £1,435

The Chancellor mentioned this benefit for the better off thus:

"For the first time in 7 years, the threshold at which people pay the higher tax rate will rise not just with inflation – but above inflation."

However, the consequences were not made clear either in the speech or in the detailed notes. The rather different figures there remain a puzzle.

Future rises
The Chancellor also made clear his - and his party's - plans for a personal allowance of £12,500 and a threshold for higher rate tax to begin at £50,000.

"an £11,000 personal allowance. An above inflation increase in the higher rate. A down-payment on our commitment to raise the personal allowance to £12,500 and raise the Higher Rate threshold to £50,000."

If that is done in the next Parliament the Government will need increases in the final three years of £500 a year on the personal allowance and £2233 a year on the higher rate threshold.

Tax threshold changes 2015/16 to 2017/18, projected to 2020/21
2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 Increase
Personal tax allowance £10,600 £10,800 £11,000 £11,500 £12,000 £12,500 £1,900
Higher rate threshold £42,335 £42,700 £43,300 £45,500 £47,700 £50,000 £7,665

The result will be that basic rate taxpayers with incomes between £12,500 and £42,335 will see a tax cut of £380 in 2020/21 compared with 2015/16. But higher rate taxpayers with incomes of £50,000 to £121,200 will enjoy a tax cut in 2020/21 over 2015/16 of £1903 - five times as big.

Past changes
These plans reverse the trend over the current Coalition government of squeezing higher rate taxpayers - either to deny them any of the tax gain given to basic rate payers or to limit the gain to the same cash amount. The higher rate threshold was cut or frozen for the three years 2011/12 to 2013/14. In 2010/11 the threshold was £43,875, which is higher than it will be in 2017/18.

These calculations only look at income tax not at National Insurance. They exclude the new savings allowance and marriage allowance and do not include the extra personal allowance which some over 67s got in 2014/15 and some over 78s got in 2015/16. After 2016/17 these age allowances will finally disappear.

19 March 2015
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