Pensioners will be able to earn £10,000 before they are taxed.
The tax-free allowance for pensioners has increased.
Pensioners will benefit from a £450 rise in their personal tax allowance next April, according to the Treasury. The first £10,000 earned by over 75s will not be taxed.
The change marks the first ever increase in personal allowances above the £10,000 threshold.
The government’s confirmation of the tax rates for the next two years revealed that the tax-free income band for over 75s will rise to £10,090. Pensioners aged between 65 to 74 will benefit from a rise too – the increase, to £9,940, is above above retail prices index inflation. Both of these higher allowances will have an income limit of £24,000 before they start to be eroded.
The tax free allowance for savings made by pensioners will also rise from £120 to £2,560.
John Whiting, policy director at the Chartered Institute of Taxation, said: “For pensioners, these increases are better than feared [given the deficit]”.
The Treasury also confirmed that the personal allowance for under 65s will rise from £1,000 to £7,475 from April 2011. However, the extra cash will be generated by subjecting higher earners to a 40% tax on incomes over £42,475, which could affect almost 700,000 people.
Experts have warned that the one percentage point rise in National Insurance Contributions, set for the same time next year, teamed with the drop in income thresholds will hit those earning over £42,500 the hardest. People on lower incomes will be best placed to benefit from the changes.