Millions of pensioners who have saved for their old age will lose the extra tax free allowance they enjoy on modest savings and occupational pensions from next year.
Campaigners called the change “outrageous” and an attack on pensioners who had scrimped and saved for their retirement.
Under the current system, those aged between 65 and 74 with incomes of between £10,500 and £20,500 a year have a tax free personal allowance of £9,940. For those aged 75 it is even higher at £10,500. Both are considerably more generous than the £7,475 personal allowance for working age taxpayers.
But under a move described by the Chancellor as a “simplification”, the age-related tax free allowance will be frozen until it comes into line with the lower personal tax allowance for everyone else, earning the Treasury £3.32 billion by 2016.
George Osborne attempted to justify the move in his budget by criticising the complexity of the current scheme, saying too many pensioners did not understand it and 150,000 of them ended up filling out self-assessment forms as a result.
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But campaigners immediately branded the chance a “granny tax” and said it was a blow for up to five million older people, many of them on modest incomes of just over £10,000.
Ros Altman, director General of Saga, said she was “hopping mad”.
“This is an outrageous attack on decent, middle class pensioners who put something by for future. Those with incomes between £10,500 and £20,500 are bearing the brunt of this stealth tax,” she said,
“I don’t understand how this can be classed as fair. Older people are just sitting ducks to have money taken away from them time and time again. The message is clear – you are a mug for saving for your old age.”
Dot Gibson, general secretary of the National Pensions Forum, also criticised the move.
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“The decision to freeze the age-related personal tax allowances effectively means around 5 million pensioner taxpayers will no longer get additional reductions in their tax over the coming years, while those on the top rate of tax will see their bills reduced,” she said.
“Many older people will feel they are being asked to forego their reduction in tax to help out the super-rich. There’s no fairness in that.”
In an attempt to soften the blow, the Chancellor announced that next month the basic state pension for a single person will rise by £5.30 a week to £107.45.
He also confirmed the Government would press ahead with plans to merge the basic pension with the state second pension and create a single-tier pension which would, on current estimates, be worth about £140 a week.
Although this move will benefit those who have paid lower contributions during their working life it will penalise better off retired households.
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More details will be published later this spring.