Chancellor George Osborne was facing a huge backlash last night after it was revealed that four million pensioners will be worse off following changes to simplify the tax system unveiled in the Budget.
The Government stood accused of trying to bury a billion pound “Granny Tax” raid on pensioners, which will affect half the country’s older population.
At the moment, people over the age of 65 are not taxed on the first £10,500 of their income, but this will be frozen for existing pensioners and from next April new pensioners will have a tax-free allowance of £9,205, bringing them into line with the general population.
The changes will raise around £1bn annually for the Government and the average loss for pensioners has been put at £80 a year, rising to £197 for those retiring from next April.
Rachel Reeves, MP for Leeds West and Labour’s Shadow Chief Secretary to the Treasury, said: “George Osborne has tried to bury his £3bn ‘Granny Tax’ raid on pensioners over the next four years.
“The freeze in the personal allowance for pensioners will see 4.4 million pensioners who pay income tax losing an average of £83 per year next April. And people turning 65 next year will lose up to £322.
“And he added insult to injury by dressing up a tax grab as a ‘simplification’ and claiming that he was taking this money away from pensioners because they could not understand the allowances they were entitled to.”
Dot Gibson, general secretary of the National Pensioners Convention, said it was unfair that older people were being asked to sacrifice tax reductions to help out the rich.
She said: “The decision to freeze the age-related personal tax allowances effectively means around five million pensioner tax payers will no longer get additional reductions in their tax over the coming years – whilst those on the top rate of tax will see their bills reduced. 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.”
Chancellor George Osborne said the current age-related allowances were a “particularly complicated” feature of the tax system, which many pensioners do not understand, requiring around 150,000 pensioners to fill in self-assessment forms.
He said: “So over time we will simplify the tax system for pensioners by doing away with the complexity of the additional age-related allowances for anyone reaching the age of 65 on or after April 6 2013 and I will freeze the cash value of the allowance for existing pensioners until it aligns with the personal allowance.
“This will protect the existing level of allowance pensioners have, while introducing a single personal allowance for all.”
But Dr Ros Altmann, Director-General, Saga said: “This is an outrageous assault on decent middle-class pensioners. This Budget contains an enormous stealth tax for older people. Over the next five years, pensioners with an income of between £10,000 and £24,000 will be paying an extra £3bn in tax while richer pensioners are left unaffected.
“There is nothing in this Budget for savers, there is nothing to improve the annuity market, nothing to appease the damage of quantitative easing and nothing to support ISA changes and shelter older people’s money in cash.
“This Budget is terrible news for pensioners.”
Joanne Segars, chief executive of the National Association of Pension Funds (NAPF), said pensioners were the “biggest losers” in the Budget.
She said: “This will come as a blow to millions of pensioners who have paid into the tax system throughout their working lives.”
But she welcomed the Government’s plans to introduce a simple, single-tier state pension of around £140, based on contributions.
The Chancellor confirmed the introduction of a single-tier pension for future pensioners, which he said would cost no more than the current system in any year and represented “a further major simplification of our tax and benefit system”.
The plans come ahead of a huge overhaul of the pensions system with the automatic enrolment of up to 10 million workers in schemes from this autumn.
Further details about the new single-tier pension will be given by the Government later this spring.
The Government also signalled that the age of retirement will continue to creep up, with plans for an “automatic review” of state pension age to ensure it keeps pace with people living longer.