Coalition fends off Commons bid to block Osborne’s ‘granny tax’

Labour appealed for coalition backbenchers to help them derail plans to end age-related allowances, which it estimates will cost some pensioners on relatively modest incomes up to £323 a year.

But the Budget measure was backed in the Commons by a 69-strong majority.

Shadow chief secretary Rachel Reeves accused Chancellor George Osborne and Chief Secretary to the Treasury Danny Alexander of seeing pensioners as a “soft touch” who were “ripe for a sneaky tax grab”.

“This is yet another broken promise from the Conservatives and their Liberal Democrat friends,” she told the Commons.

“It is all too clear why this Chancellor didn’t bother to wait for the final report (from the Office of Tax Simplification). He wasn’t really interested in simplifying taxation for older people.

“His single-minded focus, his overriding priority, was getting through his millionaires’ tax break and he was willing to fund this by cutting the incomes of pensioners.”

Ms Reeves said the Budget had become an “embarrassment” to MPs on the Government benches and it had shaken confidence in Mr Osborne.

But challenged from the Government benches on whether Labour would commit to un-freezing the age-related allowance, Ms Reeves said: “We do not know what the economy is going to look like in three weeks’ time, let alone in three years’ time.

Age-related allowances are due to be withdrawn for new pensioners from April next year while existing pensioners will have their allowances frozen at £10,500 for the over-65s and £10,660 for the over-75s until overall tax thresholds catch up with them.

Ministers insist the move simplifies the system by bringing pensioners into line with basic rate tax payers. They also point to the £5.30 weekly boost to state pensions that came into force earlier this month.

During committee stage of the Finance Bill, which enshrines the Budget in law, Labour also failed in an effort to prevent the “cliff edge” effect, which means anyone turning 65 after April 2013 will not receive any extra allowance at all.

Exchequer Secretary David Gauke said: “The idea of having the same personal allowance whether you’re 64, 65 or 75 seems to me something that is perfectly sensible.

“The changes made by this clause will help ensure that people get the allowances they are entitled to, pay the right amount of tax and make it more straightforward for Government to administer, thereby minimising costs to the taxpayer.”

Tory MP for Ipswich Ben Gummer said the Chancellor’s changes to the tax system were ironing out anomalies which meant pensioners paid less than low-earning families.

He said: “At some point, someone needs to face up to the fact that we are going to increase spending on old age pensions by almost double between now and 2040.

“This is about beginning to reform the provision for people who are retiring in our country. And if we do not begin to make these small changes, we are not going to be in a position to be able to make the changes which are necessary in the future.”

The “granny tax” is one of a number of measures from last month’s Budget that has attracted a slew of negative headlines and criticism from campaign groups.

But the Government has managed to comfortably see off Labour challenges, including Wednesday’s bid to reverse the cut in the top rate of income tax from 50p to 45p. Moves to block the imposition of VAT on hot takeaway snacks, on static caravans and on improvements to listed buildings were also defeated.