Chancellor George Osborne today delivered a £1 billion Budget tax hit to pensioners as he cut the top rate of tax for Britain’s wealthiest earners.
The Treasury acknowledged that 4.5 million pensioners would lose out as a result of the decision to phase out their additional age-related allowances.
Age UK said it was “disappointed” with the move warning that it could leave some pensioners up to £259-a-year worse off, with little chance to change their retirement plan.
However, Treasury sources pointed to a report by the Office for Tax Simplification which claimed many pensioners did not understand the allowances and found claiming them “burdensome”.
Mr Osborne presented his statement as a Budget that “supports working families” - lifting another 840,000 of the low paid out of taxation as he raised the income tax threshold to £9,205.
His widely expected cut in the top rate of income tax for earners on over £150,000 from 50p to 45p was offset by a hike in stamp duty on properties worth over £2 million and a commitment to clampdown on “aggressive” tax avoidance.
However, it threatened to be overshadowed by the row over the phasing out of age-related allowances.
Under the Chancellor’s plans allowances will be withdrawn for new pensioners from April next year while existing pensioners will have their allowances frozen at £10,500 for the over 60s and £10,660 for the over 75s until overall tax thresholds catch up with them.
According to the Budget red book, the measure will raise an additional £1.01 billion for the Exchequer by 2015-16.
Although Mr Osborne insisted there would be no cash loss to pensioners, Treasury sources said existing pensioners would be, on average, £63 a year worse off while new pensioners would lose out to the tune of £197 a year on average.
Mr Osborne said of the allowances: “The National Audit Office points out that many pensioners don’t understand them.
“These allowances require around 150,000 pensioners to fill in self-assessment forms, and as we have real increases in the personal allowances, their value is being eroded all the time.”
Mr Osborne also signalled that millions of existing workers will have to wait longer for their pensions, with automatic reviews of the state pension age “to ensure it keeps pace with increases in longevity”.
And he also warned of new cuts to welfare payments - with the need to find additional savings of £10 billion by 2016.
However there was action to ease the effects of his decision to end child benefit for the better off, with a phased withdrawal of payments for those on incomes between £50,000 and £60,000.
Overall, the Chancellor said his measures would raise five times more from the wealthy than the top rate introduced by Labour.
He said a study by HM Revenue and Customs found that the 50p rate had raised just a third of £3 billion predicted and that cutting it to 45p would cost the Exchequer just £100 million a year - a loss which could be cancelled out by other tax revenues.
But Labour leader Ed Miliband said the Budget meant millions would pay more while millionaires paid less.
“It is a millionaires’ budget that squeezes the middle,” he said.
Treasury sources said it was a fiscally “neutral” Budget with the £2 billion in tax cuts paid for by a £2.4 billion reduction in the cost of operations in Afghanistan - funded from the Treasury reserve - as the troops return home by the end of 2014.
Mr Osborne rejected calls to relieve the pressure on motorists struggling with record petrol prices to cut fuel duty.
He also dealt a blow to smokers, saying that duty on all tobacco products would rise by 5% above inflation - slapping 37p on a packet of cigarettes from 6pm tonight.
However, drinkers escaped unscathed, with no additional increases in alcohol duty.
The Chancellor predicted slightly better than expected economic growth, with the Office for Budget Responsibility expecting the UK to avoid a technical recession with positive growth in the first quarter of this year.
He said the OBR had reported that the economy has “carried a little more momentum into the new year than previously anticipated”, slightly revising upwards its their growth forecast for the UK this year to 0.8%.
The OBR is now predicting growth of 2% next year, 2.7% in 2014 and 3% in both 2015 and 2016.
Mr Osborne said public sector borrowing was now set to come in at £126 billion this year, falling to £120 billion next year and then dropping back to £21 billion by 2016-17.
There was good news for business as the Chancellor announced another 1% cut in the rate of corporation tax from next month to 24%.
He said that by 2014, the rate would be 22% which is “dramatically lower” than competitors’.
TUC general secretary Brendan Barber said: “The Chancellor’s decision to raise more than £1 billion extra in tax from pensioners by freezing age allowances will come back to haunt him. It’s already being dubbed ‘the granny tax’.
“Pretending that pensioners will be grateful because it will simplify their tax is a vain hope. Instead they will see that they are being asked to pay more while the super-rich have kept all the pensions tax relief - a heavy burden for ordinary taxpayers.
“And with ever more increases in the state pension age threatened in a new White Paper - a burden that falls more heavily on the poor, the regions and those with manual jobs - older workers and pensioners are paying a heavy price for a pro-rich Budget.”