Pensioners received a £3.3 billion blow in today's Budget as they found out they will eventually lose the higher personal allowance they enjoy in comparison to the rest of the population. This has been dubbed the new 'Granny Tax'.

Today's changes mean they will eventually pay the same tax as everyone else rather than enjoying lower payments (for a full round-up, see the Budget 2012 Summary MSE News story).

HM Revenue & Customs admits that by April 2014, 4.4 million people will be worse off in real terms, with an average loss of £83 per year.

Within that total, 360,000 65-year-olds will lose an average £285 while 230,000 people will be brought into income tax that wouldn't have paid it otherwise.

Martin Lewis, creator, says: "It looks like George Osborne has rouged up and given pensioners a taste of fiscal drag. That's where you increase the amount they pay by freezing thresholds, knowing that people will earn more so they'll pay more tax anyway.

"By not increasing these thresholds, on first glance it is looking like a back-door tax rise."

Frozen allowances

Those aged 65-74 currently get the first £9,940 of their income tax-free while those 75 and over get £10,090. These allowances rise to £10,500 and £10,660 respectively in April. If a pensioner earns £24,000 a year (rising to £25,400 in April), the allowance begins to fall until in line with the general allowance which everyone else pays.

However, Chancellor George Osborne said he will freeze the personal allowance for existing pensioners from April 2013, until it is aligned with the general allowance.

This is currently £7,475 for under-65s, rising to £8,150 as planned in April, and again to £9,205 in April 2013, as revealed by Osborne today.

Anyone who reaches 65 after April 2013 will get the general personal allowance instead, so eventually, there will be no age-related personal allowance.

The Treasury's full breakdown of Budget figures reveals the change is estimated to raise £3.3 billion in tax over its first four years, money which otherwise would have been in pensioners' pockets.


Saga director-general Ros Altmann says: "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 £10,500 and £24,000 will be paying an extra £3 billion in tax while richer pensioners are left unaffected."