Osborne accused of imposing £1bn ‘granny tax’ on the elderly

British chancellor George Osborne was last night accused of imposing a £1bn “granny tax” on pensioners as he used his budget to cut the 50p top rate for Britain’s wealthiest earners and lift thousands of low-paid workers out of taxation altogether.

Treasury acknowledged that 4.5 million pensioners will lose out as a result of the decision to phase out their age-related allowances.

Age UK said it was “disappointed” with the move, warning it could leave some pensioners £259 a year worse off.

Economist Ros Altmann, director-general of the Saga Group, denounced it as an “absolutely outrageous assault” on all pensioners with incomes between £10,500 and £24,000.

Osborne presented his statement as a “budget that rewards work”, announcing that a £1,100 rise to £9,205 in the income tax threshold will take another 840,000 of the low paid out of taxation and save 24 million people £220 a year.

Around 300,000 people will be drawn into paying income tax at 40% from 2013/2014 by a reduction in the higher rate threshold to £41,450.

The 50p top rate on earnings over £150,000 introduced by Labour will be cut to 45p from April next year, after a study by HMRC found it raised “next to nothing”, Osborne said.

The widely expected cut was offset by a hike in stamp duty on properties worth over £2m and a commitment to clamp down on “aggressive” tax avoidance.

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.

Deputy prime minister Nick Clegg hailed it as “a budget every liberal can be proud of”, pointing to the lift in the income tax threshold and increases in taxes on wealth which Liberal Democrats had demanded in negotiations with their coalition partners.

Osborne told MPs that “Britain is going to earn its way in the world” as a result of the budget. “Together, the British people will share in the effort and share the rewards,” he said.

“This country borrowed its way into trouble. Now we’re going to earn our way out.”

However, the heavily trailed tax changes threatened to be overshadowed by the row over the phasing out of pensioners’ allowances.

Under the plans, age-related allowances will be withdrawn for new pensioners from April next year while existing pensioners will have allowances frozen at £10,500 for the over-65s and £10,660 for the over-75s until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

According to the budget red book, it will raise an additional £1.01bn for the exchequer by 2015/2016.

Osborne also warned of new cuts to welfare payments, with the need to find additional savings of £10bn 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, Osborne said his measures would raise five times more from the wealthy than the top rate introduced by Labour.

He 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 duty on all tobacco products would rise by 5% above inflation, putting 37p on a packet of cigarettes.