Balls accuses Osborne of a 'grab on grannies' as pensioners feel pinch

Chancellor George Osborne before delivering a much-trailed Budget which contained two surprises: pensioners' allowances and further welfare cuts (Reuters)

The Government was accused of an "outrageous assault" on the elderly after it emerged that more than four million pensioners will be worse off following changes to simplify the tax system unveiled in the Budget.

A furious row erupted over the plans – which will raise an additional £1bn a year in tax from pensioners by the end of this Parliament – with campaigners arguing that the elderly were being forced to fund tax cuts for the wealthy.

In a major shift in the way tax is calculated, 4.41 million pensioners will be worse off, by an average of £83, in real terms in 2013-14. The change was instantly dubbed by Shadow Chancellor Ed Balls as a "tax grab on grannies".

But new pensioners will lose out most with the changes amounting to a £259 cut for those reaching 65 from next year and a £291 cut in potential income for older pensioners – or £5.60 a week.

At the moment, people over the age of 65 are not taxed on the first £10,500 of their income, rising to £10,660 for those aged 75 compared to £8,105 for other taxpayers. But from next April these allowances will be frozen for existing pensioners while the rest of the population enjoys a rise of £1,100, giving them a tax-free allowance of £9,205.

The freeze will continue until pensioners' allowances come into line with those of other taxpayers. From next April new pensioners will be treated the same as other taxpayers with a tax-free allowance of £9,205. The changes will affect around half of pensioners.

Dr Ros Altmann, director-general of Saga, said: "This Budget contains an enormous stealth tax for older people. It is terrible news for pensioners."

The Treasury said the aim was to move towards "a simpler, single personal allowance regardless of age".

The move came as George Osborne revealed the main gamble of his Budget – a tax cut for the top 1 per cent of earners. He and, in particular, his Liberal Democrat colleagues, point out it is offset by the tax cut for the 24 million people earning less than £100,000, who will benefit from the rise in the personal tax-free allowance to £9,205 in April – it is currently £8,105. The top rate of tax, which bites on incomes above £150,000 a year, will fall from 50p to 45p in April next year. The Chancellor insisted the 50p band introduced by Labour was raising very little, and the £100m cost would be recouped five times over by a package of measures to hit the rich. They include higher stamp duty on homes worth more than £2m and a levy on such homes held in companies, which the Lib Dems hailed as big steps towards their "mansion tax". The Coalition parties insisted the Budget was "for millions, not millionaires". But Labour is convinced the cut in the 50p rate will backfire, claiming it would give 14,000 millionaires a tax cut of £40,000 a year. Ed Miliband, the Labour leader, said: "After today's Budget, millions will be paying more while millionaires pay less. It's a millionaires' Budget that squeezes the middle."