Osborne has 'robbed the old to fund tax cuts for the wealthy'

Four million elderly people will be £83 a year worse off as Chancellor unveils 'granny tax'

Paul Smith, 86, a retired headteacher in Cheltenham (David Hedges)

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 £1 billion a year in tax from pensioners by the end of this Parliament – with campaigners arguing that the elderly were being forced to pay for tax cuts for the very 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 a "granny tax".

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.

Around half of pensioners will be affected by the changes.

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

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

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 by filling in self-assessment forms "burdensome".

Joanne Segars, chief executive of the National Association of Pension Funds, said: "Pensioners with modest amounts of pension saving stand to be the biggest losers."

Dot Gibson, general secretary of the National Pensioners Convention, said: "Many older people will feel they are being asked to forego their reduction in tax to help out the super rich. There's no fairness in that."

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.

The Budget also saw the Government announce plans to introduce a simple, single-tier state pension of around £140, based on contributions.

The Government also signalled that the age of retirement will continue to creep up, with plans for an "automatic review" of state pension age to ensure it keeps pace with people living longer. The state pension age is already scheduled to rise to 67, for both men and women, by 2026.

Case study: I'm furious. It's a real cut in my income'

Paul Smith, 86, a retired headteacher in Cheltenham, receives a full state pension plus his teacher's pension, giving him around £23,000 a year.

"I am absolutely furious. This is a real-terms cut on my income. When I retired, I planned for a certain sort of lifestyle, given the pension I was going to get. I had calculated on a small amount of surplus income that I could set aside for leisure activities but since I retired in 1989 this has been swallowed up by rising costs just trying to make ends meet."