Who will be affected by the freeze on pension allowances?

Who will be affected by the government's so-called "granny tax"? Credit: Reuters

The Chancellor's surprise announcement of freezing pensioners allowances in his Budget caused widespread anger, but what is the so-called "granny tax" and who will be affected by the measures?

What is "granny tax"?

  • The Government is scrapping the extra tax free income that people over 65 have been allowed since 1925, when it was introduced by Sir Winston Churchill.

  • Personal allowance is the first bit of income that anyone earns and is tax-free.

  • From April 2013 the amount a current pensioner can earn before income tax will be frozen.

Who is affected?

  • The 4.4 million people in the UK who already get the "higher allowance" will find it frozen at its 2012/13 rates.

  • That means it will remain fixed at £10,500 for those born between April 6, 1938 to April 6, 1948.

  • This means that their pension will not be cut in cash terms but will be reduced in real terms by £83 per year.

  • For those born before April 6, 1938, the allowance will remain at £10,660.

  • Anybody who turns 65 next year (born after April 5 1948) will not be entitled to the "higher allowance" you get when you become a pensioner. This means they keep the same allowance they had before turning 65, which is £9,205.

  • There are 360,000 people in this situation, they will lose £285 in real terms.

Who is not affected?

  • Pensioners with an income of more than £30,000 will not be affected at all because they would not have received the extra allowance.

  • OAP's on the basic state pension will not be affected as they will not earn enough to have to pay income tax.

  • That means around 60% of pensioners (50% on basic state pension, 10% earn over £30,000) will not be affected by the age-related allowances freeze.

Reaction to "granny tax"

Despite the widespread anger over the "granny tax", Chancellor George Osborne claimed that pensioners "will be better off" under the coalition government, claiming they will take home an extra £5 a week.

Age UK said the people affected the most would be those with "modest pensions".

Saga director-general Ros Altman said on twitter that pensioners have already been hit by high inflation and low interest rates giving them little return on their savings.

Sources: Age UK, Saga, Treasury