Budget 2012: Over-65s' tax-free income freeze

The amount of income that is not taxed will be frozen for those aged over 65, affecting the financial plans for those approaching retirement.

From April 2013, those hitting 65 will no longer receive a larger personal allowance than people of working age.

This will save the government £1bn by 2015, Budget documents have revealed.

The government said it wanted to "simplify" the tax system and spread tax relief across everyone, regardless of age.

But the National Association of Pension Funds said: "Over the course of this Parliament, pensioners stand to lose over £2bn in age-related tax allowance.

"This will come as a blow to millions of pensioners who have paid in to the tax system throughout their working lives. Pensioners with modest amounts of pension saving stand to be the biggest losers."

An accountant has warned that the change could cause difficulties for the UK tax authority's computer system and leave some people paying the wrong amount of tax.

"It is going to impact those least able to detect whether they are paying the wrong amount of tax," said Chas Roy-Chowdhury, of the ACCA tax body.

Major change

For those aged between 65 and 74, the personal allowance, the amount of income that is tax-free, has been set at £10,500 from April. For those aged 75 and over, the allowance will be £10,660.

This extra allowance gradually reduces for pensioners, whose taxable income is between £24,000 and about £29,000. It disappears for any pensioner earning more than £29,000. There is also a gradual withdrawal of the basic personal allowance for everyone with income above £100,000, regardless of age.

In a major shift in the way tax is calculated, already dubbed a "grannytax" on Twitter, Chancellor George Osborne has said that income tax personal allowances will change in the following way:

• The under 65s' personal allowance will increase to £9,205 in April 2013 - that relates to people born after 5 April 1948

• A personal allowance of £10,500 will be restricted to most people born after 5 April 1938, but before 6 April 1948

• The personal allowance of most people born before 6 April 1938 will be £10,660

The change means that as people turn 65, they will not be entitled to the higher personal allowance set aside for most pensioners.

Instead, they will receive the same as everyone else. As time goes on, more and more people will fall into this group.

As a result, in 2013-14, some 4.41 million people will be worse off in real terms with an average loss of £83, HMRC said.

Within the total, 360,000 individuals aged 65 lose an average £285. Some 230,000 people will be brought into income tax.

So this will save the government £360m in the year it is introduced, rising to £1.25bn a year by 2016-17.

"This measure will support the goal of a single personal allowance for all taxpayers regardless of age, and spread tax relief fairly across working-age people and pensioners," said HM Revenue and Customs (HMRC).

Pension age

Although the tax-free income allowance is rising for the under-65s, HMRC has confirmed that 300,000 will be drawn into higher rate tax from 2013/14.

The change comes as a result of the higher rate threshold being reduced from £42,475 to £41,450 - the point at which people start paying 40% tax on their income.

Meanwhile, the chancellor confirmed that he would set up an "automatic review" of the state pension age to make sure it keeps on rising if people keep on living even longer, which means to 68 and beyond.

The state pension age is already scheduled to rise to 67, for both men and women, by 2026.