Millions of pensioners in the UK are set to be worse off after chancellor George Osborne announced a surprise raid on income tax breaks currently enjoyed by over-65s.

From April 2013, people aged 65 and over will no longer receive a larger tax-free personal allowance than people of working age, as Mr Osborne looked to "simplify" the tax system.

The plans will also save the government over £1 billion by 2015, according to estimates, but the proposals have been met with staunch opposition from organisations representing older people in the UK.

Dr Ros Altmann, director general of Saga, said: "This budget contains an enormous stealth tax for older people. Over the next five years, pensioners with an income of between £10,000 and £24,000 will be paying an extra £3 billion in tax."

Currently, over-65s enjoy a larger personal allowance than workers, with those aged between 65 and 74 not required to pay tax on any income below £10,500 from April and over-75s enjoying a personal allowance of £10,660. This compares favourably with the tax-free income threshold for those aged under 65, which is due to rise to £8,105 next month.

However, from April next year, the allowances will be frozen for existing pensioners, while those retiring in the future will not be eligible - meaning that they will only benefit from the same tax-free allowance as workers.

It is estimated that those approaching retirement will be worse hit and lose out on an average of £259 a year as they switch to the standard personal allowance, which will be £9,105 from April 2013.

HM Revenue and Customs claim that 4.41 million people will be worse off from 2013-14 as the new regulations come into force.

Joanne Segars, chief executive of the National Association of Pension Funds, said: "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."