Personal allowance now close to £10,000Tax breaks for pensioners scrapped: #grannytax trendingEd Miliband: 'Millions pay more while millionaires pay less'Stamp duty rate of 7% for £2m housesEconomic growth forecast to be 0.8% this yearBudget deficit expected to be £126bn in 2012

The chancellor, George Osborne, smuggled away a £3.5bn raid on pensioners and foreshadowed another £10bn of welfare cuts as he announced a controversial cut in the top rate of income tax to 45p and took a further 1 million people out of income tax altogether.

The personal tax allowance will rise to £9,205 for millions of working people while child benefit cuts will be phased in for those on more than £50,000.

The Labour leader, Ed Miliband, said millionaires would get a "massive income tax cut".

The Treasury claimed five times the revenue would be raised on the top 10% than lost through reducing income tax.

They also published figures suggesting those earning over £150,000 will be paying an additional £1,300 overall annually once the budget measures are considered overall.

The Liberal Democrats were championing the large rise in personal allowances as a great victory for their flagship policy. They also insisted that the budget overall reflected a shift from taxing income to taxing wealth.

But the surprise hit on pensioners was already overshadowing much of the budget reaction on social media, with the term #grannytax trending on Twitter.

The surprise decision to scrap income tax breaks for the over-65s will leave Britain's pensioners worse off by more than £1bn a year by 2015.

Citing the need to simplify pensions, Osborne also plans to save £3.5bn by freezing age-related allowances for half Britain's pensioners, affecting 5 million people by the end of the parliament. The Treasury stressed that no pensioner will be worse off in cash terms.

The loss for existing pensioners will be £63 a year and £197 for new pensioners. Higher figures were produced by independent pension advisers. In his speech Osborne made little of the announcement, and will realise that he is going to be criticised by pensioners' groups. The Treasury argued that overall pensioners have been relatively well protected since the coalition came to power

The much-heralded increase in the standard personal allowance, to £9,205 in 2013, will put an extra £220 a year into the pockets of 24 million taxpayers, the chancellor said. But pensioners will be picking up part of the bill for Osborne's giveaway.

George Osborne announced a £1,100 increase in the personal tax allowance next April, and cut the top rate of tax to 45p.

Osborne said the rise in the threshold to £9,205, which takes the coalition closer to its goal of a £10,000 allowance, was the largest in history and would help 24 million low-paid workers.

The chancellor also tried to neutralise political controversy about his decision to ditch the 50p top rate, by introducing a clutch of new tax measures aimed at the rich, including a 7% stamp duty rate for properties worth more than £2m, and a cap on the tax allowances top earners can claim.

Osborne said the 50p rate had distorted the economy by encouraging tax avoidance, and cutting it to 45p would only cost the exchequer £100m. "It raises at most a fraction of what we were told, and it may raise nothing at all." He insisted the rich would pay five times more tax as a result of all the measures taken together. However Miliband said the impact of the budget would be that "millions will be paying more while millionaires pay less".

There was some relief for families, as the cut-off point for those receiving child benefit was raised from £42,475 to £60,000. The withdrawal of the benefit will also be tapered for households where someone earns over £50,000, reducing by 1% for every £100 over that figure, so no families will "fall off a cliff edge", Osborne said. The changes mean an extra 750,000 families will keep some or all of their child benefit payments.

Osborne's third budget took place against the background of an economy struggling to recover from the deepest recession in a generation.

The chancellor announced that the independent Office for Budget Responsibility now expects economic growth to be slightly higher, at 0.8% this year, up from 0.7% in its autumn forecasts. However, next year, it is projecting 2% growth, weaker than the 2.1% it expected in November.

Osborne stressed that he would stick to the government's aggressive austerity programme, which he said had enabled the Treasury to borrow at the cheapest rates in its history.

Announcing the OBR's latest forecasts for the public finances, he said he now expected this year's deficit to be £126bn – just £1bn lower than expected in the autumn, after official figures published earlier on Wednesday revealed a much larger-than-expected shortfall of more than £15bn in February alone.

In future years, the deficit will come down slightly faster than had been previously expected, to £21bn by 2016-17, instead of the £24bn forecast in November. The government's debt will now peak at 76.3% of GDP in 2014-15, instead of 78%, and will then start to decline.

The budget statement was also peppered with help for struggling firms, as the chancellor insisted he was "unashamedly" pro-business.

He announced a larger-than-expected cut in corporation tax to 22p over the next three years, styling himself as the champion of British business, in a budget he said would help the country "earn its way in the world".

Osborne has made reducing corporation tax, to signal Britain's competitiveness to foreign investors, his first tax-cutting priority. The rate was already due to decline to 25% this year; it will now fall to 24%, and there will be a further two 1p cuts in the years ahead.

He also set out a battery of supply-side reforms, from simplified planning rules to public funding for ultra-fast broadband and support for the video games industry, which the Treasury hopes will help kickstart economic recovery.

"Do we have the national resolve to say: 'no, we will not be left behind, we want to be out in front?'" the chancellor asked, as he announced a new government target to double exports, to £1tn.

• This article was amended to change the figure of £5bn revenue raised from the changes in pension tax allowances to £3.5bn, on March 21 2012