The BBC has said it will have to close channels and make enormous cuts to its services unless over-75s are made to pay for the licence fee, as it prepares to cover the loss of government funding that currently allows older people to consume its content for free.

The corporation put a number of proposals on reforming the subsidy out for consultation on Tuesday, saying that the £745m cost of maintaining the status quo would take up a fifth of its budget and equates to the total amount it spends on all of BBC Two, BBC Three, BBC Four, the BBC News channel, CBBC and CBeebies.

Its proposals include making all over-75s pay the fee, introducing discounts, or applying means-testing. Although the BBC insists all options are on the table, it has been preparing the ground through careful political and media interventions in recent months. A final decision on any changes will be made by the BBC board next summer.

The consultation acknowledges that some of the poorest older people would lose out under any changes and, because “television can be a form of companionship”, some may be put at higher risk of social isolation if they cannot afford the fee. Reintroducing the licence fee for over-75s would also bring back the prospect of older people being prosecuted for non-payment.

One option put forward for consultation is charging a 50% rate for over-75s, although this would still require the BBC to find £415m a year – equivalent to the budget of BBC Two.

Other proposals include raising the age of a free licence to 80 or applying a means test under which only people who receive pension credit will not have to pay the fee, although the BBC noted that not all of those eligible for the credit actually claim it.

The director general, Tony Hall, said each option had “merits and consequences, with implications for the future of the BBC, and for everyone, including older people. We need to hear views to help the BBC make the best and fairest decision.”

Q&A Why is the BBC planning to charge over-75s the licence fee? Show In June 2019 the BBC confirmed that it plans to make most over-75s pay the TV licence fee from 2020. The change will affect around three million households. The BBC says the annual cost of the free licences is £745m. They argue that maintaining the status quo would have taken up a fifth of its budget, equal to the total amount it spends on all of BBC Two, BBC Three, BBC Four, the BBC News channel, CBBC and CBeebies. The corporation has said it will continue to provide TV licences to over-75s who claim pension credit, a means-tested benefit designed to help older people. It estimates this proposal will cost it £250m a year, requiring some cuts but no channel closures.

The policy of free TV licences for the over-75s was introduced in 1999 by Labour chancellor, Gordon Brown, with the cost met by the government. However, in 2015 the Conservatives, guided by George Osborne, struck a deal under which the subsidy would be phased out by 2020, with the broadcaster having to shoulder the cost. The government later gave the BBC responsibility for deciding what to do about the benefit, meaning any unpopular decisions on charging over-75s had to be made by the BBC rather than ministers. Jim Waterson, Media editor Photograph: www.alamy.com

Free TV licences for over-75s were introduced by the then chancellor, Gordon Brown, in his 1999 budget to try to reduce pension poverty. He agreed that the cost of providing the universal benefit should be paid by the Department of Work and Pensions to the BBC to ensure the broadcaster’s budget was not hit.

However, in 2015 the Conservative government struck a deal under which the subsidy would be phased out and the broadcaster having to shoulder the cost from 2020 onwards. The government later gave the BBC responsibility for deciding what to do about the freebie, meaning any unpopular decisions on charging over-75s had to be made and owned by the BBC board rather than government ministers.

The shadow culture secretary, Tom Watson, said: “The government should never have privatised welfare policy in this way. The Tories promised in their 2017 manifesto that free TV licences for the over-75s would last until 2022. Any change to the current system means they will be breaching their manifesto commitment. The government should step in and save TV licences for the elderly.”

Older people are living longer, meaning the cost of providing the free licence is rising at the same time as the BBC is trying to attract younger audiences in the face of challenges from the likes of Netflix.

The average age of a BBC One viewer is now in their 60s – meaning a large proportion of people who consume many of the corporation’s flagship services are not paying for it.

Frontier Economics research commissioned by the BBC for its consultation concluded the number of households receiving a free TV licence will rise from 4.6m in 2022 to around 5.7m in 2030. It also found that the average over-75 was substantially wealthier nowadays than they were two decades ago when the subsidy was introduced.