In his Budget 2011 speech to the House of Commons this afternoon, Osborne announced that the amount employees can earn before paying tax will be increased by £630 from April 2012.
As already announced, the point at which any income tax starts to be paid - known as the 'personal allowance' - will rise by £1,000 to £7,475 from 1 April this year. With the new increase it will add up to £326 every year extra.
As a result of this change, the Institute for Fiscal Studies (IFS) estimates that 500,000 people will no longer pay income tax.
Today's announcement will increase this number to 1.1 million people and the chancellor confirmed it would not pull any more workers into the higher rate of tax.
Commenting on the increase, Mike Hayes, a principal at tax advisory firm Kingston Smith, said: "It is fair that personal allowances are being increased to go with the VAT rise [to 20%]. It was a big part of the Liberal Democrat manifesto to raise personal allowances to £10,000 and I think it shows the Government demonstrating it wants to look after the less well off."
However, considering Osborne had pledged a 'Budget for growth', Justin Govier a partner at IBB Solicitors, has reservations about today's announcement. "I am not sure how raising personal allowances would help promote growth. This Budget has posed a real challenge and the Government needs to concentrate on making a difference, rather than making headlines."
Figures released on Tuesday showed the Consumer Prices Index annual rate of inflation had risen to 4.4% in February, up from 4% in January, driven by food, fuel and clothing costs.