In his Budget 2013 speech, Osborne announced that one third of all employers will pay no jobs tax at all as a result, equating to 450,000 small businesses.
He said: "The last Government put a tax on jobs but this Government has announced a tax off jobs.
"This means an employer can hire one worker on £22,000 a year or four workers on minimum wage."
The employment allowance will be implemented in April 2014. He also announced a reduction in corporation tax to 21% next year, and a reduction to 20% in April 2015.
Ian Brinkley, director of The Work Foundation, said: “The new Employment Allowance for new hires is likely to be less wasteful than some past schemes, but will only have a limited impact on the labour market."
He added: “The Budget measures will have no measurable impact on economic prospects. The priority should have been significant new investment in science, technology and innovation and in measures to address youth unemployment, rather than corporation tax cuts.
Osborne said the Budget was designed to create an "aspiration nation".
"This Budget is for those who want to work hard and get on, for those people who want to start their own business, who want to buy their first home and it's a Budget for people who want save for retirement and help their own children."
The chancellor paid tribute to British businesses in the private sector who helped create six new jobs for every one lost due to cuts in the public sector.
Osborne again reiterated his call from the Autumn Statement that Britain is competing in a "global race" and this country is sending a message to companies who want to invest that "Britain is open for business".
In other measures Osborne announced a cap of 1% on public sector pay while exempting the military to "recognise their good work". He is also doubling to £10,000 the loans employers can offer tax-free to pay for items like season tickets for commuters.
Osborne cut his official growth forecast in half, but insisted the UK would avoid a "triple dip" recession.
He said growth in 2013 would be 0.6% – half the 1.2% he predicted four months ago in his Autumn Statement.
His revised forecast is for the UK's national debt to rise to 85% of GDP and not start coming down until 2017/18– a year later than previously predicted.
But the chancellor predicted the deficit would continue to come down thanks to the "many tough decisions" taken by the Government.
He said the deficit had fallen from 11.2% of GDP in 2009-10, to a forecast of 7.4% this year – a fall of a third.
Labour leader, Ed Miliband said it was a "downgraded Budget from a downgraded chancellor" and will result in "higher borrowing and lower growth".