The income people can earn without paying tax will increase to more than £8,000 next year, George Osborne will announce in his second Budget.

The Chancellor will extend by £600 the £1,000 increase in the personal tax allowance that he unveiled last June. This means the allowance will stand at £7,475 from next month and at £8,075 from April next year.

The second increase will leave 25 million taxpayers an average of £45 a year better off, on top of a £170 boost from next month's rise. But 550,000 taxpayers earning more than £115,000 will lose an average of £45 annually.

The change will be trumpeted by the Liberal Democrats, who will argue they are on track to deliver their policy of a £10,000 tax threshold by the 2015 general election. It is designed to take one million people out of the tax net.