Every soldier serving in Afghanistan and Iraq will get a cash bonus to wipe out their tax bill, it was revealed today.
The Defence Secretary Des Browne is set to make the announcement today, according to sources at the Ministry of Defence.
The move is designed to put troops on an even footing with their US counterparts, who do not pay tax while in war zones.
Last week it was reported that Prime Minister Tony Blair had ordered a review of the whole support package available to Armed Forces personnel.
And it has already been revealed that all British troops wounded while fighting in Iraq and Afghanistan will receive an extra allowance of £10 per day while they are in hospital overseas.
Existing separation allowances and at-sea bonuses will also be extended to cover personnel who are in hospital.
Other measures announced last week included additional travel expenses for families visiting service personnel in hospital, free delivery of postal parcels over the Christmas period and improved access to broadband internet connections.
An MoD spokesman confirmed that Mr Browne was due to make a statement to the Commons today.
Speaking on BBC Breakfast, Mr Blair said: "I think it is important that we recognise that what our troops, and indeed the troops of many other countries, are going through today, because of what has happened in the past few years, is something quite different from what they have faced really over the last few decades.
"So I think it is important that we make some recognition of that."
He said the the work of the troops in places such as Afghanistan, where there has been "really, really tough" fighting, was vital to world security.
Mr Blair, on a visit to a community centre in east London, said it was important to give British troops some "recognition" for the work they are doing.
He said: "Our troops are doing very tough and vital work in situations tougher than anyone could imagine. We have got to give some recognition for the work that they are doing."
Chancellor Gordon Brown, delivering a speech on security issues in London, said it was "right" that the armed forces should be "properly rewarded".
He said British forces already earned "significantly more than their US counterparts and the majority of international forces".
"But the Secretary of State for Defence and I have agreed that we can go further and increase the award our forces receive when on operational service in the most dangerous conflict zones.
"This will seek to ensure that the extraordinary job our forces do and the risks they take and the danger they endure is once again acknowledged, making them amongst the best paid of any armed forces in the world."
Labour MP and defence expert Bruce George (Walsall South) commented later: "This is admirable news and I despise anyone who thinks otherwise."
Mr George, who was chairman of the influential Commons Defence Committee from 1979 to 2005, said it was galling for British troops in Iraq and Afghanistan to discover from their foreign counterparts fighting alongside them that they were not paying tax.
He said: "It might not seem much to everyone else, simply paying tax, but if you are facing daily danger on behalf of your country then special respect should be shown for the work that you do.
"I wish it had come in much earlier. The Government cannot absolve these troops from paying tax, but at least they can be given a sum of money which off-sets it. I am very pleased."Reuse content