More than one million low-income earners would be taken out of the income tax net altogether under Liberal Democrat plans to raise the tax-free personal allowance to close to £13,000.
Danny Alexander, the Chief Secretary to the Treasury, signalled that the move was likely to be in the party’s next manifesto, by declaring that no one earning the minimum wage should have to pay tax.
The personal allowance is set to rise to £9,205 in April and to £10,000 in 2014, fulfilling a key Liberal Democrat demand in negotiations over the Coalition agreement.
But Mr Alexander said: “We want to go even further, so that someone working full time on the minimum wage pays no income tax at all and those on low and middle incomes receive further big tax cuts.”
It is thought the allowance would need to rise to about £12,900 to cover full-time earnings on the adult minimum wage.
Mr Alexander’s intervention is a response to the Labour leader Ed Miliband’s announcement of his party’s support for a new 10p rate of income tax to ease the burden on the low-paid.
The Labour plan would pay for the new rate with a “mansion tax” on homes worth more than £2m, which would apply to about 70,000 homes and raise about £2bn a year,
Mr Alexander said: “The Labour Party’s pale imitation at fairer taxes is a 10p rate gimmick designed to distance themselves from the tax rises they imposed when in government.
“The Lib Dems are the only party that will radically cut taxes for people on low and middle incomes.”
Grant Shapps, the Tory chairman, said this week he would “love” to raise the tax threshold above £10,000.