A "fairer and simpler" tax and benefits system was promised by the Government in the Queen's Speech today.
While Labour's planned National Insurance rise will go ahead for employees, the Conservative-Liberal Democrat coalition will use the cash to help cut the overall tax bill for low and middle- earners.
But employers will not be hit with the NI rise - dubbed a "jobs tax" by the Tories - that former chancellor Alistair Darling had proposed.
The Tories originally wanted to axe the NI rise, of 1% from next April, for most employees too.
But that plan was sacrificed in the coalition negotiations with the Lib Dems and will now be included in a National Insurance Contributions Bill.
The move will raise £9 billion, which will be used to fund a "significant" increase in the earnings threshold at which income tax is paid.
The Government says that, overall, most people will be better off under the combined tax measures than under Labour's plans and all "low and middle income" employees will pay less than they do now.
The first increase in the income tax threshold will be unveiled in the June 22 Budget, but the "longer-term objective" is to raise it to £10,000 - a Lib Dem manifesto commitment.
The NI rate rise will also finance an increase in the threshold at which that tax is paid, which will mean those earning under £20,000 pay less than they do at the moment.
The rate at which employers pay NI will rise but that will be offset by an increase in the threshold at which it is paid.
Also in the Budget next month will be a five-year roadmap for reform of corporation tax, reducing and simplifying rates to promote business.
An independent Office of Tax Simplication is to suggest reforms.
The Government is also promising to reduce the regulatory burden for business.
While aiming to reduce tax, the Government will also introduce a Welfare Reform Bill designed to better incentivise people to return to work.
Ministers want to get more than five million currently on benefits to take up jobs, by making clear the gains they stand to make by doing so.
There will also be efforts to reduce the massive amounts lost through fraud and error by cutting "unnecessary administration".
The earnings link to the basic state pension - broken under Margaret Thatcher's Conservative government in 1980 - will be restored from April 2011.