Tax adjustments will make 25 million households better off

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 their £170 boost from next month's rise. But 550,000 taxpayers earning more than £115,000 a year 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 flagship policy of a £10,000 tax threshold by the 2015 general election. It is designed to taking one million people out of the tax net and gives most basic-rate earners an annual £700 income-tax cut.

Mr Osborne will also try to head off criticism from Tory MPs, who are worried about alienating middle-class voters, by not reducing further the threshold for the 40p tax rate from 2012. The threshold will, however, still fall from £37,401 to £35,001 of taxable income next month, drawing 750,000 people into the higher rate. Nor will that threshold rise in line with inflation next year.

Mr Osborne will also announce a £250m scheme to help first-time buyers and the construction industry. Those earning less than £60,000 a year who are trying to get a foot on the housing ladder will need to raise only a 5 per cent deposit instead of the normal one of up to 25 per cent. The other 20 per cent will be funded equally by the Government and the construction industry by an interest-free loan repayable when the home is sold. The programme should result in an extra 10,000 new homes being built, providing work for 40,000 people in the building industry.

The Chancellor is also expected to halt the rise in fuel duty due next month and to set up a mechanism to protect motorists from increases in the global oil price by lowering the duty on petrol.

The Liberal Democrats will welcome Mr Osborne's announcement that a £3bn green investment bank will be up and running by 2015 to fund low-carbon projects such as wind and tidal power – £2bn more than originally envisaged.

Although the Chancellor will announce a series of measures to help small firms in his "Budget for growth", the independent Office for Budget Responsibility will downgrade its forecast from last November that the economy would grow by 2.1 per cent this year.

Tax protests for London

Anti-cuts protesters have said they intend to "turn Trafalgar Square into Tahrir Square" when they take to the streets on Saturday in what organisers are predicting will be the largest demonstration in recent years.

Drawing inspiration from the protests across the Middle East, the campaigners announced their intention for a round-the-clock occupation of the tourist landmark. "We have seen time and again that marches from A to B do not achieve their objectives," said Michael Chessum from the National Campaign Against Fees and Cuts. "We want Trafalgar Square to become a focal point for the ongoing occupations, marches and sit-ins."

Kevin Rawlinson