Tax-free £10,000 earnings likely 'within two years'

People earning under £10,000 a year are set to be excluded from paying income tax within two years after the Government moved to speed up its reform of the system.

From April 2013 no-one with an income of less than £9,205 a year will pay tax, which, George Osborne claimed, would result in the lowest-paid being £170 a year better off.

It is now likely that a £10,000-a-year tax-free threshold will be announced in next year's Budget – ensuring that the Liberal Democrats meet their key election pledge.

The measure had been a demand of Nick Clegg and his party in the Budget negotiations in return for agreeing to cut the basic rate of tax from 50p to 45p.

Announcing the move as a highlight of the Budget, Mr Osborne said: "Every working person on low or middle incomes will benefit.

"Because higher-rate earners will also benefit, 24 million people earning less than £100,000 a year will gain from this measure. We are in touching distance of the goal of £10,000 personal allowance that we all share."

But Liberal Democrat strategists fear that the policy is already being hijacked by the Conservatives.

In his Budget speech, Mr Osborne even used the phrase "going further and faster" to announce the increase – a key slogan of Mr Clegg and the Liberal Democrats' Treasury chief secretary Danny Alexander in the run up to the Budget statement.

They are concerned that voters still fail to associate the party with the policy which they regard as central to portraying the Liberal Democrats as the progressive side in the Coalition at the next election. Trying to counter that impression, Mr Clegg said Liberal Democrats should take credit for the central direction of the Budget.

"(We should be) proud of the fact that we're halving the tax bill for people working on the minimum wage and proud, very proud, that we are taking over two million people on low pay out of paying any income tax altogether," he said.

But critics point out that the policy could conversely end up helping the wealthier taxpayers as much – if not more than the poor. Two-earner couples, who tend to have higher family incomes, will benefit twice over from the increase in the personal allowance because both members of the couple would see their income tax liabilities fall.

As the respected think tank the Institute for Fiscal Studies has put it: "It will strengthen work incentives, especially for low earners. But it is important not to claim too much for a policy which, especially in the current fiscal climate, is expensive."

Rachel Reeves, shadow secretary to the Treasury, said the rise in tax personal allowance was not enough.

"Ed Balls said ahead of the Budget the best way of getting money in the pockets of ordinary people was a cut in VAT, but we said we would support an increase in personal allowance. But numbers from the Institute of Fiscal Studies shows that from next month the average family is going to be £530 worse off each year, and these changes only help by about £170."