What is happening?

The personal tax allowance, which determines the level of income you need to earn before paying tax, is to be raised by £600 this year from £5,435 to £6,035.

In a related move, the level of income needed to pay higher rate tax of 40 per cent has been dropped from £41,435 to £40,835.

Why is this necessary?

The increase in the allowance has been hurriedly introduced to compensate those who lost out from Alistair Darling’s decision to scrap the 10 per cent tax band, which had sparked a huge backbench rebellion.

How will people benefit – and when?

The change to the tax allowances will be backdated to the start of the tax year on April 6. Basic-rate taxpayers under the age of 65 will see a one-off increase in their monthly income of £60 in September. This is the earliest that the Treasury says it can get its systems in order to deal with the change and covers six months’ payments since April. This will be followed by a monthly increase in after-tax pay of £10 for the rest of the year. Overall, basic rate taxpayers will get an extra £120 in their pocket.

Who will be the big winners?

Basic rate taxpayers whose earnings fall roughly between £17,000 and £40,000. They didn’t lose out when the 10 per cent tax band was removed and some even benefited. They will get the extra £120 even though they were no worse off anyway.

Will anyone lose out?

No, but 1.1m workers will still be worse off. The £120 will not be enough to compensate them for the cut in take-home pay they suffered when the 10 per cent tax band was scrapped. This mostly affects the very low paid, earning £13,000 or less.

Someone who earns just £8,000 a year, for example, is £230 worse off as a result of the disappearance of the 10 per cent tax rate, according to Price Waterhouse Coopers, the accountant. Even after they have received the extra £120 they will still have £110 less in their pocket by the year end.

I am a higher-rate taxpayer. How does this affect me?

It doesn’t. You will be no better or worse off.

Won’t the drop in the higher rate tax threshold mean more people pay tax at 40 per cent?

The Treasury estimates that an extra 150,000 people will be dragged into paying higher rate tax for the first time. However, it claims that they will still be better off as the extra tax they will be forced to pay will be offset by the £120 they gain.