The personal tax allowance is to be raised by £600 this year in an emergency measure to compensate those who lost out by Gordon Brown's decision to scrap the 10p tax band, the Chancellor announced today in a stunning political climbdown.

The change will cost £2.7 billion and would be funded by borrowing, Alistair Darling told MPs, and would mean every basic rate taxpayer will pay £120 less tax this year. "This will mean that 22 million people on low and middle incomes will gain an additional £120 this year," he said.

Mr Darling, who faced a huge backbench backlash over the scrapping of the 10p tax band, said the one-off change was the "fairest and most effective way" to help those who lost out. He said he was bringing forward the proposals from his pre-budget report as a one-off statement.

The Conservatives, however, said it was "humiliating" for Mr Darling to have to come forward to give an emergency "mini budget" in order to correct the mistakes made by his predecessor, Gordon Brown, which were set out in his last budget before becoming Prime Minister.

The Chancellor said that today's one-off measures, which would be legislated in this year's Finance Bill, would:

- See personal tax allowances raised to £6,035, a move which would be backdated to the start of the tax year on April 6. This would benefit all basic rate taxpayers under the age of 65.

- Benefit 4.2million of the 5.3m households which had lost out when the 10p tax rate was scrapped. The remaining 1.1 million would have their losses at least halved.

- Lead to basic rate taxpayers getting a one-off increase of £60 in September, followed by a monthly increase of £10 for the rest of the year.

- Be financed from borrowing so as not to take money out of the economy while it was slowing.

- Not affect high-earners, as the 40p rate threshold would move so that their tax bills would not change.

The Chancellor's statement was designed to head off a huge political row over the scrapping of the 10p tax rate, which had angered Labour backbenchers. Party activists added that it had also caused disquiet on the doorstep ahead of this month's disastrous local elections.

Francis Elliott, deputy Political Editor of The Times, said that the issue had been badly mishandled. "The whole thing is grievously embarrassing, but if it stabilises the Government at a time when it seemed that it was really on the slide, then it will be adjudged to be worthwhile from their point of view," he said.

"At the time news of the 10p tax rate rebellion broke, the Treasury said it did not have any more money to sort this out. It has now suddenly found the ability to borrow £2.7 billion. As always, the next 24 hours will be crucial in order to see what the small print says."

However George Osborne, the Shadow Chancellor, said the move amounted to presenting a mini-budget to correct previous mistakes, and represented electioneering ahead of the forthcoming by-election in Crewe and Nantwich.

"Let no one be fooled about why the Chancellor is making this statement today: not because he wanted to, not because of any sense of guilt that they are hitting the low paid, not because the Prime Minister thinks it is the right thing to do, but because this divided, dithering and disintegrating Government is panicking in the face of the Crewe and Nantwich by-election," he said.

He added: "The Prime Minister who once commanded so much respect from friends and foes alike now looks like the unelected leader desperate to save his skin, cowering before every electoral challenge and insulting the intelligence of the very people he has hurt."

Times Recommends

• Shrinking violet Gordon turns into raging bull
• Eddie Izzard: 'I keep thinking if I do all these things she'll come back'
• Is sex for the disabled the last taboo?