Chancellor George Osborne will today offer a tax boost to millions of workers by raising the 40p income tax threshold. It will be a centrepiece of a Budget aimed at putting more money in the pockets of employees.

The tax windfall will be paid for by £12 billion of cuts to welfare payments and justified as a strategy for rewarding those who work. Child tax credits will be among those targeted.

However, he is expected to phase in the cuts more gradually, taking three years instead of two to reach his target – £8bn by 2017/18 and a further £4bn by 2018/9.

The personal tax allowance, currently £10,500 will be raised to £12,500 by the next election, in 2020. This would take most workers on the minimum wage out of the income tax system altogether.

He will also tell those demanding an end to austerity that they should look to the crisis in Greece for an example of what happens when a country loses control of its borrowing.

The Labour party will claim that he will make the poor pay for tax cuts for the middle classes. It will argue that more families will be pushed into poverty as a result of his cuts to child and housing benefits.