The new scheme - due to come into force from the autumn of 2015 - will be worth up to £2,000 per child, compared with the £1,200 originally proposed.
And it will apply to all children under 12 within its first year of operation rather than the seven-year programme envisaged when it was first announced by Chancellor George Osborne a year ago.
Around 1.9 million families could benefit, twice as many as under the present voucher scheme which is only available where adopted by an employer.
But the policy has faced criticism for excluding couples where one parent does not work and being available to high-earning households with a joint income of up to £300,000.
In a bid to counter criticism of a boost to better-off families, there will be a £50 million boost for nurseries looking after the most deprived three and four-year-olds.
And in what children's charity Barnardo's hailed as a "double victory" for the poorest families, it was confirmed that families claiming Universal Credit will have 85% of childcare costs met, up from 70%.
Details of how that would be funded "from within the Universal Credit programme" would be set out at the time of the Chancellor's Autumn Statement, Number 10 said.
With one charity estimating that the average family will be spending two fifths of their income on childcare within a decade, childcare has become a political battleground.
Labour said support for children and families had been cut by £15 billion since 2010 and dismissed the promise of a tax break after the next general election as "too little too late".
But Prime Minister David Cameron said it would "help millions of hard-pressed families with their childcare costs and provide financial security for the future".
Mr Cameron is due to make a joint appearance to highlight the package alongside Deputy Prime Minister Nick Clegg - who was expected to focus on the help for poorer families.
"As, together, we build a stronger economy for Britain, I'm committed to making sure that we create a fairer society too," the Liberal Democrat leader said.
"We want to ensure that everyone can get on and succeed."
The system will effectively allow parents to escape paying basic rate income tax of 20% on childcare costs of up to £10,000 - up from the proposed £6,000.
The self-employed and part-time workers would also now be covered by setting the lower earnings threshold at £50 per week and provision would also be made for those running fledging businesses.
The existing voucher scheme will continue for those already using it but be closed to new entrants.
Shadow minister for children Lucy Powell said: "David Cameron has cut support for children and families by £15 billion since he came to office.
"And today he confirms that no help will arrive until after the election. This is too little too late.
"Of course any childcare support is welcome but this Government has done nothing in this Parliament to help parents experiencing a cost-of-living crisis.
"Childcare costs have spiralled by 30% since 2010 and the Tories have rejected Labour's plan for 25 hours' free childcare for working parents of three and four year olds."
Anand Shukla, chief executive of the Family and Childcare Trust said: "Given that British parents pay more for childcare than in any other European country, today's news of extra help for families with the cost of childcare is both important and timely.
"The recent Family and Childcare Trust report showed that even part-time childcare costs outstrip the average UK mortgage bill, clearly demonstrating that childcare affordability is a national priority.
"We're delighted that the Prime Minister and the Deputy Prime Minister have today recognised that an investment in childcare is an investment both in our economy and in our future."
Barnardo's assistant director of policy and research, Jonathan Rallings, said research showed that poorer children could find themselves 15 months behind by the time they started school.
"Today marks a victory for the UK's most disadvantaged children, on which the Government should be congratulated," he said.
"We now look forward them boosting the nursery premium over time so that it eventually reaches the same level as the Pupil Premium."
The 4Children charity said the package was "positive and welcome" but pointed out that parents still faced having to find up to £8,000 for childcare each year.
Ahead of Wednesday's Budget, the Treasury made a fresh effort to counter claims that workers are not feeling the benefit of the economic recovery in their pockets.
Mr Osborne is expected to reveal dramatically upgraded growth forecasts but critics point to stagnation in average wages as evidence that the upturn is failing to ease a cost of living crisis.
Number 11 produced figures showing that people who had been in their job for at least a year - two thirds of the total - enjoyed above-inflation rises in all but one year - 2011 - since 2006.
Figures showing average pay packets being squeezed were skewed by some people being forced by the recession to switch to lower-paid roles, it suggested.
"Average wage growth has been dragged down by changes within the labour force, such as new entrants and those moving between jobs," its analysis said.
Shadow chief secretary to the Treasury Chris Leslie said: "Once again the Tories are desperately trying to tell people facing a cost-of-living crisis that they've never had it so good.
"In fact the latest figures show that under David Cameron real wages have fallen by over £1,600 a year.
"This analysis is totally out of touch with the real world. It ignores the one third of full-time workers who have not stayed in continuous employment and the 27% who work part-time."
Alison Garnham, chief executive of the Child Poverty Action Group, said: "The announcement that in future 85% of childcare costs will be met in Universal Credit is fantastic news and something we have been campaigning hard for.
"This is a vast improvement on what is currently on offer and it means for the first time in Universal Credit there will be positive work incentives for lone parents and second earners and this is unequivocally good news.
"It never made sense to give this level of support only to those earning above £10,000, so the Government has done the right thing and made it available to all.
"An Early Years Pupil Premium from 2015/16 for disadvantaged three and four-year-olds is a great move and will be crucial to changing the fact that childcare is often worse quality in poorer areas.
"This vital injection of funds could really begin to turn round the standard of provision for the most disadvantaged children and an additional £50 million makes an important move in this direction."
Challenged over why parents who do not work will miss out on the new tax-free childcare assistance, Mr Clegg told ITV1's Daybreak: "This is for working families, we have never hidden that, and it is important, I think, to provide support to those parents who are working or maybe want to work more, to allow them to do so.
"This will give them an extra bit of support so, if they want to work more, they can do so. We will be setting the threshold relatively low, so you just have to show you are earning £50 or more a week and it's being extended to those who are self-employed."
Asked whether Labour was right to say the Coalition had slashed £15 billion from support for children and families, Mr Clegg said: "No. If you tot up everything we are doing now to support childcare, we are providing about £5 billion worth of money - taxpayers' money - in one shape or form to support childcare, and what I am talking about today amounts to roughly another £1 billion - £750 million for the tax-free childcare offer and the rest making up the early-years pupil premium and the 85% of childcare costs for those on universal credit."
Mr Clegg said the "early-years pupil premium" will target money at toddlers and young children from the poorest families.
He declined to give any further details of what tax and benefit changes will be announced in tomorrow's Budget, but said he wanted to ensure that "as the economy recovers... more and more families feel some tangible benefit".
Speaking to BBC Radio 5 Live, Mr Clegg made clear that he is determined to ensure that the Liberal Democrats, and not the Conservatives, get credit from voters for the increase to £10,000 in the threshold at which workers start paying income tax, which comes into effect in April.
Mr Osborne is expected to extend this to £10,500 tomorrow, in a move which is thought to be designed to allow him to claim that the Conservatives have gone further than the Lib Dems promised in their 2010 manifesto.
Asked whether the £10,000 threshold should be seen as a Lib Dem or Tory achievement, Mr Clegg said: "Of course it's a Liberal Democrat policy. It was on the front page of our manifesto and it's now been transformed into the pay packets of millions of British taxpayers.
"It wasn't in the Conservative manifesto, it was only in the Coalition Agreement because I insisted that it should be. But of course it's been delivered by a coalition Government. This is the way coalition works. The parties bring different ideas to the table.
"Everybody knows I've been going on about this for over half a decade, while the Conservatives have been going on about inheritance tax cuts for millionaires, tax cuts for the very wealthiest, tax changes to give up your employment rights for shares.
"I've been utterly consistent, year in, year out, Budget in, Budget out, that my priority is helping people on middle and low incomes by raising the point at which they begin paying income tax."
Mr Clegg defended the decision to allow the help to be made available to couples with joint incomes of up to £300,000, insisting it meant the system was simpler.
He told the BBC Radio 4 Today programme: "People who are on higher than average incomes, yes, they will benefit from this.
"We decided to do that because, the more we looked at introducing a cut-off point at different income levels, the more complex it became."
The Deputy Prime Minister insisted that earners hit by the higher rate tax band - something Tory backbenchers want to reform in the Budget because the number of people affected has significantly increased - were paying less income tax under the Coalition.
"You have got to ask yourself are they paying a penny more of income tax? No, they are not. Are they actually paying less income tax? Yes, they are.
"In fact on average someone paying the 40% income tax rate is about £300 better off compared to May 2010 because we have raised the point at which you start paying income tax."