AROUND 29 million people will see their income tax bill reduce after the Chancellor announced a modest first instalment on the Conservatives' pre-election promise to raise personal allowances.

Claiming that the government's "priority is to cut taxes", George Osborne said the personal allowance had been raised from £6,500 to £10,600 in the last parliament - though he did not refer to the coalition - and the government had pledged to raise it to £12,500 during this one.

"We will keep that promise," he said. In 2016-17, the personal allowance will increase by £400 to £11,000. As a result, a basic rate taxpayer will be £80 better off in 2016-17 compared to 2015-16, and £905 better off compared with 2010.

A similar pre-election pledge for a higher rate tax threshold of £50,000 was also being met, Mr Osborne said, though next year will see a somewhat modest step towards it. The higher rate threshold will rise £42,385 to £43,000 for 2016-17, but it is the first above-inflation increase since 2010. It will lift 130,000 people out of 40 per cent tax, while a typical higher rate payer will be £142 better off compared with this year and £808 better compared with 2010.

The government will legislate to ensure that once the personal allowance has reached £12,500, it will always at least match the equivalent of 30 hours a week on the national minimum (now national living) wage.

Mr Osborne said: "The best way to support working people is to let them keep more of the money they earn."

However Anthony Thomas, chairman of the Low Income Tax Reform Group, commented: "We have always said that increasing the personal allowance for tax is not the most efficient way of boosting the incomes of the low-paid. Universal credit and other means- tested benefit claimants who earn more than the level of the personal allowance will see their benefit entitlement reduced as their net income goes up in response to the rise in the personal allowance.

"On the other hand, those earning below that level will receive no advantage at all from the rise in the personal allowance. Only those claiming tax credits (which are based on gross income) or those not on any kind of welfare will benefit in full."

The much-feared cuts to tax relief on pension contributions, particularly valuable for higher rate taxpayers but a source of huge tax loss to the Treasury, have been shelved in favour of a Green Paper.

It floats options which include a fundamental reform of the system to scrap tax relief and treat pensions like Isas, while allowing for a government "top-up" on contributions.

But Calum Cooper a partner at Glasgow-based consultants Hymans Robertson said: "If the tax relief on contributions is removed as per the pensions Green Paper, then public sector workers could actually be faced with a pay cut. Removing tax relief will mean that many will be hit with an unexpected tax bill."

He added that ending tax relief would speed up even further the closure of private sector final salary schemes, already under pressure from low interest rates and changes to the state pension next year.

Paul Gallagher, tax partner at EY Scotland, said: "While harmonising pensions and Isas on the Isa model would simplify the tax regime it would mark another huge shift for savers, employers, the pensions industry and the future economy.

"A generation who save through Pension Isas will pay no further tax once they retire, while making ever increasing demands on the healthcare system. The tax revenue from their contributions will have been long spent."

Plans to allow people in receipt of annuities to cash them in have been put back to 2017 to allow for proper examination of the issues, the government has said. But its Pension Wise guidance service is to be extended to people over 50.

A million people will pay less tax on their investments, the chancellor said, when the 40-year-old dividend tax credit is scrapped and replaced with a tax-free Dividend Allowance of £5,000 a year. After that the tax rates will be 7.5, 32.5 and 38.1 per cent for the three tax bands. He said 85 per cent of investors would see no change, and dividends paid in Isas and pensions would remain tax-free.

Charlotte Barbour at Scottish accountancy body ICAS said: "In terms of tax administration, it is a very welcome step with the forthcoming devolution of income tax."

Meanwhile the widely-expected rise in inheritance tax relief, enabling a couple to pass on a home worth up to £1million free of IHT, comes in the form of a £175,000 property top-up, phased in over three years from 2017, on the current individual tax-free band of £325,000.

Anyone with an estate worth more than £2m will see the additional allowance gradually clawed back.

Mr Gallagher said: "For most people the changes will have little impact given house prices across the UK. In reality the Chancellor has simply introduced a 'Home Counties IHT band'. The very rich will not benefit, due to the cap on the relief, and nor will many homeowners where their house is below the existing limits."

Mr Osborne said the Help to Buy Isa, where the government tops up a £12,000 saving over five years with a £3,000 bonus, would open to first-time buyers from December 1.

He said the Equitable Life Payment Scheme would close on December 31, and funds still undistributed would be used to double the lump sums paid out to those among the oldest policyholders who are on pension credit.