Anyone earning less than £12,500 would pay no income tax under plans being considered by senior Tories.
The move, already supported by Liberal Democrats, is seen as a key measure to help people cope with the rising cost of living. It comes as ministers publish legislation today that would also see £2,000 slashed from the tax bill of every small business.
The proposals would also see new rules put in place to protect small firms when a bigger company refuses to pay bills on time.
The push comes after David Cameron’s conference speech, in which he promised to help hard-working people “keep more of their money”.
The Government has already pledged to stop anyone earning under £10,000 paying income tax by next year.
But senior Conservatives believe raising the personal allowance to £12,500 will help fend off attacks from Labour over the cost of living. It is believed the measure would go further to helping those on low incomes than the energy price freeze touted by Opposition leader Ed Miliband.
In March’s Budget statement, Chancellor George Osborne also promised to introduce an “employment allowance” to benefit small businesses.
Details of the reforms, in legislation published today, show 1.25 million firms could benefit from a £2,000 tax cut — 450,000 of whom will no longer pay any national insurance at all. Tory small business champion Karren Brady said: “This means businesses will be able to hire one extra person on £22,400 a year, or four people working full time on the minimum wage, without paying any National Insurance.
“That’s great news for British business and the British economy. But most of all it’s great news for small businesses.”
The proposed laws could also see larger firms hit with big penalties if they fail to pay suppliers on time.
Introducing the measure today, Mr Cameron will say: “It’s not right that suppliers are not getting paid on time. I know that late payments can have devastating effects on our small and medium sized businesses.”
It comes after Business Secretary Vince Cable was left disappointed by the reception big business gave to a voluntary code on prompt payment floated earlier this year.
Fewer than half of the firms in the FTSE 350 group signed up.
