Image copyright Thinkstock Image caption The independent Institute for Fiscal Studies estimates the cost of the proposed change at £3.5bn.

A rise in the tax-free personal allowance to £12,500 during the next Parliament is being proposed by the Liberal Democrats.

Their general election manifesto will also pledge to consider, after the allowance rise, increasing the National Insurance threshold to the same level.

The £2,000 allowance rise by 2020 would be worth £400 a year to basic rate taxpayers, the party said.

Labour said the Lib Dems should "come clean" about how they would fund it.

The UK Personal Allowance - the amount you can earn in the UK before having to pay any tax - has risen during the current Parliament from £6,500 to its current level of £10,000. From next April, it is due to rise to £10,500.

Image caption Mr Alexander says the Lib Dems have already delivered "the biggest tax cuts for a generation"

"By cutting tax in this Parliament, cutting tax further in the next Parliament, and then moving on to National Insurance, we can make sure that over the course of a decade we shift the balance in the tax system - a generational shift - to help people in work," said Lib Dem Chief Secretary to the Treasury Danny Alexander.

Some 26 million working people would enjoy a cut in tax from the Lib Dems' proposed allowance rise, he said.

Mr Alexander added: "We want to make sure we have a tax system that rewards people who work, that rewards people particularly working on low and middle incomes.

"It puts the tax cuts where they are needed most."

'Broke promise'

Independent public spending researcher body the Institute for Fiscal Studies estimates such a change would cost £3.5bn.

It calculates the Lib Dem proposal would increase the personal allowance by £890 more than under normal inflationary rises, which would in fact be worth £178 a year for a basic rate taxpayer by 2020.

BBC political correspondent Arif Ansari said the change, if enacted, would effectively mean that anyone on the minimum wage would not pay income tax.

"But the party also has another challenge - how to make sure they win political credit from those who have benefited," he said.

Cathy Jamieson, Labour's shadow treasury minister, said: "Nobody will believe a word the Lib Dems say on tax.

"They backed the Tories in giving a huge tax cut to millionaires while breaking their promise not to raise VAT on everybody else."