Pre-Budget report sees Darling raise National Insurance
Alistair Darling: "This will raise £3bn a year from 2011"
National Insurance will go up by 0.5% more than previously planned from 2011 and public sector workers face a 1% pay cap, Alistair Darling has announced.
In his final pre-Budget report before a general election, the chancellor also announced a bank bonus tax and a home boiler scrappage scheme.
He said he wanted to promote growth without "wrecking" recovery.
But the Conservatives accused him of putting off tough decisions on spending because of the coming election.
The party said there would be tax and interest rate rises if Labour won the election as a result.
But a senior Conservative source told the BBC they would not oppose the bank bonus tax - even though they believe there were serious questions about how easy it would be for banks to find ways of avoiding it.
He said the increase in National Insurance contributions - which is on top of existing plans for a 0.5% rise - was the announcement the Tories would work hardest to avoid because it was "a tax on the many and not the few".
In his speech, Mr Darling said "fairness" was the cornerstone of his plans, telling MPs: "Those on modest incomes are protected. Those on middle incomes will pay more depending on their earnings. The biggest burden will fall on those with the broadest shoulders."
And in a foretaste of the looming general election battle, he said the choice was between going for growth or putting the recovery at risk - a choice between "two competing visions".
National Insurance up by a further 0.5% from April 2011
Economy to shrink by worse than expected 4.75% this year
New 50% tax on banker bonuses
Household boiler scrappage scheme
1p rise in corporation tax for small firms scrapped
But he was also forced to admit that the recession in the UK had been worse than he predicted last year.
He said the economy would shrink by 4.75% in 2009 compared with his Budget estimate in April of 3.5%.
And the public finances were also deeper in the red with a deficit of £178bn this year compared with the £175bn he had predicted.
Mr Darling has been under pressure to show how Labour would halve the deficit in four years.
He said he could not spell out in detail where the spending axe might fall - because the spending review has been delayed until after a general election - but said frontline public services would be protected.
BBC political editor Nick Robinson said Alistair Darling "promised gains now and pain later - after the election to be precise" adding that "much more pain remains hidden deep inside his budget calculations which imply huge cuts in many government departments".
In his speech lasting just over 50 minutes, Mr Darling unveiled a series of belt-tightening measures including a cap on public sector pay rises of 1% for two years from 2011 - sparking trade union anger.
Mr Darling said contributions from the state to the pensions of teachers, local government and health workers and civil servants would also be capped, saving £1bn a year.
TUC general secretary Brendan Barber, who broadly welcomed much of the chancellor's statement, said: "Public sector workers - many of whom are low paid - should not have to pay the price for a crash they did nothing to cause."
In his pre-Budget report Mr Darling identified savings of £5bn in five areas, including cuts to government IT and "outsourcing" prisons.
'Tax on jobs'
He also unveiled a one-off tax on bank bonuses over £25,000, to be paid by the banks rather than individuals, which he said would raise £550m.
The National Insurance announcement will hit about 10 million workers. According to Treasury estimates, someone earning £30,000 will be £90 a year worse off and someone on £40,000 will be £190 worse off, while someone earning £10,000 a year will be £110 better off.
Mr Darling said the changes would raise £3bn a year.
No one will ever believe a word they say on the economy again
The move was immediately attacked by the CBI business organisation as an "extra tax on jobs" which would harm the UK's recovery.
The chancellor also said he was freezing income tax thresholds, with an additional 70,000 people due to become higher-rate taxpayers.
Sterling weakened and the price of UK government bonds both weakened slightly following Mr Darling's statement.
But BBC business editor Robert Peston said there was little cause for alarm: "The UK is neither closer or further from losing its AAA credit rating, or suffering a sterling crisis, or being unable to borrow from international investors."
In his speech, Mr Darling told MPs unemployment would continue to rise for some time, but stressed that tackling it would remain the government's top priority.
'Bingo and boilers'
He said that from next month no-one under 24 needs to be unemployed for longer than six months - down from the current 12 months - before being guaranteed work or training.
He also announced that a 1p increase in Corporation Tax for smaller companies is to be deferred, leaving the 2010 tax rate unchanged.
The basic state pension will rise by 2.5% in April. From next year's Budget, Bingo duty is to be cut from 22% to 20%.
GUIDE TO PRE-BUDGET REPORT
Each year the chancellor delivers two reports to MPs, updating them on the state of the economy and planned fiscal changes.
The pre-Budget report (PBR) takes place in the autumn with the Budget each spring.
This year's PBR is Mr Darling's third since he became chancellor in June 2007.
Mr Darling also unveiled an extension of free school meals to more primary school children from low income families in England - and earned a cheer from Labour MP by announcing a crackdown on tax avoidance and evasion including the use of offshore tax havens.
He also announced a freeze in the £325,000 inheritance tax allowance.
Green initiatives in the report included tax rebates for electric cars and wind turbines and a boiler scrappage scheme along the lines of the car scrappage scheme.
Shadow chancellor George Osborne attacked the credibility of Labour's figures, telling MPs: "They have lost all moral authority to govern today."
"Every family in the country is going to be forced to pay for years for this prime minister's mistakes."
He added: "No one will ever believe a word they say on the economy again."
Lib Dem treasury spokesman Vincent Cable said it was clear from Mr Darling's statement that the UK's economic position was "still very grave".
He said: "What we needed was a national economic plan and what we have got is an election manifesto."
He told MPs he welcomed "small" initiatives such as help for young people and environmental issues but joked: "This is a good Budget for bingo and boilers."
SNP Treasury spokesman Stuart Hosie said: "Instead of slashing the Scottish government's budget by £500m, the Chancellor should have announced he was scrapping Trident - saving £100m and ridding Scotland of this obscene weapon of mass destruction."
Elfyn Llwyd, of Plaid Cymru, said the National Insurance increase "may well become a tax on jobs".
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