Chancellor George Osborne slashed the top rate of tax for the biggest earners in his Budget, claiming that the controversial 50% rate was damaging the economy.
He pressed ahead with the move - unpopular with some Liberal Democrats - after revealing that an official report by the taxman had found it was raising "next to nothing".
He also reduced proposed cuts to child benefits paid to the better off.
But he increased the threshold at which everyone starts paying tax to £9,205, claiming millions of working people would be £220 a year better off as a result.
The cut in the top rate of income tax to 45p in the pound for all income over £150,000 from April 2013 was countered with a hike in stamp duty on homes worth over £2 million from 5% to 7%.
The Chancellor also confirmed a crackdown on various tax loopholes used by the rich including a 15% stamp duty rate on homes held through companies.
Overall, Mr Osborne claimed his measures would raise five times more from the wealthy than the 50% top rate introduced by Labour.
But Labour leader Ed Miliband said the Budget meant millions would pay more while millionaires paid less.
"It is a millionaires' budget that squeezes the middle," he said.
The Chancellor has been besieged with calls from the motoring lobby for a cut in fuel duty as forecourt prices have soared to record highs.
But Mr Osborne ignored them, declaring: "I do not propose to make any further changes to the fuel duty plans already set out."
He also dealt a blow to smokers saying that duty on all tobacco products would rise by 5% above inflation - slapping 37p on a packet of cigarettes.
The Chancellor also signalled that millions of workers may have to work longer before they can retire.
Mr Osborne told MPs: "I can confirm today that there will be an automatic review of the state pension age to ensure it keeps pace with increases in longevity."
That raised the prospect of ever longer working lives.
Mr Osborne also set a target for savings in the welfare budget of £10 billion by 2016.
However, there was some good news as he revealed that the withdrawal of British troops from Afghanistan by the end of 2014 meant military operations there would £2.4 billion lower than expected.
The Chancellor predicted slightly better than expected economic growth as he unveiled a Budget which he said "rewards working families and helps those looking for work".
There was good news in the Budget for business as the Chancellor announced another 1% cut in the rate of corporation tax from next month to 24%.
He said that by 2014, the rate would be 22% which is "dramatically lower" than competitors.
He said there would be no further changes to alcohol duty rates.
NEXT PAGE: Budget at a glance - The major points of the 2012 Budget >
Major points of the 2012 Budget:
* The Office of Budget Responsibility expects UK to avoid recession and is revising growth forecast for this year up to 0.8%.
* Inflation forecast to fall from 2.8% this year to 1.9% next year.
* Unemployment expected to peak at 8.7% this year.
* Borrowing forecast to fall from £126 billion this year - £11 billion less than forecast in Autumn Statement - to £21 billion by 2016/17.
* Cost of operations in Afghanistan to be £2.4 billion less than expected. Extra £100 million to be spent on armed forces accommodation.
* Consultation to be held on offering gilts - Government bonds - with maturity terms of more than 50 years.
* State pension age to be automatically reviewed to ensure it keeps up with growing longevity.
* Simplification of tax system for pensioners.
* Single-tier state pension to be introduced - estimated to be £140.
* "Major package of tax changes" to boost oil and gas extraction in North Sea, and £3 billion new field allowance west of Shetland.
* Tax credits for video games, animation and TV production in the UK.
* Funding for faster broadband in UK's 10 largest cities.
* Headline rate of corporation tax to be cut further from next month by one percentage point - to 24%. Future cuts to go ahead as planned.
* Bank levy to be increased to 0.105% from next January, raising £2.5 billion a year.
* Legislation for relaxed Sunday trading laws on eight Sundays during Olympics and Paralympics, starting July 22.
* No change in alcohol duty.
* Duty on all tobacco products to rise by 5% above inflation from 6pm tonight - 37p on a packet of cigarettes.
* New duty on gaming machines.
* Changes to taxation on gambling firms, imposing tax at the place of consumption to discourage online gambling moving offshore.
* Stamp duty charge on properties above £2 million through a company to rise immediately to 15%.
* Stamp duty rate of 7% on properties worth more than £2 million.
* Fair fuel stabiliser means above-inflation rises in fuel duty will return only if price of oil falls below £45 a barrel.
* Vehicle excise duty to rise by rate of inflation. Duty frozen for road hauliers.
* Government to consult on anti-tax evasion rules.
* 50p tax rate raised £1 billion - a third of the amount forecast.
* Top rate to be reduced from 50p to 45p from April 2013.
* Changes to taxation mean the Treasury will receive "five times more money each and every year from the wealthiest in our society".
* Personal tax allowances to rise by £1,100 from next April. Tax-free allowance to rise to £9,205, making 24 million people £220 a year better off.
* Personal tax statement will explain how taxation is spent.
* Reform of tax system for small firms and review of VAT.
* Child benefit to be reduced incrementally when one member of household earns more than £50,000. Child benefit will be removed completely at £60,000.