Universal Credit claimants will be able to keep more of the benefit as they earn more, as part of a £2.2 billion tax cut to help low-paid families with the cost of living and "reward work".
The taper rate will be cut by 8% "within weeks", bringing it down from 63% to 55%, Chancellor Rishi Sunak announced as he decried the "hidden tax on work".
The taper rate is the amount of benefit taken away from every £1 earned above the claimant's work allowance - meaning claimants will now be able to keep an additional 8p per £1 of net income.
Go here for the latest regional affairs and North East politics news
The move, which will take place no later than December 1, will ease the burden on claimants who are in work by providing more of an incentive to increase their hours.
But it does not compensate for the £20-a-week reduction earlier this month or do anything to help people who are not in work.
Mr Sunak said the current taper represents a "hidden tax on work" for many of the lowest paid in society and a "high rate of tax at that".
Announcing the change to cheers from the Commons, he said: "Organisations as varied as the Trades Union Congress, the Joseph Rowntree Foundation, the Resolution Foundation, the Centre for Policy Studies and the Centre for Social Justice, have all said it is too high.
"So to make sure work pays and help some of the lowest income families in our country keep more of their hard-earned money, I have decided to cut this rate not by 1%, not by 2%, but by 8%."
The amount that households with children or a household member with limited capability for work can earn before their Universal Credit (UC) payments are reduced will also be increased by £500 a year.
Mr Sunak added: "This is a £2 billion tax cut for the lowest paid workers in our country.
"It supports working families, it helps with the cost of living and it rewards work."
The changes mean that nearly two million families will keep on average an extra £1,000 a year, he said.
This is less than a third of around six million households hit by the removal of the £20-a-week UC uplift which came into effect this month.
Also in the spending review, Mr Sunak said the national living wage will increase by 6.6% to £9.50 an hour from next April.
And he said the Government is investing an extra £170 million by 2024/25 into paying for childcare.
Responding to the Budget, Labour's shadow chancellor Rachel Reeves said "never has a Chancellor asked the British people to pay so much for so little".
She said: "After taking £6 billion out of the pockets of some of the poorest people in this country, he is expecting them to cheer today at being given £2 billion to compensate."
Institute for Fiscal Studies director Paul Johnson tweeted: "Big cut to Universal Credit taper. And increase in work allowance. Targeted at working claimants. Out of work UC claimants get nothing.
"Trade-offs as ever. Improves work incentives for current recipients but will drag more into the system."
Morgan Wild, head of policy at Citizens Advice, welcomed the change to the taper, but said it "doesn't cushion the blow of the £20-a-week cut for those still looking for work or the 1.7 million unable to work because of disability, health issues or caring responsibilities".
He added: "Given the cost-of-living crisis, the Government must ensure every family is able to access the support they need this winter."
For the latest local breaking news direct to your inbox as it happens, go here to sign up to our free newsletter.