The Chancellor used his Budget to set out a £65 billion spending package this year and next year to support the economy as it recovers from the pandemic.
But he warned that the unprecedented spending could not continue and he had to be "honest" about putting the nation's finances back on a sustainable footing.
The point at which people begin paying income tax will increase to £12,570 in April but will be maintained at that level until April 2026, meaning more people will be dragged into paying tax as wages increase.
The 40p rate threshold will increase to £50,270 and then be frozen. Mr Sunak said: "Nobody's take-home pay will be less than it is now, as a result of this policy.
"But I want to be clear with all Members that this policy does remove the incremental benefit created had thresholds continued to increase with inflation."
Corporation tax will increase from 19 per cent to 25 per cent in 2023. But a new "small profits rate" will maintain the 19 per cent rate for firms with profits of £50,000 or less - meaning around 70 per cent of companies - 1.4 million businesses - will be "completely unaffected" by the tax hike.
And there will be a taper above £50,000, so that only businesses with profits of £250,000 or greater will be taxed at the full 25 per cent rate - around 10 per cent of firms.
Mr Sunak said: "So yes, it's a tax rise on company profits. But only on the larger, most profitable companies. And only in two years' time."
Mr Sunak said there would be a "super deduction" for companies when they invest, reducing their tax bill by 130 per cent of the cost.
Later in his Budget speech, Mr Sunak revealed a host of policies designed to help rebuild the economy after it recovers from the pandemic.
The UK's first infrastructure bank, which will channel billions of pounds into capital projects, will be based in Leeds, while 750 senior civil servants will be moving to a new Treasury base in Darlington.
The Humber and Teesside are among eight sites to be hosting new low-tax freeports with different rules to make it easier and cheaper to do business, in what Mr Sunak said would provide an "unprecedented economic boost across the United Kingdom".
And the two coastal areas, both of which elected their first Conservative MPs in decades at the last General Election, will see new port infrastructure built to support the next generation of offshore wind projects.
The Towns Fund, which sees up to £25m invested to help regenerate towns around the country, is to be extended to benefit areas including Castleford in West Yorkshire
While economists have largely agreed that measures to repair the nation's finances are not needed immediately, while the economy is still being hit by the coronavirus crisis, the need for medium-term action was underlined by the Office for Budget Responsibility forecasts.
Mr Sunak said: "The OBR's fiscal forecasts show that this year we have borrowed a record amount: £355 billion. That's 17 per cent of our national income, the highest level of borrowing since World War Two."
Next year borrowing is forecast to be £234 billion, 10.3 per cent of gross domestic product (GDP), a measure of the size of the economy, "an amount so large it has only one rival in recent history - this year".
"Without corrective action, borrowing would continue at very high levels, leaving underlying debt rising indefinitely."
The Budget measures will see borrowing fall to 4.5 per cent of GDP in 2022-23, 3.5 per cent in 2023-24, then 2.9 per cent and 2.8 per cent in the following two years.
Underlying debt rises from 88.8 per cent of GDP this year to 93.8 per cent next year, it then peaks at 97.1% in 2023-24, before stabilising and falling slightly to 97 per cent and 96.8% per cent in the final two years of the forecast.
The Chancellor said the recovery from the economic damage caused by coronavirus will be "swifter and more sustained" than previously thought.
But he warned it would take "a long time" to rebuild and pledged to do "whatever it takes" to support people.
The OBR expects the economy to return to its pre-Covid level by the middle of next year - six months earlier than they previously thought - but Mr Sunak acknowledged that "coronavirus has done and is still doing profound damage".
He told MPs that despite the £280 billion of support already committed to protecting the economy the damage done by the virus has been "acute".
"Our economy has shrunk by 10 per cent - the largest fall in over 300 years. Our borrowing is the highest it has been outside of wartime.
"It's going to take this country - and the whole world - a long time to recover from this extraordinary economic situation. But we will recover."
The Chancellor said the OBR expects the economy will be three per cent smaller than it would have been in five years' time because of the coronavirus crisis, but that the economy is forecast to grow this year by four per cent, by 7.3 per cent in 2022, then 1.7 per cent, 1.6 per cent and 1.7 per cent in the last three years of the forecast.
In his Budget the Chancellor:
- Extended the stamp duty holiday from the end of March until the end of June, then a new £250,000 threshold will apply until the end of September.
- Confirmed the extension of the furlough scheme until the end of September, although employers will be expected to make a contribution from July.
- Extended the five per cent reduced rate of VAT for the tourism and hospitality sector to the end of September, with an interim rate of 12.5 per cent for another six months after that.
- Continued the business rates holiday for the retail, hospitality and leisure sectors until the end of June, with a two-thirds discount for the remaining nine months of the year.
- Announced the temporary £20-a-week increase in Universal Credit payments will continue for a further six months.
- Set out a new Recovery Loan Scheme to replace previous coronavirus loan packages, allowing businesses of any size to apply for loans from £25,000 up to £10 million through to the end of the year, with the Government providing lenders with an 80 per cent guarantee.
- Froze all alcohol duties for the second year in a row and scrapped a planned increase in fuel duty.
Earlier in the day, Mr Sunak told Ministers the impact of coronavirus on the national finances cannot be ignored, but the UK can be "optimistic about our recovery", as he updated the Cabinet ahead of the Budget.
The Chancellor said the pandemic had hit the economy hard and "we must be honest with ourselves and the country about what that has meant", with borrowing pushed to wartime levels, according to a Downing Street summary of the meeting.
In a sign that he could set out tax rises to begin addressing the public spending black hole, Mr Sunak said "we know that we cannot ignore this problem and it wouldn't be right or responsible to do so".
But Mr Sunak said he will also use the Budget to outline support "to get people through to the other side of the crisis" - with the furlough scheme and other financial lifelines set to be extended - and set a course for an economic bounceback.
A Downing Street spokesman said: "The Chancellor said that, while we face challenging times, we will rise to that challenge and we can be optimistic about the recovery. He said the Budget will begin the work of building our future economy."