The Government is to waive VAT on sales of the Military Wives' Christmas single.
The Treasury will give the money to charity in lieu of the tax taken from sales of Wherever You Are, which looks set to be Christmas number one.
Chancellor George Osborne and Defence Secretary Philip Hammond are said to have struck the deal after Conservative MP Oliver Colvile called for the tax to be waived.
Osborne said: "Our armed forces demonstrate incredible commitment to the nation and make sacrifices for all of us.
"The Military Wives choir is doing a great job of raising money for this hugely worthy cause.
"We will donate the tax collected on the single so that as much as possible of the money spent by the public on this fantastic song goes to charities helping our armed forces and their families this Christmas."
Choir member Sarah Wall, 32, whose husband, Corporal Mark Wall, is a military policeman, said any tax move by the Government was welcome.
"I know when Gareth (Malone, their conductor) went to Downing Street he asked about it," the mother-of-two said.
"I'm glad they are behind us and they want to help us raise money and everything. It is brilliant that they are doing that."
Mrs Wall was speaking as she and fellow choir members went to their workplace at Tyspane Care Centre in Braunton, north Devon - where some of them will be working when they find if their single is the Christmas number one.
Last month the Government agreed to make a charity donation equivalent to the sum of VAT receipts collected on the sales of the X Factor's charity single Wishing on a Star.
The Military Wives were formed by Gareth Malone for BBC2 programme The Choir, which climaxed with the group performing at the Festival of Remembrance at the Royal Albert Hall.
Their song has become the fastest seller for six years and could hit the half-million mark by the end of the week, virtually guaranteeing a Christmas number one. The group is outselling this year's X Factor winners Little Mix by a margin of six to one, with 242,000 copies sold in two days, according to the Official Charts Company.
Proceeds from the single are being donated to the Royal British Legion and the Soldiers, Sailors, Airmen and Families Association.
The Christmas number one will be announced on BBC1 at 2pm on Christmas Day.