The Government has dropped controversial plans to ban workers from opting to pay their union subs directly from the payroll under a so-called "check-off" system.
Public sector unions had warned the move would have cost it millions of pounds, and potentially lead to the loss of huge numbers of members.
The Government's decision emerged during a debate in the House of Lords on the Trade Union Bill.
A Government spokesman said: "This agreement will remove the taxpayer-funded administrative burden on public sector employers by transferring the cost of paying subs to individual unions. We continue to encourage union members to pay their subs directly to their union to forge a closer relationship with their workplace representatives."
TUC general secretary Frances O'Grady said: "We are delighted the Government has listened and backed away from ending check-off in the public sector.
"Banning workers from choosing to pay union subs in a convenient way through their payroll would, as many have warned, damaged industrial relations and morale in key services.
"Today's decision is the result of months of union and TUC lobbying and we are glad of the support from peers of all parties and none.
"While this is an important milestone, the TUC remains opposed to the Trade Union Bill in its entirety and will continue to push for further changes when it is debated again in the House of Commons next week. We will be urging MPs to back sensible amendments from the Lords around the use of electronic balloting, facility time and union political funds."
Unison general secretary Dave Prentis said: "There's much that's wrong with the Trade Union Bill, but banning unions from using the check-off system to collect membership fees from employees in the public sector was among the most mean-spirited of all its proposals.
"Employers and unions across the public sector will have breathed a collective sigh of relief at today's news that there has been a sensible change of heart in Westminster. And there's no cost to the public purse as a result of this decision."
Mark Serwotka, leader of the Public and Commercial Services union, said: "This is welcome news and shows the pressure we are applying is working, but the Trade Union Bill is rotten to the core and no amount of tinkering by the Government can change that.
"The proposals are a vile cocktail of everything that is wrong with the Tories' approach to working people and our economy, and the bill should be scrapped in its entirety."