Theresa May has scrapped the £65 fee millions of EU citizens were going to have to pay to secure the right to continue living in the UK after Brexit.
It came as the prime minister made a statement to MPs on how she plans to get them to back a Brexit deal.
She said she would have further discussions with Northern Ireland's DUP and others on their concerns about the Irish backstop.
She will then "take the conclusions of these discussions back to the EU".
MPs are due to vote on any proposal next Tuesday, after the PM's original plan was defeated last Tuesday by a record-breaking 230 votes in the House of Commons.
Millions of EU citizens living in the UK will have to apply for "settled status" to remain in Britain after Brexit.
Applicants must have lived in the UK for five years and had been expected to pay a fee of £65 each.
"Settled status" gives EU citizens the same access to health care and education after Britain leaves the EU.
Mrs May told MPs she had listened to the concerns of EU citizens, through their campaign group the 3million, about the fees and they would be waived when the scheme was launched on 30 March.
The government has launched a pilot scheme this week for people to apply for leave to remain, through a smartphone app.
Mrs May said anyone "who has, or will, apply during the pilot phase" will have their fee reimbursed, with further detail to be announced shortly.
The move was welcomed by Labour leader Jeremy Corbyn.
In her statement to MPs, Mrs May again dismissed calls for another EU referendum, saying: "Our duty is to implement the decision of the first one.
"I fear a second referendum would set a difficult precedent that could have significant implications for how we handle referendums in this country.
"Not least, strengthening the hand of those campaigning to break-up our United Kingdom.
"It would require an extension of Article 50. We would very likely have to return a new set of MEPs to the European Parliament in May.
"And I also believe that there has not yet been enough recognition of the way that a second referendum could damage social cohesion by undermining faith in our democracy."
Mr Corbyn accused her of of being in "deep denial" about the scale of opposition to her "undeliverable" deal, which was rejected by 230 votes in a Commons vote last week.
He said Labour would back an amendment next week that would rule out the "disaster" of a no-deal Brexit - and he challenged her to confirm that she would do that if MPs voted for it.
Mrs May attacked the Labour leader for refusing to take part in talks with her on the way forward.
She also looked ahead to the next phase of negotiations on a post-Brexit trade deal, promising to give MPs and the devolved administrations in Scotland, Wales a greater say.