British scientist Prof Stuart Parkin has won the 2014 Millennium technology prize worth €1m (£824,400) for research that has led to a phenomenal increase in the storage capacity of digital devices and heralded the era of cloud computing.

The Watford-born physicist told the Guardian he planned to use the money to buy a house in Halle, Germany, but was aiming for a low-key celebration.

"I will celebrate the award by inviting my fiancée to the Vendôme restaurant in Schloss Bensberg, one of our favourite restaurants in Germany for very special occasions," he said.

The physicist joins past winners including the inventor of the world wide web, Sir Tim Berners-Lee, Linux creator Linus Torvalds and pioneer of dye-sensitised solar cells Michael Grätzel.

Launched in 2004 and presented every two years, the Millennium technology prize is awarded by Technology Academy Finland and is backed by Finnish industry and the Finnish state. This year's ceremony takes place in Helsinki on 7 May.

"It's fantastic," said Parkin. "It's a great prize. Wonderful scientists and technologists won it before, so of course I am greatly honoured to have been chosen."

An IBM Fellow based at the Almaden Research Centre in California and director of the Max Planck Institute of Microstructure Physics, Parkin was selected as winner for his "pioneering contribution to the science and application of spintronic materials, his work leading to a prodigious growth in the capacity to store digital information," the committee said.

Reacting to the announcement, Prof Mark Miodownik, an engineer and materials scientist at University College London, said: "Music, literature, film and television have all become an important part of our digital lives, this has only been possible because of the brilliance of people like Stuart Parkin, who has pioneered the magnetic materials that squirrel it away into the interstices of atoms ... If you carry around your whole digital life in a portable hard drive you have people like Stuart Parkin to thank."

Parkin's major achievement was the application of a phenomenon known as giant magnetoresistance (GMR) to create extremely sensitive devices that can detect tiny magnetic fields.

This is of great importance in magnetic disk drives where information is stored as "bits" – zeros or ones – represented by regions of the disk magnetised differently. The more sensitive the detector is, the smaller the magnetic regions and fields need to be to store the information. This means more data can be packed on to a hard disk drive.

"It's enabled us, essentially, to store all information that we have – in digital form. And this wasn't possible before," said Parkin. "What this little sensing device enabled was a 1,000-fold improvement in the storage capacity of magnetic disk drives without changing their cost."

GMR was independently discovered by physicists Albert Fert and Peter Grünberg in the late 1980s; they shared the Nobel prize for physics for their work in 2007. The phenomenon arises when atomically thin layers of magnetic and non-magnetic materials are stacked on top of each other.

In a simple arrangement, a non-magnetic layer (typically copper) is sandwiched between two magnetic layers. These magnetic layers behave like bar magnets pointing either north or south.

When a current is induced in this sandwich, electrons move through the layers. The degree of hindrance they experience is different depending upon an intrinsic quantum mechanical property of them called "spin".

This 'spin' can be aligned to the direction of the bar magnet or against it. Electrons with a spin in one direction will move more freely, so the flow of the current can be controlled by the relative arrangement of the bar magnets of the top and bottom layers.

Parkin's achievement was to develop a device based on such "spintronic" effects in which tiny magnetic fields from magnetised regions that store data within the disk drive can rotate the direction of magnetisation in one of the layers of the sandwich. The result is a sensor that rapidly experiences large changes in resistance as it reads the disk drive.

In contrast to the expensive and difficult techniques used by Fert and Grünberg to create the layers, Parkin made use of a simpler technique known as sputtering.

"I showed that you didn't need these very exotic techniques but one could actually [use] a much simpler technique which was compatible with mass manufacturing," he said. Importantly Parkin also showed that GMR is a more common phenomenon than initially thought, and can be seen at room temperature.

The spin-valve read head was commercialised by IBM in 1997, but Parkin went on to develop the technology further in the form of magnetic tunnelling magnetoresistance – a closely related approach that is even more sensitive to tiny magnetic fields and is now replacing spin valves.

The boom in storage capacity has facilitated the rise of numerous internet-based services, from Twitter to iPlayer, that make use of cloud storage based on magnetic disk drives.

Parkin is keen to see nanotechnology yield further innovations. "I think atomic layer engineering will enable us to create interesting new technologies in the future – not only for storing data but for computing and manipulating data," he said.

"One of my main interests is in trying to build what I would call cognitive devices, devices that we could use for memory or logic that in some sense are inspired by how we compute in our own brain."

Dr Andrew Ferguson of Cambridge University's Microelectronics Research Centre, said: "Prof Parkin is an outstanding experimental physicist who has pushed forward the frontier of spin-based electronics with numerous discoveries that are important for computer memory technology. The award of the Millennium technology prize will be extremely well received across scientific and industrial communities."

The science minister, David Willetts, said: "Congratulations to Prof Parkin. The success of this British born scientist demonstrates how the world of science and innovation is a truly global endeavour. I hope his achievement will inspire and encourage others to support our work to stay ahead in the global science race."