60,000 households to pay tax at 90 per cent

The Government has been accused of creating a new poverty trap with recent changes to the tax credit and benefit system which risk penalising almost two million low earners trying to boost their income.

Thousands of the lowest-paid workers handed a pay increase or choosing to work more hours will be taxed as much as 90 per cent on their additional income because of losses in benefits and tax credits, according to analysis of figures in the pre-Budget report.

A total of 60,000 households receiving income-related benefits or tax credits will face handing 90p of every extra pound they earn to the Treasury next year, twice this year's total.

Those earning just above the minimum wage and receiving housing benefit are thought to be at the greatest risk of suffering from a very high "marginal tax rate", as small increases in the amount they earn could result in the loss of the benefit.

Single mothers returning to work are also thought to be among those hit. Currently, anyone working more than 16 hours a week loses their right to benefits. Opposition parties argue that this prevents women from working additional hours. The number of low-income households with a marginal tax rate of more than 60 per cent will grow by 85,000 to more than 1.9 million next year.

The Conservatives said that the high marginal tax rates risked becoming a disincentive for the low-paid to rise up the employment ladder.

Chris Grayling, the shadow Work and Pensions Secretary, said that he had met a low-income worker last week who had turned down a pay rise because of the consequences it would have on his tax credits and benefits.

"Once again Gordon Brown has let down hard-working, low-income families. It's simply not good enough that some of the poorest families face tax rates of over 90 per cent," he said. "This is yet another tax con trick buried in the pre-Budget report."

Vince Cable, the Liberal Democrats' Treasury spokesman, said that the Government would have to reassess its tax credits system to ease the problem. "The combination of income tax and national insurance, combined with the tax credit system, creates a serious disincentive to low-paid workers and makes it in effective prohibitive for some groups like single mothers to go out to work at all," he said.

The Treasury said that there was "little evidence" that changes to the tax credit system had led to workers choosing to work fewer hours.