Middle-class parents could keep their child benefit after all

Cameron hints at U-turn as Coalition insists defeats in Lords will not halt welfare reforms

The Government's controversial decision to withdraw child benefit from people earning more than £43,000 may be softened in the March Budget.

Chancellor George Osborne said in 2010 that families with at least one taxpayer on the 40p-in-the- pound rate would lose their child benefit in January next year. He presented the change as part of his "we're all in it together" mantra, but there are growing fears among Conservative MPs that middle-income families, who do not regard themselves as rich, will be hit badly.

David Cameron is thought to be worried that the shake-up will alienate women, as signs grow that the Coalition is losing their support.

In an interview with Parliament's House Magazine, Mr Cameron acknowledged criticism that the change would penalise single-earner families with an income just above the 40p tax threshold, while a two-earner family with a higher income would keep their child benefit. "Some say that's the unfairness of it, that you lose the child benefit if you have a higher-rate taxpayer in the family. Two people below the level keep the benefit. So, there's a threshold, a cliff-edge issue," he said."We always said would look at the way it's implemented and that remains the case, but again I don't want to impinge on the Chancellor's Budget.

"If we want to make sure that everyone makes a contribution to dealing with the deficit, that's why we had to look at measures like taking child benefit away from higher-rate taxpayers," he added.

Mr Osborne's dilemma is that he will not want to make changes which reduce the planned £2.5bn savings and the Liberal Democrats are likely to argue that the move should go ahead to show that relatively well-off people are taking their share of the pain of cutting the deficit. Mr Cameron might favour a tweak rather than headlines about another government U-turn. But he is under pressure from Tory MPs to avoid upsetting their party's natural supporters.

The Chancellor's options include means-testing child benefit by taxing it, restoring tax credits to higher-rate taxpayers or rolling child benefit into the proposed universal credit aimed at simplifying the benefits system – all of which could be problematic. He could raise the level at which the 40p tax rate starts to bite or reduce the losses for families with more than one child. Child benefit is worth £20.30 a week for the first child and £13.40 for each subsequent child.

Yesterday the Government insisted controversial benefit cuts for the sick and disabled must go ahead despite three defeats in the Lords. Nick Clegg faced a party backlash for defending the cuts. Baroness Tongue, a Liberal Democrat peer, said: "I just don't know what's happening to Nick Clegg. He doesn't seem to be thinking straight."

Downing Street signalled it might invoke a rarely used procedure to overturn the Lords decision when the Bill returns to the Commons. Classifying it as a money measure could limit the ability of peers to amend it.

In numbers...

7.7m The number of families who currently receive child benefit.

£12bn Annual cost to the Treasury of the benefit, which at current rates is paid at £20.30 for a first child, and £13.40 for each subsequent child.