Chancellor of the Exchequer George Osborne is considering reducing child tax credits for millions of working families as part of its plan to slash the welfare budget by £12bn ($18.6bn).
Osborne's allies are studying an idea by the Institute for Fiscal Studies think tank to return tax credits to 2003/4 levels, plus inflation, making a saving of £5bn, the BBC has reported.
This would roll back completely the programme first introduced by the then Chancellor of the Exchequer Gordon Brown to help working families on low incomes.
The IFS said that the change to child tax credit would cut entitlements for about 3.7m low-income families by about £1,400 a year.
Sources close to the Chancellor believe the move would incentivise work because these tax credits "papered over" poverty in the UK rather than seeking to address its "root causes".
The IFS has calculated that for the poorest families it would mean a reduction of £845 per child per year. A family with two children, where at least one parent works full-time, would see their tax credit entitlement running out at £28,847 of gross earnings - rather than £32,969.
Tough fiscal choices
David Skelton, director of the Conservative pressure group Renewal, told BBC Two's Newsnight on 10 June that he agreed the tax credit bill could be lowered.
"The issue at the moment is that we are facing tough fiscal choices," he said. "What I would like to see is the burden moved away from the taxpayer and from the state towards some big profitable employers.
"The point is you have a lot of employers who are basically getting subsidy from the state for low paid work and we'd like to see a shift towards those employers who can afford to pay the living wage to pay the living wage.
"To encourage workers to work more hours if they can, if they are working part time at the moment. And also get to see a higher minimum wage over time as well.
"So that shift in the burden should come from the state towards employers over the medium term."
The UK can no longer "paper over the cracks of in work poverty", he added.
However, Stephen Timms, Labour's acting work and pensions secretary, said plans to cut £12bn from the welfare budget would hit "working families and children hard".
"It's clear that David Cameron and George Osborne's plan will make working families less secure," he told the programme.