FAMILIES are paying the price of Tory failures with a “collision” between universal credit (UC) and child benefit leaving some facing effective tax rates of at least 80 per cent, research reveals today.

Analysis by the Resolution Foundation has found that a growing number of families with children in England and Wales will find their pay packets hit hard in 2023 due to the clash of policies between the two welfare systems.

The two systems for withdrawing child benefit and UC were originally intended to support distinct parts of the population, according to the think tank.

But a decade-long cash freeze in the £50,000 threshold at which child benefit begins to be withdrawn will mean that about 50,000 families will see the support removed at the same time as UC is also removed.

Resolution Foundation senior economist Karl Handscomb said: “Freezing the child benefit threshold for over a decade has led to marginal tax rates rising to over 55 per cent for 600,000 families.

“But 50,000 families will face tax rates of between 80 and 96 per cent where they are also seeing their UC payments reduced with each extra pound they earn.

“The number of families affected by this double whammy is set to almost double by the end of the decade.”

Under the current system, families on UC often pay high marginal deduction rates.

The Resolution Foundation estimates that three million working adults pay effective tax rates of 69 per cent or higher due to paying income tax and National Insurance contributions alongside having UC withdrawn as their earnings increase.

The think tank has said that the freeze on the child benefit threshold since 2013 has led to one in 13 families with children, or about 600,000, facing similarly high tax rates.

“Some may be surprised that families containing someone earning over £50,000 can receive UC,” the report said.

“This isn’t, of course, the typical position of most families on UC but for those with high housing rents, or with significant childcare costs, it is perfectly possible.”

The foundation is warning that a collision between the two systems has led to the “highest marginal deduction rates in the UK” — 80 per cent for families with one child, 83 per cent for those with two children, and 87 per cent for three children.

It warns that accounting for student loan repayments and pension contributions, the rates could rise as high as 96 per cent for three-child families, with fears that around 90,000 families could be caught up in a high-tax-rate situation by 2030.

One solution would be to raise or withdraw the child benefit withdrawal threshold, the foundation said, costing up to £4 billion.

Another option would be to integrate child benefit into UC, but the think tank warned that it risks cutting support for some lower and middle-income families.

“This ‘children’s benefits mess’ needs cleaning up as it creates huge complexity and disincentives for these workers to seek higher pay,” Mr Handscomb said.

“But the government faces significant challenges in fixing this problem, as the solutions are either expensive, or deal a major blow to families’ finances.”

A Treasury spokesperson said the government is committed to supporting families with children, adding it has increased child benefit in line with inflation this year along with other changes to UC, energy caps and taxing.

They said the government plans to more than half inflation next year, though government strategies have so far ignored the role of corporate profiteering in driving inflation.