Ministers’ claims that millions of poor families hit by Budget income tax changes will see their losses offset by more generous tax credits were undercut yesterday by a senior Treasury official, who admitted that low take-up of these benefits was not expected to improve.

Just a quarter of hard-pressed working couples who do not have children claim the tax credits to which they are entitled, official figures show.

Ministers have insisted that they want to see take-up of the benefits increase. However, the Treasury’s top tax and welfare official admitted to MPs yesterday that Budget figures assumed that this would not actually happen.

Mark Neale, the Treasury’s managing director for the budget, tax and welfare, said: “We haven’t forecast what the increase in the take-up of the working tax credit will be . . . We assume take-up rates in line with the current rate.”

The independent Institute for Fiscal Studies calculates that a fifth of households, or about 5.3 million people, will be left worse-off by the Budget, which cut basic-rate income tax to 20p, in 2008, but also scrapped the 10p starting rate.

Pressed by Michael Fallon, a Conservative member of the Commons Treasury Committee yesterday, Mr Neale confirmed that this estimated figure of a net 5.3 million losers from Gordon Brown’s measures was “in the right ballpark”.

Last week, the Treasury argued that many of those who have lost out would see their losses offset by claiming increased tax credits.

Yet about two million of the seven million people entitled to claim working tax credit and child tax credit do not do so. The complexity of the system and of forms required to make claims has left it beset by problems and has hit take-up.

Mr Neale’s admission that take-up of credits by many of the key people affected is not expected to improve came as pressure on Mr Brown grew after government figures showed a renewed rise in child poverty and income inequality in the previous financial year.

The official figures showed that 2.8 million children in 2005-06 were living in households classed as below the poverty line — defined as those with incomes of under 60 per cent of the national median level. This marked an unexpected increase of 100,000 from 2004-05 and a serious setback for Mr Brown’s ambition to halve the number of children in poverty by the end of the decade. Numbers of people classed as in extreme poverty — on under 40 per cent of median incomes — have also risen by 400,000 since 1997, and by a further 200,000 last year, the official data showed.

Controversy over this news was stoked by Jim Murphy, the Welfare Reform Minister, who said poor families should work their way out of poverty and refused to make a commitment to further increases in benefits.

Mr Neale’s comments were seized on last night by George Osborne, Shadow Chancellor, who claimed that they “blew a hole” in the Budget. “The Chancellor claimed that his income tax increases on the lower-paid would be offset by tax credits — but how can they be offset if tax credits are too complicated to be claimed?” he said.

The Treasury hit back. A spokesman said: “Tax credits provide support to 20 million people and take-up is higher than any previous system of income-related financial support for inwork families. The Government continues to work to improve take-up further.”

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