Lower income families will lose a majority of potential tax cut gains under Universal Credit (UC), a study suggests.

According to research from the Resolution Foundation, around three million working adults – the majority of which are from low-to-middle income households - could see two thirds of funds gained by any future tax cuts reclaimed by the Government through reductions in welfare support.

While a rise in tax allowance of £1,000 should result in a flat rate gain of £200 in post-tax income, research suggests this would be accompanied by a £130 loss for those receiving UC and equate to an overall gain of £70.

A similar impact would also be seen following the introduction of Labour's planned 10p tax band on the first £2,000 of income, the Resolution Foundation finds.

To counteract this issue, the Resolution Foundation said allowances for potential income earned under UC should be increased before the benefit is reduced. If this adjustment was to be made each time personal tax allowance was increased or a new 10p tax band introduced, additional UC allowance would compensate for reclaimed tax cut gains.

Chief executive of the Resolution Foundation, Gavin Kelly, said: ‘There is an impending collision between the agenda of using tax cuts to help lower-income families and UC which means that many households at the sharp end are set to lose most of the promised gains. This is a serious problem which must be fixed.'

Study author Donald Hirsch said: ‘Reducing taxes for most of the working population is not a well-targeted way to help low-income working families. There are more cost-effective ways of doing so, of which cancelling planned cuts in the real value of UC would be a start.'