Universal Credit claimants with children could lose £1,000 a year in benefits, a think tank has warned.

The Department of Work and Pensions (DWP) has been told that low-income families with children will be worse off if the Government chooses to increase benefits in line with earnings instead of inflation.

The decision will be made by Chancellor Jeremy Hunt on October 31, but the Government has so far refused to rule out uprating benefits in line with earnings.

The Resolution Foundation warned that the decision would amount to a real-terms cut of £1,000 a year for families on Universal Credit.

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More than three million households would be set to lose more than £500, the think tank warned.

A working single parent with one child would lose £478, and a working couple with three children would lose £978.

A couple with one child only receiving Child Benefit would lose £52 a year, while a single disabled adult on Universal Credit would lose £380.

Adam Corlett, principal economist at the Resolution Foundation, said: “These cuts would come at a time when families are already set to struggle with rising prices, soaring mortgages, and the end of temporary support schemes.

“With benefits having repeatedly failed to keep pace with inflation over the past decade, this would see real income levels for Britain’s poorest families fall to levels not seen since the turn of the century.”

Imran Hussain, director of policy and campaigns at Action for Children, told Manchester Evening News: “Anything short of raising all benefits in line with inflation will blight millions more childhoods and weaken our future economy.

“In April when inflation was 9 per cent, the government raised benefits by only 3 per cent but promised they would ‘catch up’ next year.

“To renege on that promise now as prices continue to soar and struggling families head into winter is shameful.”

Work and pensions minister Victoria Prentis said no decision had been made yet as to whether the Government will raise benefits in line with earnings or inflation.