The new tax credit will also include a childcare credit on a much more generous scale than the childcare element of the current benefit for families on low earnings.
The move will coincide with the introduction of the national minimum wage and the reform of national insurance in a package of measures, to be announced in next month's Budget, designed to make work pay for those on low earnings.
The package will be on the same scale as the Government's New Deal - for which it raised more than pounds 5bn from the windfall tax on privatised utilities - although the Government also expects the measures to reduce the bill for income support.
Dawn Primarolo, Financial Secretary to the Treasury, made it clear yesterday that the Government had backed away from a radical early version of the new tax credit. This is believed to follow the advice of Martin Taylor, head of the task force on tax and benefit reform, whose report will be published around the same time as the Budget.
Gordon Brown, Chancellor of the Exchequer, said in the House of Commons yesterday: "We plan to build on our pounds 4bn Welfare to Work programme by unveiling in the Budget the second phase of our plan to modernise the welfare state."
The initial proposals were criticised because they would have posed a threat to the independent taxation of husbands and wives, and could have taken money away from many low-paid women, putting it in their husbands' pay packets instead.
Ms Primarolo said, in a speech to the Women's Budget Group: "There is no threat to independent taxation from the working families tax credit. Nor would there be a compulsory transfer of resources from women to men." Couples could elect who would receive the credit, she said.
The new working families tax credit is designed to make it plain that work pays. Unlike the existing credit it will not be a benefit payment. It will be administered by the Inland Revenue rather than the Benefits Agency.
The Treasury has indicated that there will be an option for women to receive the new tax credit through their local post office, in which case it would be deducted from their husband's pay packet. In addition, although couples would have to make a joint claim to the Inland Revenue, just as they jointly apply for family credit, there will be no question of abolishing independent taxation. Critics had feared that the need for an Inland Revenue assessment of the household's income would make joint taxation inevitable.
Chris Giles, an expert at the independent Institute for Fiscal Studies, said: "It looks like the Government is rebadging family credit, and paying it through the pay packet. They have ended up with something reasonably sensible."