Children, working couples and employees in training will all benefit from a string of US-style tax credits.
Building on the guiding principle of making work pay, Gordon Brown said the new credits would move Britain further away from the "old welfare state" and would help to abolish child poverty.
However, Tory and Liberal Democrat critics joined some charities to launch an attack on the "massive" expansion of means testing required by the new credits.
Some Labour MPs and ministers have also privately attacked the tax credit idea as a "personal obsession" of the Chancellor, claiming that the cash should instead be directed at public services.
The Treasury has already established the working families tax credit, a cash benefit that is paid to nearly 1.3 million families where one of the parents is working. The success of the scheme, with 400,000 more families receiving help than on the old family credit system, has persuaded Mr Brown to extend the idea to other areas.
Yesterday, Mr Brown confirmed that from 2003 a new integrated child credit will combine the working families' tax credit, the disabled persons' tax credit, income support/job seeker's allowance and the existing children's tax credit.
Legislation for the integrated child credit, which will cover more than 5 million families, will be published later this week and is intended to come into effect in 2003.
The Chancellor said the new support for children would be paid to families' main carer, usually the mother, which he said was "the best way to strengthen families". Mr Brown said: "The old welfare state we inherited paid out benefits without regard to individual circumstances or personal responsibility.
"For the first time, through tax credits, the tax system is paying money to families rather than taking it ... modernising the welfare state, encouraging work and helping families without stigmatising them," he told the Commons.
The tax credits are aimed at the "working poor", offering help to ensure that those in low-paid work receive more than those who simply claim state benefits. Administered through employers' payroll systems, they can result in a negative tax rate of 200 per cent for some poor families.
Mr Brown also confirmed that a new employment credit would be introduced for those in low paid work who did not have children. Legislation would be brought forward later this week.
A further £40 million pilot scheme would be set up with the aim of giving workers time off to boost their skills and companies tax credits for training their staff.
But David Willetts, the Shadow Secretary of State for Work and Pensions, said it was "absurd" to expect families to work their way through the complex and varied tax credits to which they were entitled.
"Gordon Brown is already into his second round of changes to these credits. He's not the Iron Chancellor, he's the Iron tinkerer. Worse still, there's no evidence that delivering benefits via the payroll has any effect on work incentives," he said.
"It is no wonder that they have been the cause of some recent friction with Downing Street, which wants more spent on public services than on welfare benefits masquerading as tax credits," said Mr Willetts.
Steve Webb, the Liberal Democrat work and pensions spokesman, warned that changes to the current children's tax credit could deprive 1.4 million families of all, or part of, their entitlement.
"The Government would appear to be making up the tax and benefit system as it goes along. If the Chancellor subsumes the children's tax credit into the new integrated child credit without altering the threshold for qualification, 900,000 families will face a hefty fall in their income," said Mr Webb.Reuse content