Four million people, including a million single parents in work, will lose out when the Government streamlines the benefits system next year, according to new research.
Gingerbread, which campaigns for lone-parent families, warned that the Coalition would "give with one hand and take with the other" when the Universal Credit is introduced from October 2013.
The new system will discriminate against low earners who currently rely on tax credits to top up their wages, the charity says.
Gingerbread describes the setback as an "unintended consequence" of the Coalition's flagship policy – pushed by the Liberal Democrats – of raising the amount of money people can earn before they start paying tax, which will rise to £9,205 next year.
For every £1 of extra income, benefits will be reduced by 65p. So a £1,000 increase in the personal tax allowance will give £200 per year to every basic-rate taxpayer except those on universal credit, who will gain only £70.
Gingerbread called for an urgent review of the Government's plans to ensure that low earners can keep more of their gains from higher tax thresholds and that all workers benefit equally from future rises in the personal tax allowance.
Fiona Weir, the group's chief executive, said: "Unless remedial action is taken, those who lose out will be hard-working people whose wages still don't bring in enough to pay for their family's day-to-day essentials, including the majority of working single parents.
"We find it hard to believe that the Government would design two schemes to support people into work and lift their families out of poverty and yet have one effectively cancel out two-thirds of the other, but as things stand, the Treasury will be giving with one hand and taking with the other."
In its report published today, Gingerbread says: "At present, a £1,000 increase in the personal tax allowance is worth £200 per year to every basic-rate taxpayer, because they pay 20 per cent tax on £1,000 less of their income.
"This is true whether or not people are on tax credits, as these are calculated on the basis of total earnings without reference to how much tax a household is paying. Universal Credit, on the other hand, will be assessed on the basis of post-tax income, with people getting less of the credit the higher their income is after tax.
"The simplest solution would be to increase the earnings disregard in Universal Credit to give all workers the same benefit from increases to the personal tax allowance."
A Department of Works and Pensions (DWP) spokesperson said: "The fact is that Universal Credit will increase benefit payouts by £2bn, help to lift 900,000 adults and children out of poverty, and 2.8 million households will have higher entitlements as a direct result of the new benefit. Most importantly, Universal Credit will make work pay and end a system that penalises people who do the right thing to boost their income by going out to work."
Case study: 'I feel like I'm pedalling very fast and getting nowhere'
Angela Chicken is a single mother from Southampton who works for 16 hours a week.
She said: "We hear time and again from the Government how it is helping people on low incomes like me, but in practice I am rarely better off financially from any of the new policies.
"It's a struggle every day for me to cover the essentials while I juggle working and looking after my son.
"I already feel like I'm pedalling very, very fast and getting nowhere. I'm run ragged to be around £20 a week better off by working and it's hard to see how that will get any better under welfare changes.
"The Government should target support where it's really needed and help us to support our families."Reuse content