Chancellor George Osborne is ready to make a partial climbdown on cuts to child benefit in the face of a growing revolt by Conservative MPs, who fear alienating middle-class supporters.
The plans, which will soften the blow to higher-rate taxpayers, will be in the Budget this month.
Mr Osborne said in 2010 that child benefit would be axed from next January from families with one earner paying the 40p higher rate of tax, due to hit incomes of £42,475 from April. After pressure from David Cameron, the cut-off point is set to rise to about £50,000.
"A lot of options are on the table and this is the leading one," a government source said. "There is a big effort going on to take some of the sting out of the child benefit change."
Mr Cameron and Mr Osborne will aim to broker a deal this week with Nick Clegg and Danny Alexander, the Liberal Democrat Chief Treasury Secretary.
The Chancellor is resisting Lib Dem calls for a wealth tax – either through a mansion tax on £2m-plus homes, a hike in council tax for the most expensive properties, or halving tax relief on pension contributions for taxpayers on the 40 per cent rate to 20 per cent.
Mr Clegg wants a wealth tax to fund a faster than expected rise in personal tax allowances to £10,000 a year to take low-income families out of the tax net – the Lib Dems' flagship policy.
Mr Osborne says a tax cut must be funded by a tax rise or spending cut elsewhere. He is under pressure from Tory MPs and business to reduce the 50p top rate of tax on earnings over £150,000. Although it forms part of his Budget negotiations with the Lib Dems, Mr Osborne is nervous that cutting the top rate would be deeply unpopular and reinforce the Tories' image as the "party of the rich."
The partial re-think over child benefit cuts, which will reduce the Treasury's £2.5bn-a-year eventual savings, will be welcomed by Tory MPs.
Labour said the plan for a £50,000 cut-off would not remove an unfair "cliff edge". Families with one earner on £51,000 would lose all child benefit while those with two earners both making £49,000 would keep theirs.
Today Labour will try to stoke a Tory rebellion by proposing a review of the child benefit shake-up in a Commons debate. Ed Balls, the shadow Chancellor, said: "Labour supports the principle of universal child benefit, but if the Government is determined to make changes it would be better to do so in a fair and workable way."
Last night Labour issued figures showing thousands of families will be better off if they quit their jobs after changes to tax credits which will take effect next month.
Ministers revealed in a parliamentary answer that some families with children could be £728 per year better off out of work when they lose working tax credits. Couples with children and who earn less than around £17,700 must increase the number of hours they work from a minimum of 16 to 24 hours per week – or lose all their working tax credit of £3,870 per year. Some 212,000 couples will be hit unless they increase their working hours.
Mr Balls said: "Tax credits were introduced to help make work pay. But this unfair and damaging change will mean thousands of families will lose £73 per week and will be better off if they quit work. That cannot be right. The Chancellor must act urgently in the Budget and stop this tax credits bombshell for thousands of working parents."
In numbers: child benefit
£50,000 Likely new salary threshold to be announced in the Budget at which child benefit will be removed. The current cut-off is at £42,475
7.8m Number of families that claim child benefit
3 Number of years for which the rates have been frozen from April 2011
£12bn Amount of child benefit claimed annually
£20.30 Weekly payment for first child, plus £13.40 for each additional child