George Osborne is targeting housing benefit to pay for a partial climb down on tax credit changes, according to a government source.
Mr Osborne has faced stiff resistance from both political opponents and Conservative rebels over plans to slash tax credits for millions of working families.
The government also suffered a humiliating defeat in the House of Lords, after peers voted to force a rethink of the policy and delay the changes.
Under plans announced in the Summer budget, around three million working families would lose £1,300 a year in vital income. Osborne is looking to save £4.4bn from the tax credits bill, as part of a £12bn cut in overall welfare spending.
The Chancellor proposed increasing the taper rate for Universal Credit to reduce the impact of the vicious cuts, meaning those affected would lose 75p of each pound taken home over the earnings threshold – rather than 65p.
Opponents argue that the move would undermine work incentives, by removing the principle that Universal Credit rewards people for moving into work or taking on more hours.
However, it was reported that Iain Duncan Smith threatened to resign if Osborne raided the Universal Credit budget to mitigate the cuts.
Allies of the Work and Pensions Secretary say he has managed to fend off the Chancellor, who is now said to be targeting deeper cuts to housing benefit instead.
Iain Duncan Smith is reportedly looking at a social housing shared ownership scheme, in an attempt to bring down the £24.6bn housing benefit bill. Tenants living in social housing for longer than three years will be offered 70% of the equity in the home and rent the remaining 30%.
Meanwhile, Osborne is said to be bringing forward plans to increase the income personal tax allowance.
Conservative rebel Stephen McPartland said over the weekend that the “majority of Tory MPs now agree with me that the Chancellor must drop these proposals as they stand”.
He added: “The simple fact is that for those families on very low incomes, these changes will hurt them not help them.
Mr McPartland also revealed figures obtained from the House of Commons Library, showing that hundreds of thousands of people claiming child tax credit would also be affected.
“The Chancellor now has to come forward with measures not only to mitigate the effects of the changes to tax credits, but to guarantee to protect families’ child tax credits”.
A government source told the Sunday Times: “Iain’s won the day. No one wants him resigning. Housing benefit is now being looked at instead.”
However, they warned that less severe cuts to tax credits are still likely to go ahead. “There are still questions around universal credit but you’re not going to see anything like 75p”, they said.
George Osborne will reveal his full plans in the Autumn Spending Review on 25 November.