The chancellor said he would not go ahead with the plan to raise the child element of the child tax credit by £110 above the rate of inflation in 2012-13, saving nearly £1bn.
He will also freeze the couple and lone parent elements of the working tax credit, which goes to low earners, saving around £275m a year.
The move will help pay for an increase of 5.2 per cent – matching the CPI rate of inflation – to the level of most benefits received by people below the retirement age or with a disability.
Osborne said the welfare changes would protect the “most vulnerable people in society”, which was seen as nod to the agenda pursued by work and pensions secretary Iain Duncan Smith and the Liberal Democrats.
The changes to child tax credits will hit five-and-a-half million families, with about two million of those also suffering because of the working tax credit freeze, according to charity the Resolution Foundation.
Gavin Kelly, its chief executive, said: “Taking cash away from families on low to middle incomes is precisely the wrong thing to be doing – it hits households when they are down. Every pound taken out of their pockets is also likely to be a pound taken out of consumption in the economy”.
Anna Bird, acting chief executive of the Fawcett Society, said women and single parents would be hardest hit.