George Osborne has told MPs that he will abandon his plans to cut tax credits in a major welfare U-turn.

The Chancellor had promised to modify his plans to cut tax credits and phase them in to reduce their impact on the 3m low-income families that would have each lost an average of £1,000 per year.

His original plans had already been blocked by the House of Lords, but in his combined Spending review and Autumn Statement, Osborne said that rather than phasing in the cuts he would now scrap them altogether.

Announcing the change, he said:

“I’ve had representations that these changes to tax credits should be phased in.

“I’ve listened to the concerns. I hear and understand them. And because I’ve been able to announce today an improvement in the public finances, the simplest thing to do is not to phase these changes in, but to avoid them altogether.”

Osborne said he could pay for this change because of the improving economy, but the U-turn will mean that he breaches his own self-imposed “welfare cap”.