Changes to council tax benefits have weakened work incentives for almost a quarter of a million people in England, some of whom stand to lose as much as 97p out of every extra pound they earn, a parliamentary report has found.
The chair of the influential House of Commons Public Accounts Committee, Margaret Hodge, branded the outcome "fundamentally perverse" and said that, in some areas, the decision to give local authorities powers to design support schemes for themselves has delivered the opposite result to what the Government intended.
Council tax benefit was formerly administered nationally, costing taxpayers £4.3 billion in 2011/12 as five million people claimed support. From April 2013, responsibility was transferred to 326 local authorities in England, with the Government providing funding of £3.7 billion - a cut of £414 million, or 10% of the predicted total budget if the scheme had remained unchanged.
The Public Accounts Committee found that some 71% of councils - 230 in all - required all working-age claimants to make at least a minimum contribution to their council tax bill, including 133 authorities which provided exemptions only for pensioners and war pensioners, whom the Government insisted must be protected.
Some 19 local authorities, representing 225,000 working-age claimants in England, increased the "taper rate" at which support is reduced as income rises from 20% under the old system - some 14 of them increasing it to 25% and four to 30%.
The impact of increases in the taper rate means that, when the withdrawal of council tax benefit is combined with the loss of housing benefit and increased income tax and national insurance payments, claimants taking on additional work will lose 93p out of every extra pound they earn on a 25% rate or 97p on a 30% rate.
Ms Hodge said: "This just goes to show, for some, work simply doesn't pay under the new scheme. For them, work incentives have actually weakened rather than strengthened - the opposite of what the Government intended.
"Some of those 225,000 people stand to lose 97p for every extra £1 earned - a fundamentally perverse result."
She added: "When the scheme was introduced, local authorities were also tasked with protecting vulnerable people such as poorer families, despite the fact that savings had to be made.
"However, many local authorities have passed on some or all of their reduction in funding for council tax support to local claimants by reducing entitlement to support.
"Around 230 local authorities introduced schemes which required claimants to pay minimum council tax payments. Of these, 133 local authorities offered no protection to vulnerable groups, other than pensioners and war pensioners.
"The Department for Work and Pensions on the one hand wants to simplify benefits by merging six benefits into the new Universal Credit. Yet here DWP and the Department for Communities and Local Government are complicating matters by localising council tax support. They will have their work cut out to make sure the 326 separate council tax support schemes interact effectively with Universal Credit.
"DCLG must set out a timetable and terms of reference for the independent review it plans, taking in the important points we have raised."
Local government minister Brandon Lewis responded: "Spending on council tax benefit doubled under the last Government costing taxpayers £4 billion a year - equivalent to almost £180 a year per household. That's why, as part of our long-term economic plan, we are fixing the welfare system to make work pay and reducing the deficit to safeguard our economy for the long term.
"Our council tax policies are working. Localised council tax support has also given councils stronger incentives to support local firms, cut fraud, promote local enterprise, get people into work and end the 'something for nothing' culture.
"This Government is funding a five-year council tax freeze that has already delivered a 10% real-terms reduction in bills for hard-working families. This is in stark contrast to the last administration, when council tax bills doubled."
Sharon Taylor, chair of the Local Government Association's Finance Panel, said: "When Government handed the responsibility for administering council tax support to local authorities, it cut hundreds of millions in funding for it.
"The shortfall between the money councils receive to fund council tax support and the money we would need to protect those on low incomes is getting bigger and is likely to reach £1 billion by 2016. At the same time, councils are tackling the biggest cuts in living memory and cannot afford to make up the difference.
"The Public Accounts Committee's call for Government to review the scheme echoes concerns raised by councils. Government should consider giving local authorities the full amount of funding needed to provide council tax support and ensure that decisions over council tax and discounts are fully localised."
A Department for Work and Pensions spokesman said: "Universal Credit is massively simplifying welfare - and will allow people to keep more of their earnings.
"In fact, around 2.4 million working families will be better off as a result of Universal Credit - and be better off by £167 per month.
"Most councils have kept the same principles of council tax benefit with new schemes, so there will be no significant changes in work incentives, and local council schemes can be reviewed each year, so we expect them to be refined over time."