George Osborne is at loggerheads with the work and pensions secretary over proposals to cut spending on universal credit by more than £1bn a year. The chancellor is considering the move – which Iain Duncan Smith fears could drastically undermine the effectiveness of universal credit – as a means of partially funding his anticipated U-turn on tax credits.

The savings would be achieved by changing the taper rate that applies to the new benefit. Currently it is set at 65% – meaning that for every extra £1 claimants earn above a threshold, they lose 65p – but Osborne is looking at a proposal to increase this to 75%.

Duncan Smith is resisting this because one of the key aims of universal credit is to increase work incentives. A taper rate of 75%, alternatively described as equivalent to a marginal tax rate of 75%, would make it hard for Duncan Smith to argue that universal credit is structured in a way that encourages people to work longer hours.

According to a source familiar with the dispute, the Osborne proposal could save the Treasury around £1.5bn a year, which would help fund the remedial measures being planned to alleviate the impact of the £4.4bn tax credit cuts.

Osborne was forced into a rethink after the House of Lords voted last month to block the measures until the government comes up with a plan to compensate those losing out. The Resolution Foundation thinktank said that under the original plans, 3.3 million families were set to lose an average of £1,300 from next April.

The chancellor will announce his revised plans in his autumn statement on 25 November. So far he has said almost nothing about how he intends to lessen the impact of the planned cuts. Experts have warned that increasing the income tax allowance or the national insurance threshold – two options that have been floated – would do nothing to help a large chunk of claimants, because 43% of households receiving tax credits earn less than £1,000.

There is increasing speculation that Osborne will decide to stagger the cuts instead of introducing them in one go in April, although the Resolution Foundation this week said this would still lead to 2.6 million families losing £1,500 each on average in 2020.

Duncan Smith is particularly irked by Osborne’s proposal because the Treasury has upped the universal credit taper rate once before as a money-saving exercise. Originally it was intended to be set at 55%, but in the last parliament the Treasury decided it would be set at 65% when the benefit launched.

Universal credit is Duncan Smith’s most important welfare reform. Six existing benefits are being rolled into one, partly to simplify the system, and partly to improve work incentives. However, the programme has been hit by delays and it is not due to be fully rolled out for another few years.

Osborne and Duncan Smith have had a strained relationship for years and in 2013 Osborne was forced to deny a claim in a book about the coalition that he thought the work and pensions secretary was “just not clever enough”. But Duncan Smith was delighted by Osborne’s decision to announce a “national living wage” in the summer budget, and famously responded to it with a double fist pump in the Commons.