Hundreds of thousands of the poorest families in England will find themselves significantly worse off under the Coalition’s flagship benefit reforms, new research has found.

Under plans being drawn up by Iain Duncan Smith, the Work and Pensions Secretary, a single Universal Credit will replace all current benefits such as childcare, housing and tax credits paid to families on low incomes by the Government from 2013.

But research by the Centre for Social and Economic Inclusion has found that single parents and families with two or more children could lose as much as £5,000 a year as a result of the changes.

Families in London – where child care and housing costs are significantly higher – will be particularly badly affected, according to the analysis commissioned by London Councils, an umbrella organisation representing all local authorities in the capital.

It found that a single parent with two children living in the capital would be £5,168 a year worse off under the Universal Credit if in a full time job on a minimum wage, using childcare, than under the 2011 system. Nationally a lone parent in the same situation would be £4,300 a year worse off.

A couple who both work full time and have two children will be £2,333 a year worse off in London and £1,528 nationally.

The report also suggests that for some groups there would be little incentive to move from benefits into work – a key aim of the Universal Credit. For example, a lone parent with two children in London would be £2,165 worse off if they worked, under the new system, because of high costs of childcare. Nationally they would be £657 worse off.

If the projections prove accurate it could cause significant political problems for the Coalition in the run up to the next election in 2015 – particularly for the Liberal Democrats. The party has put much store on being a moderating influence on the Coalition and any suggestion that the changes will make the poorest families in society worse off would be politically toxic.

London Councils’ executive member for skills and employment, Councillor Steve Reed said: “We need to see a system that really makes work pay and helps families out of poverty.”

The report recommends that the universal credit calculation needs to recognise there are different “childcare markets” across the country. It also recommends that the government considers raising the overall benefit cap for London or raising the housing element of the cap for London, which is proposed to be £500 a week.