Nearly two-thirds of British children in poverty live in working families, the Institute for Fiscal Studies has revealed in its annual poverty and inequality report, undermining government assertions that a job was an automatic route out of poverty.

The economic thinktank said child poverty and inequality are set to rise as a consequence of the government’s planned tax and benefit cuts, which will favour high earners and hit the poor.

Recent declines in income inequality would be reversed, while currently static child poverty rates would begin to increase, the IFS said.

Ministers heralded official statistics that show the number of children living in a household claiming out-of-work benefits is at its lowest since records began in 2008 – falling by about 450,000 since 2010.

A government spokesperson said: “Work remains the best route out of poverty and we want to ensure that when people go out to work they are paid a decent wage and get to keep more of what they earn.

“That is why we have introduced a new national living wage and are increasing tax thresholds so Britain can move from a low-wage, high-tax and high-welfare economy to a higher wage, lower tax and lower welfare society.”

But the IFS said that the effect on poverty of this jobs boost had been outweighed by low wages. “Since 2009–10, a fall in the number of workless families has acted to reduce poverty, but this has been offset by a substantial rise in in-work poverty,” said Chris Belfield, an IFS research economist and an author of the report.

“This largely reflects the wider nature of the labour market since the recession: robust employment and weak earnings.”

The IFS said the government’s planned rises to the minimum wage would help many on low incomes, but this would be counter-balanced by cuts to benefits and tax credits, pushing up absolute poverty figures.

The report said: “Recent falls in inequality are likely to prove temporary. Stronger earnings growth and the Conservatives’ planned income tax cuts would do most for incomes towards the top of the distribution, while planned benefit cuts will hit low-income households [both in and out of work] hardest.”

The report is the 14th in an annual IFS series that analyses official statistics to examine key trends in living standards, inequality and poverty.

It found that while income inequality barely changed across social groups, the top 1% of earners increased their share of household income from 5.7% in 1990 to 8.4% in 2007-08 and 8.3% in 2013-14.

Pensioners had also caught up in relative terms with working-age households, boosted by rising entitlements to state pensions and higher private pension incomes. While in 1990 the median pensioner was nearly a third poorer than the median non-pensioner, they now possess greater relative spending power.

However, some social groups – including disabled people, lone parents and social housing renters – appeared to be hit by rising material deprivation, meaning that they were more likely than others to struggle with the cost of basic goods and services.

Those affected by two coalition government policies, the bedroom tax and the abolition of council tax benefit, were more likely to run up debts and arrears as a direct result, the report found.

Although the IFS had predicted a rise in child poverty for 2013-14 because of cuts to benefits, the outturn data published last month, showed that poverty had remained largely static. Although the IFS admitted this may have “come as a surprise”, it said it did not change its assessment of the upward trend over time.

It was likely that absolute poverty will have remained stable in 2014-15, the IFS predicted, as falling inflation helped to preserve the value of benefits, which rose by only 1%. But it said this would rise as planned benefit cuts hit low-income working households.

Julia Unwin, chief executive of the Joseph Rowntree Foundation, which funded the IFS research, said: “A strong economy and rising employment have masked the growing problem of in-work poverty, as years of below-inflation wage rises have taken their toll on people’s incomes.

“The upcoming minimum wage rise will help, but many low-income working families will still find themselves worse off due to tax-credit changes. Boosting productivity and creating more jobs which offer progression at work is vital to make work a reliable route out of poverty.”