More than half a million children could be lifted out of poverty by reforming Universal Credit, the Government has been told.

The TUC and the Child Poverty Action Group (CPAG) have urged ministers to improve the credit rather than raising the income tax threshold to £12,500.

In a study of 13 options, the tax threshold proposal cost the most and came bottom for reducing child poverty.

Work and Pensions Secretary Iain Duncan Smith has announced a new way of measuring child poverty, to include factors such as educational achievement and living in workless households as well as income.

But the TUC and CPAG said a package of improvements to Universal Credit including increasing work allowances, would reduce child poverty by 460,000.

TUC general secretary Frances O'Grady said: "The Government is right to think about giving more help to people in work on low earnings, but the Chancellor should look carefully at the most effective way of doing it before making a final decision on raising the tax threshold."

Alison Garnham, chief executive of the CPAG, said: "This comprehensive analysis shows the Chancellor must be careful not to back the wrong horse when it comes to the Government's flagship policies.

"Rather than committing billions on the costly and poorly targeted policy of raising the personal tax allowance, the Treasury should stop starving universal credit of the investment it needs to fulfil its poverty-reducing potential and justify the massive upheaval surrounding it.

"The evidence is clear that investment in tax credits is incredibly effective in lifting children out of poverty."

A Department for Work and Pensions spokesman said: "Universal Credit is already transforming the lives of some of the poorest families in our communities, with claimants moving into work faster and earning more than under the old system."