Child benefit is to be axed for higher-rate taxpayers from 2013, Chancellor George Osborne has announced.
He told the Conservative conference the "tough but fair" move - affecting couples where one parent earns about £44,000 - would save £1bn a year.
Labour said the benefit should remain universal and the families who wanted to "get on" were being penalised.
Mr Osborne also revealed the total state benefits one family can claim in future will be capped at about £26,000.
This will mean that no family on welfare will be better off than one earning an average income from work, the chancellor said.
He outlined the steps in a major speech in which he defended the government's austerity measures as cuts "not for their own sake" but savings "to secure our future".
About 7.7 million families with children currently get child benefit, costing about £12bn a year.
Ministers estimate the change will affect about 1.2 million families.
The coalition says big reductions in expenditure are needed in nearly all areas of government if it is to bring down the budget deficit.
As recently as a year ago, Mr Osborne said the Tories would preserve child benefit as it was "valued by millions".
But the chancellor told delegates in Birmingham that in the current financial climate, he could no longer continue to spend £1bn a year in child support to those who were better off.
"Believe me, I understand that most higher-rate taxpayers are not the super-rich. It is very difficult to justify taxing people on low incomes to pay for the child benefit of those earning so much more than them," he told delegates.
Describing the measure as "tough but fair", he added: "These days we really have to focus the resources on where they are most needed.
"When the debts left by Labour threaten our economy, where our welfare costs are out of control, this measure makes sense."
What it means
At the moment, parents are paid £20.30 a week for the eldest child and £13.40 for subsequent children, with payments continuing until the age of 19 for those in full-time education.
Families with three children who will no longer be eligible to receive child benefit face being £2,500 a year worse off.
Mr Osborne confirmed the cut would hit homes with a single or two high earners but families with two parents on incomes up to £44,000 - which might add up together to over £80,000 - would keep the benefit.
The chancellor defended this by saying his plan was "the most straightforward" option - which would avoid across-the-board means testing.
The alternative was to introduce a "complex" system of means testing where all households had their incomes assessed, he said.
People will be expected to declare on their tax returns whether they fall within the 40% and 50% tax brackets and the money will then be clawed back through the tax system.
However, Mr Osborne urged top-rate taxpayers to stop claiming child benefit altogether, saying this would be the "most sensible" thing to do.
The chancellor insisted this was a "one-off" measure and did not mark the end of the principle of universal benefits which have underpinned the welfare state for decades.
BBC political editor Nick Robinson said the government's move amounted to a middle-class tax rise that would directly hit most delegates at the Conservative conference.
He said that this reflected the contradiction that, while the party was delighted to be back in government, it was having to come to terms with the reality of the painful decisions facing the country if it was to meet its objective of eliminating the structural deficit within five years.
But critics say the move - coming on top of the three-year freeze in child benefit announced in June's budget - will put even more of a squeeze on average families.
"We support child benefit for all children and all families," said shadow work and pensions secretary Yvette Cooper.
"Of course there are difficult choices to make and we need more welfare reform, but it's better to get the economy growing faster and raise more tax from the banks than to cut support for children in middle-income families.
"Whatever people's income, it is families with children who are paying most - through cuts in child tax credit, maternity allowance, child benefit and housing benefit."
Trade union leaders said no-one was now safe from what it said were precipitous budget cuts.
"This is a big blow to the principle that has served Britain well for decades that welfare should be available to all, not just the poorest," said TUC general secretary Brendan Barber
The Child Poverty Action Group said it was "unfair" that families should be paying the price for a debt crisis not of their making.
Lib Dem leader Nick Clegg has said child benefit costs should be looked at but some party members are likely to be alarmed, having passed a motion at their conference last month to ring-fence child benefit from austerity measures.
Miranda Whitehead, vice-chair of the Women Liberal Democrats, told the BBC she was "disappointed" by the announcement, as child benefit guaranteed families a certain amount of money even if their circumstances changed.