The Paymaster General faced resignation calls last night for the tax credits fiasco which threatened financial hardship for thousands of Sussex families.

East Worthing and Shoreham MP Tim Loughton told Dawn Primarolo she would have lost her job if she made a similar error as a company director.

Ms Primarolo is fighting for her political life after HM Revenue and Customs overpaid tax credits to almost half a million families last year.

In Sussex, 41,500 families were asked to pay back an average £997 when HMRC realised its error.

In an angry Commons exchange yesterday, Mr Loughton asked: "If the Paymaster General was the finance director of a company, does she think she would be entitled to keep her job?

"If the company had overpaid its dividend by about £2 billion, had then told recipients it was perfectly OK for them to spend that money, and subsequently had to write menacing letters to those people to say they had to pay it back even though it threatened dire financial circumstances."

Ms Primarolo has been backed by the Government and was defended by dozens of Labour MPs in the Commons.

Hastings and Rye MP Michael Foster was among those who highlighted how many families had been helped financially by the Government's introduction of tax credits.

Ms Primarolo said no families had suffered hardship as a result of the mix-up.

She said: "For those who notified the HMRC that their income grew in excess of £10,000 a year or more, where they had received more tax credits than they were entitled to, they are asked to repay that.

"Where there is official error, there is a question about whether the amount can be written off and for those who are in hardship, there can be additional payments.

"If a company was as flexible and direct as this Government in supporting those in the labour market then the Chancellor would be able to claim a lot more victories."