Government in new climbdown over benefit cap

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Families with children will be allowed to keep more of their state support in a fresh government climbdown over plans to cut the costs of welfare.

Child benefit will no longer count towards the benefit cap of £26,000, as ministers seek to avert a Liberal Democrat rebellion. The proposal to limit benefits to £500 a week proved popular with voters but angered children's charities and caused a rift in the coalition. When George Osborne announced the cap he said it would be based on "average income", but this has since been amended to "average earnings", which does not take into account additional money households receive from child benefit and tax credits.

A government source said: "Politically we cannot increase the level of the cap, but we can look at what counts towards it." The source added that the policy is political, rather than a key aim of the deficit reduction plan, so could be amended without requiring cuts elsewhere. A group of more than a dozen bishops is expected to table an amendment in the Lords, which would leave the cap at £26,000 but stipulate that child benefit does not count towards the limit. It would also allow 12 months' grace, so someone made redundant would receive all benefits they are entitled with the cap imposed only after a year. Lib Dems are expected to join crossbenchers and Labour peers in inflicting another defeat on the Government in the Lords. Lib Dem MPs are not expected to help the Conservatives to overturn the amendment in the Commons.

Simon Hughes, the Lib Dem deputy leader, used a speech yesterday to caution that the Government's plans as they stand could exacerbate family breakdown, because parents would be able to receive more benefits if they lived apart.

"We cannot simply stand by and watch the benefits system become an instrument for breaking up families, breaking up communities or punishing children for the poor decisions of their parents," he told party members in Liverpool. "Under the plans as they stand, a couple with four children will see their benefits limited to £500 but if the parents live separately they will be able to claim up to £1,000. How will that support families?"

Mr Osborne announced the benefits cap to great applause at the Tory party conference in 2010. He told delighted delegates: "Unless they have disabilities to cope with, no family should get more from living on benefits than the average family gets from going out to work." However, critics say this implied additional income received by working parents, such as child benefit and tax credits, would be included when calculating the average.

John Sentamu, the Archbishop of York, said last week that the cap would have a "deleterious and chilling effect" on some of the most vulnerable children. The Children's Society has calculated that up to 80,000 children could be made homeless.

However, the Department for Work and Pensions notes that the proposed cap is the equivalent to a salary of £35,000 before tax, and need not force families to split up.

The Lords inflicted three defeats on the Government's welfare cutbacks last week.