Peers voted by 252 to 237, a majority of 15, in favour of an amendment put forward by the Rt Rev John Packer, the Bishop of Ripon and Leeds, to exclude child benefit from calculating the £26,000-a-year limit.
In a blow to Coalition unity and a rebuff for Nick Clegg, 26 Liberal Democrats, including the former party leader, Lord Ashdown, and the former party president, Baroness Williams, joined the rebellion.
Ministers vowed to overturn the vote when the Welfare Reform Bill goes back to the Commons, insisting the policy was backed by the vast majority of the public.
The defeat came after charities warned that vulnerable families could lose their homes as a result of the planned cap, with children and single parents disproportionately affected by the measure.
The Government estimates 50,000 families will be hit by the reform, losing an average of £93 per week, with 7,500 households losing more than £150 per week.
The result was embarrassing for Mr Clegg, who was unable to persuade his party’s peers to back the cap – proposed by the Work and Pensions Secretary Iain Duncan Smith – the day after he spoke in its defence.
On Sunday, Lord Ashdown said he would vote against the Coalition for the first time because of the “unacceptable” hardship the scheme would cause children. However, the subject is difficult for the Liberal Democrats – as well as Labour – as polls show the public overwhelmingly supports the idea of a cap. Labour has said it too backs the concept but fears that in its current form it could end up costing more than it saves and lead to vulnerable families being evicted from more expensive areas.
The victorious amendment was put forward by the Rt Rev John Packer, the Bishop of Ripon and Leeds, who told Lords the proposed cap “failed to differentiate between households with children and those without”. “It cannot be right for that to be the same for a childless couple as for a couple with children,” he said. “Child benefit is the most appropriate way to right this unfairness.”
But the Welfare Reform Minister, Lord Freud, said: “The effect of excluding child benefit would simply be that families on child
benefit would have an income higher than average earnings.”
The Children’s Society said after the vote: “The Lords have stood up to the Government and sent a clear message in support of children up and down the country.”
The Department for Work and Pensions said it was “very disappointed” with the result and believed the cap was fair because it was the “equivalent to someone earning £35,000 before tax, a salary many working families would be happy to receive”.
Earlier, ministers saw off by 250 votes to 222 a Labour-led move to exempt families threatened by homelessness from a benefits cap.
Lord Freud condemned the bid as a “wrecking amendment” which would render the policy unworkable.
WELFARE REFORMS WHAT THEY WANT – AND WHETHER THEY'LL GET IT
Proposal: Under planned benefits cap, no household will receive more than £26,000 a year in allowances.
Justification: Government says it is a matter of fairness that a household should not receive more in benefits than a working family's average pay.
Problems: Critics say it could force families, particularly those in areas with high rents, on to the streets.
Chance of success: Despite the strength of feeling in the Lords, ministers seem determined to push it through, perhaps with mild tweaks.
Proposal: Disability Living Allowance to become a Personal Independence Payment with regular medical tests.
Justification: Because there are no regular reassessments of claimants the money goes to people whose conditions have improved.
Problems: Move is designed to save cash and 500,000 people would be left struggling, say campaigners.
Chance of success The Government has announced minor concessions, but essence of the reform will survive.
Proposal: Entitlement to Employment and Support Allowance, which replaces incapacity benefit, is being limited to one year.
Justification: Will save £2bn and encourage people to return to work.
Problems: Government has suffered three defeats in the Lords.
Chance of success Ministers will overturn the defeats – but could make minor concessions.
Proposal: Removing child benefit from better-off families.
Justification: It is hard to support a system whereby a millionaire receives the benefit.
Problems: The Tory Right protesting it penalises mothers who stay home.
Chance of success Not part of the current Welfare Bill and amendments to the plans look likely in the Budget.
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