The "two-child" benefit, currently employed by the Department for Work and Pensions (DWP), is set to be axed for thousands of families but researchers are warning Universal Credit claimants could still "lose out".
Scotland is set to tackle the UK's controversial policy on benefit payments, which currently affects 440,000 families across Great Britain, including 27,000 in Scotland.
The Scottish Government announced in its Budget for 2025-26 a policy to mitigate the impacts of the two-child limit as far as possible.
Implementation is planned for 2026-27 at the latest, though details remain limited on how the policy will work in practice.
Scotland is preparing to axe the "two-child" benefit cap but Universal Credit claimants could still lose out
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The two-child limit restricts Universal Credit payments by not providing the "child element" worth £3,455 per year for third or subsequent children born after April 6, 2017.
Universal Credit normally tapers away at 55 per cent as earnings increase, providing a smooth reduction in benefits as income rises.
Thanks to an existing "cliff edge", a household with three children is at risk of missing out on more than £4,000 annually if they earn just enough to no longer be eligible for Universal Credit.
This is due to the fact that entitlement to the UK-wide payment means they also qualify for the Scottish Child Payment, which is administered by Social Security Scotland.
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If the SNP-led Government axes the "two-child" benefit cap in Scotland, the Institute of Fiscal Studies (IFS) found the amount families would "lose out" on would jump to over £7,500.
IFS economists Sam Ray-Chaudhuri and Tom Waters broke down the ideal method of mitigation for the "two-child" benefit cap.
The duo explained: "The superior approach would require DWP not to apply the two-child limit when calculating how much Scottish families are entitled to, with the Scottish Government compensating DWP for the extra expenditure."
If DWP cooperation is not feasible, the alternative would be "mitigation payments" - top-up payments equal to the child element for each affected child.
John Swinney unveiled his manifesto in Edinburgh earlier this year
GB NEWS"For families who get such payments, this is equivalent to disapplying the two-child limit," explains Ray-Chaudhuri and Waters.
However, families whose earnings are slightly too high for Universal Credit under current rules, but who would qualify without the two-child limit, are difficult to identify.
These families are not currently receiving the DWP's signature benefit payment for those on low income and often have not applied for it.
No Government, either in Westminster or in Scotland, currently has the necessary information needed to assess their eligibility, analysts claim.
This creates what economists call a "cliff-edge" in welfare entitlements, leading to problematic incentives for those in the benefits system. The smooth taper of Universal Credit was specifically designed to avoid such cliff-edges.
This contradicts the original Universal Credit design principle where "as a family's earnings increase, the amount they receive falls smoothly until their entitlement reaches zero".
Identifying all eligible families, particularly those not currently receiving Universal Credit, will be a key hurdle, according to the IFS.
The think tank economists added: "This 'cliff-edge' means there is a region in which the parent could work more but the family ends up with lower total after-tax-and-benefit income.
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Universal Credit claimants are impacted the "two-child" benefit cap
Getty"If the two-child limit mitigation was paid in a similar way to SCP, this would mean an even larger cliff-edge, so that the family could lose more than £7,500 a year simply by working 23 hours per week rather than 22 hours per week.
"The larger cliff-edge means this parent would have to work over 40 hours per week to increase their family’s income above what they get when working 22 hours per week.
"If a family had four children rather than three, then the size of the cliff-edge would be even bigger – almost £12,500 a year, equivalent to working an extra 29 hours per week for someone on the NLW."
First Minister John Swinney shared: "The eradication of child poverty is my government’s number one priority, and I want it also to become our nation’s number one goal."
