SNP plans to scrap the two-child benefit cap will deepen disincentives to work that mean earning more can cost welfare claimants thousands of pounds, economists have said.
The Institute for Fiscal Studies (IFS) said that while the policy would reduce child poverty rates, it would also mean that some families would face a significant financial hit if they earn enough to no longer qualify for state handouts.
An existing “cliff edge” means a family with three children faces missing out on more than £4,000 a year if they earn just enough to no longer qualify for universal credit — because entitlement to the UK-wide benefit means they also qualify for the Scottish child payment.
Should the SNP scrap the two-child benefit cap in Scotland, the independent think tank said, the amount they could miss out on would increase to more than £7,500.
For a family with four children, working one additional hour per week would lead to a reduction in overall income of more than £12,500 per year so it would make little financial sense to attempt to escape the benefits system.
SNP ministers have previously insisted there is little evidence that the welfare system created by Nicola Sturgeon is having a negative impact on the employment market, citing their own government’s research.
However, the IFS said other studies had found creating cliff edges could lead to behavioural change, such as part-time workers refusing additional hours because of fears it would result in a fall in their overall income.
“Any form of mitigation of the UK government’s two-child limit policy is likely to be a cost-effective way of reducing child poverty in Scotland,” Sam Ray-Chaudhuri, a research economist at the IFS, said.
“Administratively speaking, making payments to affected recipients of universal credit is likely the most straightforward way to do this but it has the unfortunate consequence of strengthening already substantial disincentives to work more for some families.
“Good policy should try to avoid such features and ensure that benefit recipients do not become financially worse off as a result of working more.”
In December, the SNP said it would effectively scrap the two-child benefit cap north of the border in a move designed to heap political pressure on Sir Keir Starmer, who has refused calls to lift it across the UK.
The policy, which means that third or subsequent children do not qualify for the “child element” of universal credit, was introduced in 2017 by the Conservative government.
Advocates of the policy argue that families on benefits should face the same financial choices in terms of whether they have more children as those not on welfare.
When the Scottish child payment was introduced in February 2021, it was £10 per week for each eligible child. It has rapidly increased and is now worth £26.70, or almost £1,400 per year per child aged under 16. The Scotland-only benefit has cost taxpayers £1 billion since it was introduced.
While universal credit is designed to incentivise work by gradually tapering off as earnings increase, those who qualify for the Scottish child payment either receive the benefit in full or not at all. As entitlement is tied to universal credit, someone in receipt of even a nominal sum would still qualify for the full child payment.
According to the IFS analysis, a couple with three children, with one in full-time work on minimum wage and the other working 22 hours per week, would still receive a universal credit payment and therefore the full Scottish child payment.
However, if the part-time worker, also on minimum wage, increased their hours to 23 per week, the family would lose universal credit and therefore the entire child payment while gaining just £11.44 per week in pre-tax earnings. To receive more overall income, the second parent would have to work more than 40 hours per week.
Removing the two-child cap would make the situation worse because the family would also lose the £3,455 per year in universal credit they would receive for the third child, probably in a top-up payment if SNP ministers scrap the limit in Scotland.
“This stark report lays bare the urgent need to reform Scotland’s social security system,” Liz Smith, the Scottish Conservative shadow social security secretary, said.
“The last thing ministers should be doing is introducing policies that put more Scots off from working more at a time when our economy is stagnating. It is clear that the SNP have prioritised getting cheap headlines for this policy, rather than thinking of the deeply damaging consequences it could have.”
Shirley-Anne Somerville, the social justice secretary, said: “The UK government has failed to scrap the two-child cap despite it being a key driver of child poverty. In the face of such inaction the Scottish government is determined to end the impact in Scotland.
“The 2025-26 budget commits to developing the systems needed to deliver mitigation of the two-child cap. The Child Poverty Action Group estimates that scrapping the cap in Scotland could lift 15,000 children out of poverty.
“Our public consultation to consider the impacts of different approaches to mitigating the two-child cap was launched in February and is considering the most effective way to implement the mitigation.”
