Universal Credit - mitigation of the two-child limit: consultation

Opportunities and challenges

The Scottish Government has consistently criticised Universal Credit due to the low levels of support it provides, particularly given the caps and limits imposed on it, such as the two-child cap, as well as the many years of benefit freezes, which have all eroded the value of social security and the effectiveness of the safety net it should provide. While the Scottish Government is committed to mitigating the two-child cap to the extent it can within the Scottish Parliament’s powers, mitigation payments cannot fix all of the problems with Universal Credit.

Alongside the two-child cap, Universal Credit is subject to the bedroom tax, which is fully mitigated by the Scottish Government, and the benefit cap, which it mitigates as far as possible within devolved powers. People under 25, including those who are parents, receive a lower rate of Universal Credit, and people also have to wait for five weeks for their first payment, which leads to many of them taking out loans which have to be repaid.

In addition, the lack of a link between Local Housing Allowance rates and real-world rents means that many low-income households are left in an uncertain position, not knowing if they are going to receive sufficient support with their rent in future years. The Scottish Government has consistently called for LHA rates to be raised and the Housing Minister wrote to the Secretary of State for Work and Pensions on 31 January urging the UK Government to reverse its recent decision to freeze rates.

Overall, the Scottish Government would like to see the UK Government move towards an Essentials Guarantee for Universal Credit, which would ensure that it adequately covers the cost of essentials, including food, transport, energy; and to ensure that deductions, such as debt repayments to government, sanctions, or as a result of the benefit cap, can never pull support below this level.

The Scottish Government has considered a number of factors in developing its proposals, including practicability, cost and timescales for delivery. It also considered how fully each option would mitigate the cap, and of course the impact on people who have had their Universal Credit payments reduced through the two-child cap.

The Scottish Government considered whether or not the new Childhood Assistance powers introduced by the Social Security (Amendment) (Scotland) Act 2025 could be used to create a new benefit. While this option would allow for the fullest range of policy opportunities, it would be considerably more complex to deliver.

The introduction of tapering, which in UC reduces the level of benefit paid to someone by 55p for every £1 earned over a certain allowance, and which can reduce entitlement to zero if income is high enough, would require both significant time investment and development costs.

To deliver similar functionality the Scottish Government would need income-based data from HMRC as well as the data on impacted households from DWP, and to build a significantly more complex system to deliver the payments.

As well as employment income, the Scottish Government would also need to consider capital, self-employed earnings and relevant unearned income. As well as additional HMRC and DWP data, it would also need data that cannot be obtained in that way to be supplied direct by the applicant. This would have implications both for the time taken to start making payments, and the cost of system build and delivery.

The policy intent of tapering in UC is to ensure earning more through paid work is always worth it to clients and that it avoids disincentives to work when someone is in receipt of the benefit, by mitigating against losing the benefit entirely as their earnings from work increase. The taper is applied to the overall UC award, rather than being applied individually to distinct elements.

The Scottish Government’s proposal is a flat-rate payment equal to the UC child element for each affected child: £287.92 each month, rising to £292.81 in April.

There are academic analyses and some empirical evidence of how ‘cliff edge’ designs of benefits (e.g. where awards are not tapered) can result in behavioural effects^[7]. However, the Scottish Government is not aware of any evidence around for example, Scottish Child Payment, that a lack of tapering acts as a widespread barrier to people working. SG analysis of how Scottish Child Payment interacts with the labour market, published in July 2024 concludes that it is not negatively affecting work incentives at scale in the economy^[8]. The SFC’s report^[9] on the proposals on the two-child cap states: “it is likely that the proposed mitigation payments would not generate large behavioural responses over and above the ways that families may already have adapted to the Scottish Child Payment.”.

The Scottish Government intends to carefully monitor the impact of the two-child cap mitigation when it is introduced in order to keep this under review, but it considers that the benefits of the increased income for families who will receive the payments will outweigh any negative behavioural impacts which might result.

The Scottish Government considers that the potential benefits of taking the time to develop a new, bespoke, means-tested benefit in Scotland are likely to be outweighed by the additional time and cost required to build it, which would almost certainly push back the date when people begin to receive mitigation payments. It does not consider that such a payment would represent value for money, nor that it would move quickly enough to effectively tackle child poverty as soon as possible.

The Scottish Government’s intention is therefore that the payments will be made using the powers at section 79 of the Social Security (Scotland) Act 2018, which allows top-up of a UK qualifying benefit.

This opportunity offers the quickest operational route to delivery, and that speed means that the Scottish Government considers s79 the most appropriate type of payment for Social Security Scotland to use in delivering the mitigation payments. This is the same power that was used to deliver the Scottish Child Payment in 18 months, which is unprecedented in the UK.

Using the powers at s79 does mean that the payments can only be made to people who are in receipt of a reserved UK benefit. Unfortunately, the design of the UK Universal Credit system means that some people will not receive Universal Credit, and as such it would not be possible to make a payment under s79 to them.

For example, a person can become ineligible for Universal Credit because of the way the DWP applies the two-child cap. A person's income can take them over the Universal Credit income threshold only because they do not receive the Child Element for every child or qualifying young person they are responsible for, as the level of the income threshold varies according to the number of children a person is responsible for. Each of the first two children in a household raises its UC earnings limit, but the operation of the two-child cap prevents the earnings limit being increased to take account of any subsequent children not subject to an exception.

In circumstances like these, there is no ‘qualifying benefit’ to top-up, and as such no mitigation payment can be made using the powers at s79.

DWP allows a number of exceptions for the two-child cap: for multiple births, for people responsible for a child via adoption or kinship care and where a third or later child has been conceived non-consensually. The Scottish Government is considering how the mitigation will interact with the existing exceptions people have and for those who will be subject to the two-child cap if they have another child.

Since the purpose of the policy is to mitigate the impact on individuals of not being entitled to the child element due to the two-child cap, people who in fact receive that element, whether by operation of an exception or otherwise, are not within scope. As such, data on exceptions is a key area for close co-operation with DWP, to make sure that interactions between the two systems are as smooth as possible.

Raising awareness will be a key priority. Social Security Scotland has a commitment to encourage benefit take-up, and this payment will be no exception. The Scottish Government considers the first step will be to make it as easy as possible to receive the payment, and is currently exploring ways in which it might achieve that aim.

For example, take-up of School Age Payment in Best Start Grant has risen from 77% to 97%^[10] since the introduction of automatic awards, and Social Security Scotland might already hold some of the information it needs to identify eligible people.

Provisions exist in the Fiscal Framework between the UK and Scottish Governments to ensure that benefits provided in Scotland provide additional income, and these provisions have been relied upon with previous payments made in Scotland.

The Scottish Government considers that the mitigation payments should be disregarded by the UK Government, like other forms of assistance delivered by Social Security Scotland, as income for benefit and tax calculations, and that the benefit cap should be adjusted to accommodate them. Scottish Child Payment is disregarded as income and disregarded when applying for legal aid and council tax reductions. This helps ensure that receipt of Scottish Child Payment does not rule out recipients from receiving other forms of support which they may be entitled to.

The Scottish Government is seeking early engagement with the UK Government so that any mitigation payments against the two-child cap are also treated in this way. Legislation will likely be required in both Scottish and UK Parliaments to achieve this.