Options for reforming the two-child limit

There is much speculation about the future of the ‘two-child limit’, a policy which means that low-income families with children do not receive additional means-tested benefits for any third or subsequent children. The Labour Party last year committed to reducing child poverty in its manifesto, and since entering government has been developing a child poverty strategy which is expected this autumn, and which some reporting suggests will recommend the policy’s removal. There are also reports  that the two-child limit will be scrapped or watered down in the Budget in November. Already the Scottish Government has committed to providing an offsetting payment to mitigate the effects of the policy (for most of those affected) next year.

Families receiving universal credit typically receive a ‘child element’ worth £3,500 a year for each additional child they have.1 However, the two-child limit means that families do not receive the child element for third and subsequent children born on or after 6 April 2017. This date-of-birth cut-off means the number of affected families is set to steadily grow until all children born before that date have grown up. By the time it is fully rolled out, the policy will save the exchequer around £3.6 billion a year, reducing the benefit entitlements of over 800,000 households.2 George Osborne, the Chancellor who announced the policy, said the two-child limit was introduced to ensure families whose income came solely from benefits faced ‘the same financial choices’ as those in work when deciding whether to have more children.

This comment summarises the latest evidence on trends in child poverty and the impact of the two-child limit, and sets out the various options available to the government. 

How many children are in poverty?

We first briefly survey recent trends in child poverty, focusing on measures that account for families’ housing costs. Figure 1 shows that the relative child poverty rate – measured as the proportion of children in households with incomes below 60% of the contemporaneous median – rose from 27% to 31% between 2010–11 and 2019–20, and remains at that elevated level. The rate of absolute child poverty – the proportion of children in households with incomes below 60% of the median in 2010–11 in real terms3 – fell over the 2010s. Together this means that the incomes of poorer families with children have not fallen in real terms on average, but have failed to keep up with those of middle-income families.

Figure 1. Rates of relative and absolute child poverty, 1997–98 to 2023–24

Strikingly, the rise in relative child poverty was more than entirely driven by increased poverty among families with three or more children, with rates of relative poverty among families with one or two children falling over that period. Absolute child poverty has also risen slightly for larger families since 2016–17, meaning that the incomes of the poorest among this group not only failed to keep up with those of middle-income families but have declined in real terms. Figure 1 also shows an increase in rates of deeper measures of relative and absolute poverty (the proportion with incomes below 50% or 40% of the respective medians) among third and subsequent children in recent years. This is suggestive that children in larger families who were already below the headline poverty lines are getting poorer still, though deeper poverty is hard to measure reliably using survey data. 

What are the effects of the two-child limit on children and their families?

Here, we outline the available evidence we have on the impacts of the two-child limit on household incomes and income poverty, and employment. We then discuss fertility, and the broader effects on children’s outcomes in areas such as education, focusing on the quantitative evidence available that attempts to isolate the causal effects of the policy. A wider body of qualitative evidence on the effects of the policy on broader outcomes also exists, including Nesta’s study, which interviewed parents on the effects of the two-child limit on their children’s learning, and a number of qualitative papers that formed part of the Larger Families study. And there is a growing wider economics literature on the effect of income on children’s outcomes, which we discuss below.

Household benefit entitlements and income poverty

The two-child limit significantly reduces benefits for a group which is on average low-income. Around 60% of families with three or more children are entitled to means-tested benefits, and therefore can expect to have their entitlements reduced by the policy. Among affected families, the average annual cut in benefit entitlements is over £4,400 – roughly a tenth of their total disposable income.4

Consequently, the imposition of the two-child limit has been an important driver of income poverty for families with children. Reversing it would, in the long run, bring around 630,000 children out of absolute poverty (a decrease of 4.3 percentage points) at a cost of roughly £5,700 per child.5 Previous IFS analysis showed that, compared with other levers in the benefit system, reversing the two-child limit would be one of the most cost-effective benefit policies for reducing child poverty (though other policies are better targeted at children in the deepest poverty). Even if the policy were reversed, children in larger families would still have substantially higher rates of poverty than those in smaller families.

Employment of affected parents

When setting levels of means-tested benefits, the government trades off support for low-income families against the immediate cost of the policy and the effects on claimants’ incentives to enter paid work or increase their hours of work. Where parents have been incentivised to enter or increase paid work by the two-child limit, this could offset some of the income loss and raise revenue for the exchequer – but it also increases the cost of scrapping the policy.

A study earlier this year found that the two-child limit increased the employment rate of affected mothers (those with three or more children and in receipt of benefits) by around 3 percentage points, when their affected child was age 4, from a baseline in which about half of mothers in affected households are in work. The finding draws on Census data to compare mothers with a third or subsequent child born before April 2017 (who are not affected by the policy) with those born after (who are), and is consistent with previous evidence showing that mothers’ labour supply can be responsive to welfare reforms. The increase was concentrated in full-time work, which has been shown to be most important for mothers’ career progression. This increase, though meaningful for affected mothers, implies that the substantial majority of mothers do not respond to the policy through employment and hence will have a lower income because of it.

Broader effects on children

Concerns about child poverty naturally extend beyond immediate material living standards. A government policy paper warned that ‘poverty scars the lives and life chances’ of children, and argued that tackling child poverty ‘is both a moral imperative and crucial to building a stronger society and economy’.  

There are well-documented inequalities between richer and poorer children across many outcomes, including educational attainment, health and later employment. However, higher- and lower-income families differ on average in many important respects other than income, and these factors could contribute to the differences in their children’s outcomes. For example, poorer parents on average may themselves have worse health or lower educational attainment, which may themselves lead to worse outcomes for their children. 

The academic literature, much of it in the US, provides some evidence that benefits can impact broader outcomes such as health and education (see Cooper and Stewart, 2021 and Page, 2024 for reviews) – though the size of these effects varies significantly, with the most precisely estimated effects tending to be smaller. Recent evidence published since those reviews were conducted from two randomised controlled trials (Noble et al., 2025; Krause et al., 2025) showed no significant impacts of cash transfers on early childhood development.  

In view of the potential impacts of child poverty on children, campaigners and others outside government have suggested that the reversal of the two-child limit would bring longer-term benefits, improving children’s educational attainment, reducing future demands on public services and improving economic growth.  

While there is little evidence on the impact of the two-child limit specifically on health and longer-term educational outcomes, recent IFS research was able to directly estimate the causal effect of the two-child limit on ‘school readiness’ – an assessment carried out at the end of Reception by teachers, based on a statutory framework covering literacy, numeracy, communication, and social and physical development. The government’s main measure is the ‘good level of development’, currently achieved by two-thirds of children, and the government has a target to increase this to three-quarters. Our research, examining the records of the large majority of children in English state schools, showed that despite the large effect of the policy on incomes, it had no significant effect on the proportion of children achieving a ‘good level of development’. This does not necessarily rule out effects on educational performance at older ages. 

Childbearing

Another potential effect of the policy is to discourage some parents from having third and subsequent children. One recent paper shows that there was no immediate effect of the policy on childbirth – that is, the number of births did not significantly drop in the couple of months after the policy’s implementation in April 2017, suggesting that few families precisely timed childbirth to avoid the two-child limit. But there remains considerable uncertainty about the longer-term effects (which are more important than the short-term effects) and which could change as awareness of the policy grows.6 There is some wider evidence suggesting that these sorts of incentives can affect childbirth, though effect sizes vary substantially, and estimates of the longer-term effects are typically smaller than the shorter-term effects.

What are the government’s options?

As discussed above, media reports suggest that the two-child limit may be changed at the Budget in November. One option would be to scrap the two-child limit entirely. Alternatively, the government could choose an intermediate option that neither scraps it nor leaves it fully in place.7

One possibility is to reintroduce a ‘child element’ for third and subsequent children, but one that is lower than that received for first and second children. This could be a fiscal and political compromise, and there is some economic rationale for a benefit system that awards higher payments for earlier-born siblings – there may be ‘economies of scale’ from having multiple children. For example, some of the additional expenditure parents incur comes from one-time investments such as toys and furniture, and other costs (such as childcare or food) may be cheaper per-child in larger families. Other parts of the benefit system take this approach; child benefit and Sure Start maternity grants are both higher for first children than for subsequent children. Historically, the child element in universal credit was also higher for first children. Reintroducing a lower element would ensure every family with three or more children receiving benefits (except those already exempt from the two-child limit, and the small and especially poor minority already affected by the benefit cap) saw some increase.

Figure 2 sets out the impact of different levels of a potential new element for third and subsequent children (as a proportion of that for first and second children) on poverty, and also shows the total cost of these options. As shown by the line in Figure 2, the cost of introducing a lower child element scales with the proportion chosen – for example, setting the element at half the rate applied to the first and second children would cost about £1.8 billion, around half the cost of full reversal. Likewise, the effects on poverty roughly scale in a similar way, with a child element of half the rate that first and second children get reducing poverty by 310,000 (2.2 percentage points), compared with 630,000 (4.3 percentage points) for full reversal. 

Figure 2. Cost, and impact on poverty, of reintroducing child element for third and subsequent children at lower rates than for first and second children 

Alternatively, the government could partially reverse the two-child limit by reintroducing the full element only for certain families or children. One straightforward option is a ‘three-child limit’ – that is, reinstating the child element for third children born since April 2017, but providing no further payment for fourth and subsequent children. This would again ensure the substantial majority of households currently hit by the two-child limit saw some increase, lifting around 420,000 children out of absolute poverty (a 2.9 percentage point reduction) at a cost of roughly £2.6 billion a year. It would prevent the largest families receiving very large payments – but would be less well targeted by need than a lower element for all third and subsequent children – clearly fourth, fifth and sixth children (and so on) incur some additional expenditure for parents.

An alternative option is to exempt the youngest children from the two-child limit – perhaps reflecting parents’ lower ability to increase work hours before children enter primary school, or the additional investments required in early years. Younger children are also more likely to be in income poverty. Another option is to exempt families with at least one parent in paid work. This could be attractive as it would strengthen, rather than weaken, the incentive for affected parents to enter work. Our modelling suggests this policy would lift around 410,000 children out of absolute poverty – a 2.8 percentage point reduction and a majority of those pushed under the poverty line by the two-child limit. However, it would not help children in non-working families, who are more likely to be in the deepest poverty and would remain below the poverty line with or without the two-child limit – a subtlety missed by focusing only on the headline measure.8 Figure 3 compares the options discussed, with the ability to examine other metrics, including deeper measures of poverty and overall costs. 

Figure 3. Comparison of options for mitigating the two-child limit

Conclusion

As ever, the government faces a trade-off. The two-child limit modestly strengthens work incentives, does not seem to have had much impact on children’s early educational outcomes, and its removal would imply higher taxes, higher borrowing, or lower spending elsewhere. On the other hand, the policy certainly keeps hundreds of thousands of children in income poverty today, and other longer-term consequences for the children are possible. Partial reforms – such as introducing a lower element for third and subsequent children – would imply both smaller costs to the exchequer and smaller effects on poverty, compared with full scrapping. The choice ultimately turns on the government’s priorities: how it balances fiscal constraints, its commitment to reducing child poverty, and its view of the role that the benefit system should play in supporting families with children.