Two-child limit mitigation in Scotland would help larger poor families but policy design could harm work incentives

Background

5.6 million families in Great Britain receive universal credit (UC), the primary benefit supporting the incomes of working-age families (Department for Work & Pensions, 2025). The maximum amount of UC that a family can be entitled to depends on a number of factors, such as whether the claimant is a single adult or a couple, the number of dependent children they have and their rental costs. If a member of the family works, then this maximum amount is tapered away at a rate of 55% (beyond a disregard) – meaning that for each additional pound of (after-tax) earnings, the amount of UC that the family receives is reduced by 55p. Hence, as a family’s earnings increase, the amount of UC they receive falls smoothly until their entitlement reaches zero.

A key component in determining the maximum UC entitlement (and hence the final amount received) is the ‘child element’, currently worth £3,455 per year for each child in the family. However, children born on or after 6 April 2017 who are the third or subsequent child in the family do not (aside from some exemptions) generate an extra child element – a policy known as the ‘two-child limit’. As of April 2024, there were 440,000 families affected by the policy, including 27,000 families in Scotland (Department for Work & Pensions and HM Revenue & Customs, 2024). In its Budget for 2025–26, the Scottish Government announced a policy to mitigate, as far as possible, the impacts of the two-child limit (Scottish Government, 2024b) from 2026–27 at the latest. Not much more is currently known about how this policy will be implemented. Some cooperation between the Scottish Government and the Department for Work & Pensions (DWP), which administers UC, will be necessary.

Undoing the two-child limit

How might the two-child limit be undone in Scotland? Ignoring administrative challenges, 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 this is not feasible, then the most obvious alternative is ‘mitigation payments’. These are top-up payments, equal to the child element for each child, to families in Scotland who are affected by the two-child limit policy and are still receiving UC. For families who get such payments, this is equivalent to disapplying the two-child limit.1 The issue with the mitigation payments approach is that there are some families whose earnings are slightly too high to be entitled to UC with the two-child limit policy in place, but who would be entitled to some UC if the two-child limit policy were not in place. These families are difficult to identify – since by definition they are not on UC and in many cases will not have applied for it, and so as things stand no government has the information needed to assess their eligibility (including the number of children, any partner, their earnings, rent, assets and more). They would therefore not receive mitigation payments and so would continue to lose out due to the two-child limit policy. Moreover, as discussed shortly, this policy design creates a ‘cliff-edge’ in benefit entitlements which leads to perverse incentives – exactly the issue that the smooth UC taper is designed to avoid.

In its costings, the Scottish Fiscal Commission (SFC) assumes the mitigation payments option (Scottish Fiscal Commission, 2025). Implementing mitigation in this manner would be similar to how the Scottish child payment (SCP) is administered – the SCP is paid only to families with children on UC, meaning that those who get any amount of UC get the full SCP, while those who earn slightly too much to be entitled to UC get nothing.

Benefits cliff-edges and financial incentives

Implementing the removal of the two-child limit in this way would worsen already perverse incentives created by the SCP, as shown in Figure 1. This graph shows annual net income for an example couple with three children where one partner works 40 hours a week at the National Living Wage (NLW, worth £11.44 in 2024–25). It shows how the family’s income changes as the other partner’s hours of work (also at the NLW) change. As they work more, the family’s net income rises, although some of the additional earnings are lost via higher taxes and reduced UC amounts. Under the current system (shown in green), if this parent works more than 23 hours then their income suddenly drops, because at this point their earnings rise too high to get any UC – and so they are no longer eligible for the SCP, worth £4,176 per year (£1,392 per child). 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. If the two-child limit mitigation was paid in a similar way to SCP (shown in yellow), 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.2

Figure 1. Annual net income for example couple with three children

_{Note: Assumes spouse works 40 hours per week also earning NLW, couple owns their property outright, and third child is young enough for family to be affected by the two-child limit.}

_{Source: Authors’ calculations using TAXBEN, the IFS tax and benefit microsimulation model.}

While here we have focused on the cliff-edges introduced by the SCP and potential two-child limit mitigation policy, there are in fact other benefits that operate in a similar manner. Table 1 lists some of these, along with their eligibility criteria. For example, children can receive free school meals if their family receives UC and has income less than £7,400 per year but get nothing if their income is any higher.3 The design of these benefits means that, in some cases, slightly increasing one’s earnings can be very costly. It should be noted that it can be difficult to design a system that ‘smoothly’ withdraws non-cash benefits such as free school meals, which presumably explains the existence of some of these cliff-edges. The SCP and two-child limit mitigation payments are cash benefits though, the difficulty instead coming from the overlapping responsibilities of DWP and Social Security Scotland.

Table 1. Examples of ‘cliff-edges’ in the UK benefits system

_{Note: Eligibility criteria given for the UC system rather than legacy benefits, although those on legacy benefits are usually eligible for these benefits. Prescriptions are usually free for individuals in Scotland, Wales and Northern Ireland. Legal aid and funeral expenses are administered separately in Scotland but UC recipients automatically qualify.}

_{Source: UK government, Scottish Government.}

Costs and impacts on household incomes and poverty

In its costing, the Scottish Fiscal Commission assumes that the two-child limit mitigation policy would not lead families to change their behaviour significantly – for example, by reducing their hours of work – because the SCP already creates such a cliff-edge and a recent report from the Scottish Government concluded that it has not had a significant impact on employment in Scotland (Scottish Government, 2024a). There is wider evidence that such cliff-edges in the benefit system can lead individuals to change their behaviour though; for example, Blundell et al. (2016) find that tax credits with a cliff-edge when at least one adult works 16 hours per week mostly result in an increase in part-time employment rather than full-time. The SFC predicts that mitigation payments will be paid for 43,000 third or subsequent children in 2026–27, at a cost of £155 million. As the roll-out of the two-child limit continues, the number of children benefiting from mitigation payments is forecast to rise to 50,000, with the cost reaching £198 million a year by 2029–30.

To assess the potential impacts on household incomes of a two-child limit mitigation policy in Scotland, we model the system described by the SFC in its costings. Figure 2 shows the share of households that would benefit from mitigation payments by income decile (tenth). Households affected by the two-child limit policy are virtually all in the bottom half of the income distribution, and 87% are among the poorest 30% of households. The average gain for those receiving the payments is £4,570 per year, equal to 11% of average income. For poorer households, the proportional effects are larger still; for example, those in the poorest tenth would see an increase in income of 14%. The full distribution of gains, in cash and proportional terms, is given in Figure A1 in the appendix.

Figure 2. Share of households affected by two-child limit mitigation policy, by equivalised income decile

_{Note: Assumes full take-up of benefits and full roll-out of universal credit and the two-child limit. Incomes measured net of taxes and benefits but before housing costs are deducted.}

_{Source: Authors’ calculations using the Family Resources Survey, 2019–20 and 2022–23, and TAXBEN, the IFS tax and benefit microsimulation model.}

Two-child limit mitigation payments would also reduce child poverty rates. Estimating precisely what the impact on poverty might be is made difficult by the relatively small sample of three-child families in Scotland around the poverty line in the survey data we use. Bearing this caveat in mind, our best estimate is that mitigation of the two-child limit in Scotland would reduce relative child poverty by 2.3 percentage points (equivalent to 23,000 children).4 A previous analysis – with a larger sample size, but for the whole of the UK – found that the impact would be 4 percentage points (Henry and Wernham, 2024). The smaller effect we find may be because Scotland has fewer large families and child poverty is lower in Scotland than in the rest of the UK, although it may also simply be sampling noise. In any case, both numbers indicate that mitigating the two-child limit would have a strong impact on child poverty. This is because the child poverty rate is significantly higher among large families than among smaller families, and in fact the rise in UK child poverty since 2013–14 is entirely explained by an increase among large families. As a result, Henry and Wernham (2024) find that, of the options they consider, removing the two-child limit is the single most cost-effective policy for reducing UK child poverty, with an annual cost of £4,500 per child lifted out of poverty.

Conclusion

The Scottish Government is in a difficult position. Removal of the two-child limit is a highly cost-effective policy to reduce child poverty, but because universal credit is run by the UK government the Scottish Government may not be able simply to disapply the two-child limit for Scottish families. Mitigation payments for families receiving UC offer a workable alternative that reaches families on the lowest incomes, but they would add further to the list of cliff-edges already in the benefits system which disincentivise families from working more.

Appendix

Figure A1. Average effect of two-child limit mitigation policy on household income among beneficiary households, by equivalised income decile

_{Note: Assumes full take-up of benefits and full roll-out of universal credit and the two-child limit. Incomes measured net of taxes and benefits but before housing costs are deducted.}

_{Source: Authors’ calculations using the Family Resources Survey, 2019–20 and 2022–23, and TAXBEN, the IFS tax and benefit microsimulation model.}

References

Blundell, R., Costa Dias, M., Meghir, C. and Shaw, J., 2016. Female labor supply, human capital, and welfare reform. Econometrica, 84, 1705–53, https://doi.org/10.3982/ECTA11576.

Cribb, J., Farquharson, C., McKendrick, A. and Waters, T., 2023. The policy menu for school lunches: options and trade-offs in expanding free school meals in England. IFS Report, http://ifs.org.uk/publications/policy-menu-school-lunches-options-and-trade-offs-expanding-free-school-meals-england.

Department for Work & Pensions, 2025. Universal credit statistics, 29 April 2013 to 9 January 2025. https://www.gov.uk/government/statistics/universal-credit-statistics-29-april-2013-to-9-january-2025.

Department for Work & Pensions and HM Revenue & Customs, 2024. Universal credit and child tax credit claimants: statistics related to the policy to provide support for a maximum of 2 children, April 2024. https://www.gov.uk/government/statistics/universal-credit-and-child-tax-credit-claimants-statistics-related-to-the-policy-to-provide-support-for-a-maximum-of-2-children-april-2024.

Henry, A. and Wernham, T., 2024. Child poverty: trends and policy options. IFS Report, https://ifs.org.uk/publications/child-poverty-trends-and-policy-options.

Scottish Fiscal Commission, 2025. Mitigating the two-child limit and the Scottish Budget. https://fiscalcommission.scot/publications/mitigating-the-two-child-limit-and-the-scottish-budget/.

Scottish Government, 2024a. Scottish child payment and the labour market. https://www.gov.scot/publications/scottish-child-payment-labour-market/.

Scottish Government, 2024b. Scottish Budget 2025 to 2026. https://www.gov.scot/publications/scottish-budget-2025-2026/.

Data

Department for Work and Pensions, NatCen Social Research. (2021). Family Resources Survey. [data series]. 4th Release. UK Data Service. SN: 200017, DOI: http://doi.org/10.5255/UKDA-Series-200017.