Remove the two-child limit

Policy baseline

Budget 2025 removes the Universal Credit two-child limit from April 2026. Official costings include increased take-up behaviour.

• Targets low-income families with three or more children.
• Government says 450,000 children leave poverty.
• Take-up assumptions are uncertain.

Core trade-offs

The direct beneficiaries are low-income larger families and children. The costs fall mainly on taxpayers funding higher uc spending. The main economic question is poverty falls but work incentives need monitoring.

• Low-income larger families and children gain most directly.
• Costs fall mainly on taxpayers funding higher uc spending.
• Key risk: poverty falls but work incentives need monitoring.

Fiscal impact by 2028-29

+GBP 2.4bn to +GBP 4.0bn. Central estimate: +GBP 2.8bn.

• Positive numbers mean net fiscal cost; negative numbers mean Exchequer savings.
• Main channel is the scored tax, spending or delivery change.
• Offsets depend on tax receipts, behaviour and pass-through.
• Range reflects uncertain implementation and economic response.
• This is not an official costing.

Economic impact by 2028-29

• Jobs: Work incentives may weaken or strengthen depending on taper design and childcare constraints.
• Wages: Household incomes rise for recipients; wages change only if labour supply shifts.
• Prices: Extra demand can lift local prices slightly; national inflation effects should be small.
• GDP / productivity: Long-run gains depend on child outcomes; near-term output effects are mostly demand-side.

Assessment

This is a real trade-off, not a free gain. Low-income larger families and children benefit, while taxpayers funding higher uc spending bear most costs. Overall output depends on behaviour, capacity and pass-through.

Confidence: Medium-low. Higher on the policy target and fiscal channel; lower on behaviour, pass-through and economy-wide effects.

Main risks

• Work incentives: Higher payments can weaken work incentives unless childcare and taper design are careful.
• Take-up uncertainty: Costs rise if eligible households claim more than expected.
• Poverty persistence: Cash support helps, but does not remove housing, childcare and health constraints.

Safeguards

• Protect work incentives with taper analysis.
• Publish take-up and poverty impacts.
• Pair cash support with childcare and housing supply.

Academic evidence

UK government evidence

Sources

• PolicyLens illustrative scenario methodology for remove the two-child limit Internal - PolicyLens, 2026
• Budget 2025 policy costings UK government costing - HM Treasury, 2025
• Budget 2025 UK government budget - HM Treasury, 2025
• What Works? A Meta Analysis of Active Labor Market Programs Academic article - Card, Kluve and Weber, Journal of the European Economic Association, 2018
• Moral Hazard versus Liquidity and Optimal Unemployment Insurance Academic article - Chetty, Journal of Political Economy, 2008
• Change: Labour Party Manifesto 2024 Party policy source - Labour Party, 2024

Other Labour policies

• Raise employer National Insurance
• Apply VAT to private school fees
• Replace non-dom tax status
• Raise capital gains tax rates
• Extend the Energy Profits Levy
• Capitalise the National Wealth Fund
• Capitalise Great British Energy
• Expand the Warm Homes Plan