Research by the Institute for Fiscal Studies formed part of the evidence base behind this major change in policy.
Child poverty comes at a “triple cost” to society, said Chancellor Rachel Reeves in her 2025 Budget speech. There is a price to the child, to stretched council services supporting families, and to the country’s future economic growth through wasted talent.
In 2023 to 2024, 4.5 million children in the UK were living in relative poverty (defined as having incomes below 60% of the average household income for that year), which was 900,000 more than in 2010 to 2011. Tackling child poverty is high up the policy agenda for the government, which has set ‘breaking down barriers to opportunity’ for children as one of its five missions.
In the same speech, the Chancellor announced the abolition of the two-child benefit limit, a policy that prevents low-income families with children from receiving additional means-tested benefits for any third or subsequent children.
This landmark decision was informed by in-depth research from the Institute for Fiscal Studies (IFS), which provided vital evidence showing that scrapping the two-child limit was the most cost-effective way to lift hundreds of thousands of children out of poverty.
Understanding the impact of the two-child limit
Introduced in April 2017, the ‘two-child limit’ substantially lowered the incomes of families receiving universal credit, with an average annual cut in benefit entitlements of over £4,400, roughly a tenth of their total disposable income.
The policy has the greatest impact on larger families and is thought to have contributed to the significant increase in relative child poverty rates among those families. In 2013 to 2014, 34% of children in families with three or more children were in relative poverty. This figure had risen to 46% in 2022 to 2023, compared to 24% for those in smaller families.
For the IFS’s ESRC-funded Centre for the Microeconomic Analysis of Public Policy, the direct link to child poverty made it an important policy to study. “Bigger families are more likely to be in poverty, so we wanted to understand the effects of the policy on poverty rates, as well as its impact on other areas, such as children’s educational outcomes,” says Tom Waters, Associate Director at IFS.
Modelling how changes to policy could affect child poverty rates
Researchers analysed data sets on households using a tool developed by the IFS, the tax benefit micro simulator, which enabled them to model the effects of different policy changes. “It’s essentially a very fancy calculator that embodies all the rules of the tax and benefit system in the UK. It allows us to calculate how household incomes would change if a policy, like the two-child limit, was altered or scrapped,” explains Tom.
The 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, bringing around 630,000 children out of absolute poverty at a cost of roughly £5,700 per child.
However, it also highlighted that this option was not a silver bullet. “The household benefit cap is a separate benefit policy that places a limit on the amount of benefits a household can receive,” says Tom. “It means for the very poorest households, those with income typically some way below the poverty threshold, any gains from scrapping the two-child limit are partially or fully wiped out. So, while reversing the two-child limit is the most cost-effective option for reducing headline poverty figures, it’s less effective for those in deep poverty.”
Exploring a link to school readiness
Beyond the immediate financial impact, the IFS also explored the effects of the two-child limit on children’s educational outcomes. Their analysis drew on their own research as well as existing studies to understand how reduced family incomes might affect children’s readiness for school and educational attainment.
“We wanted to test the idea that poverty has an impact on children’s outcomes, including education,” says Tom. “Some research has been done on this internationally, with somewhat mixed results, but very little has been done in the UK.”
They compared how children born before and after the policy was introduced scored in the Early Years Foundation Stage Profile, which is an assessment of a child’s readiness for school at the end of the reception year. The research showed there was no significant adverse effect on the number of children reaching a ‘good level of development’.
Currently, two-thirds of children achieve a ‘good level of development’ but the government has set itself a target of raising that to three-quarters. Says Tom, “Our research suggests that scrapping the two-child limit would not be a cost-effective policy specifically for improving children’s early educational performance, particularly when compared with other, more targeted policies, such as Sure Start, which previous IFS research has shown to have proven cost-effective positive effects.”
Providing an evidence base for government strategy
The IFS team worked closely with policymakers on the development of a child poverty strategy. “We shared the findings of our work in a seminar with civil servants, and I was also part of the advisory group for the child poverty taskforce,” says Tom.
IFS research and data provided evidence that was included in the government report produced on the effects of income on child outcomes. It also provided an evidence base for the government’s decision to reverse the two-child limit, a move that is estimated to reduce relative child poverty by 450,000 children in 2029 to 2030.
What’s next?
The IFS will continue to analyse the impact of the policy, both on children and their families.
The IFS will continue to analyse the impact of the policy, both on children and their families. “Our findings don’t rule out other effects of the policy on children, or indeed their parents. We will be using hospital data to look at the impact on health, and school data for educational performance at older ages,” explains Tom. “We will also be exploring how reduced income affects household spending. For example, whether families cut back on things that make a difference to a child’s development. By researching these different areas, we can start to build a more detailed picture of how this policy affected families and how they responded to it.”