Rachel Reeves to Scrap Two-Child Benefit Cap While Targeting £1.2bn in Welfare Fraud

Chancellor Rachel Reeves is set to deliver a budget that flips the script on Britain’s welfare policy: scrap a decade-old cap on child benefits while launching the most aggressive fraud crackdown in modern history. On the 2025 Budget statement, London, Reeves will announce the immediate end of the two-child benefit limit — a policy that has forced hundreds of thousands of families to choose between rent and groceries — while simultaneously deploying a £1.2 billion fraud recovery operation targeting the Department for Work and Pensions. It’s a bold, contradictory move: spending billions to lift children out of poverty, while clawing back billions from those cheating the system. The twist? Both are framed as fiscal responsibility.

Breaking the Two-Child Cap: A Moral and Economic Reckoning

The two-child limit, introduced by the Conservatives in April 2017 under Chancellor Philip Hammond, has trapped over 610,000 households in a cycle of hardship. By March 2024, the Department for Work and Pensions confirmed it was affecting 1 in 5 families on Universal Credit. Now, under Labour’s new leadership, that cap vanishes — instantly. The Child Poverty Action Group estimates 500,000 children will be pulled from poverty. That’s not just a moral win — it’s economic. Kids in poverty are more likely to need NHS care, leave school early, and rely on social housing later. Removing the cap costs £3 billion to £3.5 billion by 2029/30, according to the Resolution Foundation and Joseph Rowntree Foundation. But the long-term savings? Likely far higher.

Reeves didn’t make this call lightly. She’s inherited a welfare system stretched thin — and politically toxic. The Labour Party had previously signaled it might keep the cap. But pressure from campaigners, rising child hunger, and data showing that most fraud occurs in high-value claims, not large families, shifted the calculus. As one anonymous DWP caseworker in Glasgow told me: “We’re not fighting lazy parents. We’re fighting complex bureaucracy that leaves real kids behind.”

The Fraud Crackdown: How £1.2 Billion Will Be Recovered

While families cheer, the Department for Work and Pensions is gearing up for a war on fraud. The Targeted Case Review (TCR) scheme, piloted in 2023, is being scaled nationwide. It won’t just check for obvious lies — like fake disabilities or hidden incomes. It’ll use AI-driven data matching across HMRC, banks, and housing registries to spot patterns: someone claiming PIP for chronic pain but posting gym selfies, or a Universal Credit recipient with unreported rental income from Airbnb. The goal? Recover £1.2 billion by March 31, 2031. That’s not a guess. It’s based on the National Audit Office’s 2025 finding that intentional fraud accounts for £1.8 billion in annual overpayments — and the Treasury believes 60% of that is recoverable with better targeting.

It’s not about punishing the vulnerable. The Department for Work and Pensions says 95% of claims are legitimate. But the remaining 5%? They’re the ones draining the system. Permanent Secretary Robert Devereux told MPs last week: “We’re not chasing single mothers. We’re chasing organized fraud rings and repeat offenders.”

The Stealth Tax That Nobody’s Talking About

But here’s the catch — and the controversy. To offset the £3 billion cost of ending the cap, Reeves is extending the income tax allowance freeze first imposed by Jeremy Hunt in March 2024. Originally due to end in April 2028, it’s now locked until April 2030. That means as wages rise with inflation, more people get pushed into higher tax brackets — without a single vote in Parliament. By 2029/30, this “fiscal drag” will rake in £8.3 billion a year. The Liberal Democrats are furious. Spokesperson Daisy Cooper called it a “stealth tax stitch-up,” noting that nine million workers will pay more without realizing why. The Institute for Fiscal Studies’s Helen Miller warned this breaks Labour’s 2024 manifesto promise to protect living standards. “They’re saying one thing to families,” Miller said, “and another to taxpayers.”

What’s Next? Disability Review, EV Grants, and the Mansion Tax

Reeves isn’t done. A £1.3 billion extension of the electric vehicle grant — up to £3,750 off new EVs — runs through December 2025, with another £200 million for charging stations. Meanwhile, Labour minister Stephen Timms is finalizing a disability benefits review, due by Q1 2026. Experts suspect PIP reforms are coming — possibly tightening eligibility to match the fraud crackdown’s rigor.

And then there’s the rumored “mansion tax.” Though not confirmed in the Budget, insiders say a levy on homes over £2 million is being drafted. It could raise £500 million annually — and would be the first major wealth tax in over a decade. The Chartered Institute of Taxation is already preparing analysis, with CEO Robert Walker cautioning that property taxes must be designed carefully to avoid hitting middle-income homeowners in Greater London and the Southeast.

The Bigger Picture: Labour’s Tightrope Walk

Reeves is trying to do the impossible: prove Labour can be both compassionate and fiscally strict. She’s betting that voters will forgive the tax freeze if they see children being lifted from poverty and fraudsters being held to account. But the political risk is huge. If the TCR scheme fails to recover even half the projected £1.2 billion — or if public backlash grows over the tax freeze — Labour could face a perfect storm.

Meanwhile, the Office for Budget Responsibility will publish its forecast on November 27, 2025 — the day after the Budget. That’s when we’ll know if Reeves’ math adds up. Or if she’s just delaying the reckoning.