Rachel Reeves is warned about abolishing the two-child benefit cap

Axing the two-child benefit cap is not a 'silver bullet' for tackling poverty and would even fail to help some of the poorest households, Rachel Reeves has been warned.

The Institute for Fiscal Studies (IFS) says the move would come with an annual £2.5billion price tag and lift around 540,000 children out of poverty - an average cost of £4,500 a child.

But its report, published today, warned that the cash boost would be partially or fully wiped out for 70,000 of the poorest households.

This is because it would lead to them being affected by the separate household benefit cap, which limits the overall amount of handouts that can be claimed by out-of-work parents.

Highlighting how the welfare system may be encouraging people to remain on benefits, the report found just 200,000 to 350,000 children would be lifted out of poverty if more parents got jobs and the government hit its target of increasing the employment rate to 80 per cent. It is currently around 75 per cent.

Scrapping the household cap rather than the two-child one would lift less kids out of poverty but significantly alleviate the depth of poverty for beneficiaries. This would cost significantly less - around £800million.

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The Chancellor is under pressure from her own backbenchers and some opposition MPs to lift the two-child benefit cap ahead of her first budget on October 30.

More than 100 MPs from all parties signed Commons motions calling for the cap to be scrapped earlier this year.

Over the summer Ms Reeves indicated she will not axe the limit, saying she could not pledge to do so without saying where the money 'is going to come from'.

However, following a huge backlash after stripping 10million pensioners of winter fuel payments, she will likely face pressure to come up with a welfare spending offer.

The two-child cap, announced in 2015 by the Tories, prevents parents from claiming child tax credit or universal credit for any third or subsequent child born after April 2017.

Its supporters say it is unfair for taxpayers to subsidise parents having large families that they can't themselves afford.

However, its critics say the measure has fuelled child poverty.

The child 'relative' poverty rate increased from 27 per cent to 30 per cent between 2010/11 and 2022/23 - a rise of 730,000.

The IFS report said the increase had been entirely driven by families with three or more kids, with half of children in poverty now coming from such families.

The 'relative' measure of poverty relates to people living in households with income below 60 per cent of the median in any given year.

According to the Office for National Statistics, the median household disposable income in the UK last year was £34,500.

IFS report author Anna Henry said: 'The recent rise in measured child poverty is entirely driven by higher rates of poverty among families with three or more children.

'Scrapping the two-child limit would be a cost-effective way of reducing child poverty, at a lower cost per child lifted out of poverty than all the other obvious changes to the benefits system, but it is not a silver bullet.

'Scrapping the two-child limit would eventually cost the government a significant sum, around £2.5 billion a year.

'It would do nothing for households affected by the household benefit cap, who are among the poorest.

'In fact, removing the two-child limit would lead to 70,000 more households being affected by the household benefit cap, wiping out some or all of its effect for those households.'