The coalition's blanket £26,000 cap plan on household welfare benefits has been defeated in the House of Lords.
A cross-party alliance involving Labour, Lib Dem and crossbench peers joined to defeat the reform plan by 252 to 237 votes and backed a bishops' amendment which excluded child benefit from the cap. Senior Lib Dem peers such as Lord Kirkwood and Lord Ashdown backed the amendment.
Government peers and Whitehall said the Lords vote "clearly flies in the face of public opinion". A Department for Work and Pensions spokesman said: "There has to be a limit on the amount of money benefit claimants can receive. We think that limit is set at a fair rate of £26,000 - the equivalent to someone earning £35,000 before tax, a salary that many working families would be happy to receive.
"If you take child benefit out of the cap it will simply become ineffective, failing the very principles of our reforms, which is to bring fairness back into our welfare system while ensuring that support goes to those who need it. We are very disappointed by this decision and it clearly flies in the face of public opinion. We are determined our reforms will be implemented in full and we will take this back to the House of Commons to reverse tonight's decision."
The new cap is expected to come into force in England, Wales and Scotland in 2013. The government will have to decide whether to include child benefit in the cap when the bill returns to the Commons.
This was the fifth time the government took a battering on the bill.