The welfare cap

The welfare cap is a limit on the amount that government can spend on certain social security benefits and tax credits. The cap aims to better control spending in an area that can be difficult for government to control.

Around half of total welfare spending is included in the cap. It excludes pensions and those payments most sensitive to the economic cycle.

The cap was first introduced in Budget 2014 and the Office for Budget Responsibility (OBR) – the UK’s fiscal watchdog – first reported on whether the cap had been met or exceeded alongside Autumn Statement 2014. The operation of the welfare cap is laid out in the Charter for Budget Responsibility, the document that sets government policy and targets for the public finances.

How is the cap set and assessed?

Spending on relevant welfare must be within a cap and a margin in a single year, all of which are chosen by the Treasury. The cap is only formally assessed at the first Budget or first fiscal update of each new Parliament.

The cap is breached when, at the point of formal OBR assessment, relevant spending is forecast to be above the cap plus margin in the year of the cap.

At preceding fiscal events, the OBR informally monitors the cap.

What happens if the cap is breached?

If the cap is breached at a formal assessment, DWP Secretary of State is required to set out to the House either measures that would bring spending back to below the cap or justify the breach. This would be followed by a debate and a vote.

No formal mechanism is triggered if the OBR, in an informal assessment, says that the cap is on course to be missed.

Latest formal assessment and level of the cap

Autumn Budget 2024 was the first event of the current Parliament. The OBR therefore made a formal assessment of the legislated cap and judged that it was not being met. The legislated cap had been set by the Conservative Government in Spring Budget 2020.

The formal breach means that on 29 January 2025, the DWP Secretary of State will justify the breach to the House of Commons. This will be followed by a debate and a vote.

The Treasury also set a new cap and pathway for the cap at Autumn Budget 2024, as it must do at or before the first fiscal event of the Parliament. The Treasury said that the welfare cap will apply in 2029/30. A vote in the House of Commons is scheduled for 29 January 2025 to approve the new cap.