On Monday evening, peers voted in favour of excluding child benefit from a proposed household benefits cap of £26,000 a year.
Critics, including former Liberal Democrat leader Lord Ashdown, argued that imposing the same cap on all families would penalise children.
Ministers said they were “disappointed” with the result but intended to push through their plans “in full”.
Work and Pensions Secretary Iain Duncan Smith claims the cap on out-of-work benefits would save about £600m towards deficit reduction.
But Liberal Democrat, Labour and crossbench peers allied to back a Church of England bishop’s amendment by 252 votes to 237 that child benefit should not be included in the cap.
A spokesperson for the Department for Work and Pensions said: “We are very disappointed by this decision and it clearly flies in the face of public opinion. 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.”
