The government has been defeated in the House of Lords after Bishops succeeded in amending the Welfare Reform Bill to exempt child benefit from a maximum cap.
The Church of England Bishops - who sit in the House of Lords - tabled an amendment to the government's plans to cap benefits to households at £25,000 a year.
They were joined in the division lobbies by Labour peers, who earlier lost their own separate amendment which would have seen those at risk of homelessness being exempt from the cap.
To a rather unusual cheer in the Lords, the Bishops amendment was carried by 252 to 237.
Ministers insist that the Bishops' amendment would have the effect of raising the cap to £50,000 a year, something they say would be useless as a deterrent to people remaining on welfare and not getting a job. It is highly likely that the government will seek to overturn the amendments in the Commons.
Earlier in the debate the minister in the Lords trying to get the flagship reforms through, Lord Freud, told peers that the reforms were about encouraging families to go out to work, and that the Bishops' amendment would: "take the pressure away from those families, they will go on in the same way that they have been, we will not have the behavioural change that we want and we need from those families."
On Monday morning work and pensions secretary Iain Duncan Smith had insisted that the welfare reforms would not push anyone into poverty, but this is disputed by Lib Dems who say it could force people to leave their homes if they lose their jobs.
However some in the government are said to believe the knock-on costs of the cap would outweigh the benefits, even though polls suggest a majority of the public think £26,000 a year is quite enough for benefit claimants to live on.
Labour's position on the benefit cap can be seen as something of a flip-flop. Despite their earlier claim to support the benefit cap in principle, they supported a separate amendment in an attempt to derail the Bill.
Earlier in the Commons the work and pensions minister Chris Grayling accused Labour of "tabling a 'wrecking amendment' on the cap", suggesting Labour were claiming to support the changes, whilst simultaneously supporting an amendment which would block it.
The House of Lords was unusually crowded, with former Lib Dem leader Lord Ashdown telling peers that he could not support the government on the cap, because ministers had failed to outline a decent transition to the new scheme.
Ministers were supported by former Ulster Unionist leader Lord Empey, who said in order to change the welfare system, it wouldn't be possible to avoid upsetting one section of society or another, and that welfare reform was necessary.
Lib Dem peer Baroness Hussein-Ece told the the Lords that the price of social housing had "shot up" in many parts of London, thanks to much of it having been sold off and managed by the private sector. She said that areas of central London had extremes of wealth, and suggested that forcing families out of their homes would create "ghettos" similar to those seen in the outlying areas of Paris.
To widespread murmurs of approval, she added she deplored the claim that some families were deliberately having children just to claim more benefits.
"Some of the women from these communities are not in a position to make those kinds of choices," she added, saying many lacked the education to make family planning decisions.
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