By Alex Stevenson Follow @alex__stevenson
Peers have rejected the government's plans to prevent benefit claimants receiving more than £26,000 a year, handing the coalition's welfare reforms another big setback.
The Lords backed an amendment put forward by Church of England bishops, who had argued that the most vulnerable in society would be hit by the changes, by 252 votes to 237.
The proposal for a £26,000 cap after tax, or £35,000 before tax, is applicable across the country - despite the fact that rental prices are significantly higher in the south-east of England compared to other parts of the UK.
The Department for Work and Pensions has already increased its assessment of the number of families set to be hit by the changes, which now stands at 67,000 - up from 50,000.
Earlier work and pensions secretary Iain Duncan Smith refused to accept that families would be "plunged into poverty" as a result of the changes, however.
He told the Today programme this morning: "We always said there would be discretionary measures to make sure this doesn't punish people, but that we make sure help them to change their circumstances.
"There is absolutely no reason why any family should not be able to found accommodation and that why no children should be in any respect plunged into poverty."
Coalition plans to reform the benefits system have encountered extensive opposition in the Lords so far this month, with changes to the disability living allowance prompting three defeats in one sitting.
Leaked government correspondence suggests the number of homelessness 'acceptances' could double the number already expected as a result of the benefits reforms to total 40,000.
Mr Duncan Smith said that the definition of 'homelessness' used by the government was misleading, as it included those families where children have to share rooms.
He added: "I can guarantee this - nobody will be made homeless in the sense of the public's view of it as a result of this."
But the Rt Rev John Packer, Bishop of Ripon and Leeds, told peers he was not persuaded that the number of homeless people would not be negatively affected.
The number of homeless people in West Yorkshire is rising steadily and churches and many others in the county are increasingly involved in providing night shelter accommodation for the homeless," he said in the Lords.
"Any arrangement which seeks to find accommodation for people is liable in practice to see some of them slipping through nets and finding themselves with nowhere to go at all."
There are also concerns the total cost of the move could end up costing more than the estimated £270 million of savings.
A letter from communities and local government secretary Eric Pickles' office, published by the Observer last July, warned that the savings do not take into account the additional costs to local authorities through homelessness and temporary accommodation.
"In fact we think it is likely that the policy as it stands will generate a net cost," it stated.
Mr Duncan Smith hit out at the bishops in an interview with yesterday's Sunday Times.
"The question I'd ask these bishops is, over all these years, why have they sat back and watched people being placed in houses they cannot afford? It's not a kindness," he argued.
"I would like to see their concerns about ordinary people, who are working hard, paying their tax and commuting long hours, who don't have as much money as they would otherwise because they're paying tax for all of this. Where is the bishops' concern for them?"
The work and pensions secretary received a sympathetic voice from Norman Fowler, the Tory peer who served as Margaret Thatcher's social services secretary from 1981 to 1987.
"It is almost impossible," he observed, "to make changes to the social security budget without running into controversy".
Labour had adopted a position of limited opposition to the government's proposals. It supported the "principles" of the benefit cap, a spokesman said, but challenged the implementation of the reforms.
Its amendment exempting those threatened with homelessness was defeated in the Lords by 250 votes to 222. The party's peers then voted in favour of the bishops' amendment, helping defeat the government.
Paddy Ashdown had indicated before the vote he was prepared to vote against the government, in what would be a first for the former Liberal Democrat leader.
Fellow Lib Dem peer Joan Walmsley told peers during the debate she would not vote with the government, citing her concern for the disruption to children's education which upheavals caused by the reforms could have.
"To be made roofless or overcrowded... is going to be very bad for their education," she warned.
Lord Ashdown told Sky News on Sunday that the moves were "completely unacceptable".
He insisted "this legislation is in its present form I won't accept," before expressing a hope that work and pensions secretary Iain Duncan Smith could mitigate the impact of the changes through transition arrangements.