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In this paper, we examine the labour market effects of lowering the UK's benefit cap in 2016. This policy limits the total amount a working‐age non‐disabled household with no‐one in employment can receive in social security. We treat the sharp reduction in this benefit cap as a natural experiment, comparing those at risk of being capped and those who were not before and after the cap was lowered. Drawing on data from ~500,000 individuals, we find that this reform reduced unemployment compared to those not at risk of being capped. The reform also increased economic inactivity, partly because the cap harmed mental health but also because those at risk of being capped were eligible to claim disability‐related welfare payments that made them exempt. Limiting total monthly welfare payments of low‐income families may increase employment for some but it can also push others out of the labour market altogether. [ABSTRACT FROM AUTHOR]

In this paper, we examine the mental health effects of lowering the UK's benefit cap in 2016. This policy limits the total amount a household with no‐one in full‐time employment can receive in social security. We treat the reduction in the cap as a natural policy experiment, comparing those at risk of being capped and those who were not, and examining the risk of experiencing poor mental health both before and after the cap was lowered. Drawing on data from ~900,000 individuals, we find that the prevalence of depression or anxiety among those at risk of being capped increased by 2.6 percentage points (95% confidence interval: 1.33–3.88) compared with those at a low risk of being capped. Capping social security may increase the risk of mental ill health and could have the unintended consequence of pushing out‐of‐work people even further away from the labour market. [ABSTRACT FROM AUTHOR]