Peers have imposed new restrictions on the Government's proposals for a "bedroom tax" on council tenants with spare rooms but backed down over changes to other parts of the coalition's controversial welfare shake-up.
The Lords defeat over the cut in housing benefit for tenants in under-occupied properties sets up a second showdown with the Commons over the proposals.
But peers resisted making further changes to the Welfare Reform Bill, which puts in place a £26,000 benefits cap and introduces a new, simplified universal credit to replace a complex range of payments.
A rebellion by six Liberal Democrat peers helped inflict a narrow defeat on the Government over the bedroom tax, which will now not affect the disabled, war widows and foster carers unless they refuse to take up an offer of a suitable alternative home.
Peers voted by 236 to 226, majority 10 in favour of the amendment by Lord Best, which he insisted was targeted at those who needed help.
He warned that families on low incomes hit by the bedroom tax, which would see a 14% reduction in housing benefits for having a spare room or a 25% reduction for having more than one extra bedroom, could be forced to use payday lenders or loan sharks to make up the shortfall.
"While older tenants may have put aside a bit, few will be able to cope when faced with a new tax of £728 every year on top of the rises in their heating bills and other costs," he said.
Labour's Baroness Hollis of Heigham backed Lord Best and said the Government's cuts were hitting the most vulnerable.
She told peers: "Families with a disabled child can lose £14 a week while most of us enjoy a tax-free winter fuel allowance, or find for the second year running that our council tax has been frozen. Not a penny of these cuts are falling on me, and I suspect on very few of you, and yet we are asking disabled families and families with disabled children to carry those cuts for us."
Welfare reform minister Lord Freud said the £100 million extra cost of Lord Best's amendment was "regrettably in the present climate a lot of money" and opposed the change.