MPs have approved the controversial Welfare Benefits Uprating Bill following a fiery debate in the House of Commons.

The bill, which will cap rises in a number of benefits at 1 per cent, passed by 328 votes to 262.

The legislation, which will now need to be approved by the House of Lords, will mean local housing allowance base rates will be capped at 1 per cent – less than the rate of inflation – for two years from April 2014. Most working age benefits, including employment and support allowance, income support, and jobseekers allowance will also be uprated by 1 per cent over the next three years, as will child tax credits and working tax credits.

Earlier, Iain Duncan Smith told MPs that the gap has grown between the increase in wages and increases in benefits. He said in the last five years out of work benefits have increased by 20 per cent, twice the rate of earnings.

The work and pensions secretary said: ‘I think this is not fair, particularly for the taxpayer.’

He countered accusations the coalition government is hitting people on low and middle incomes by saying the increase in the low tax band threshold has lifted two million people out of tax and claimed the government is raising more tax from the richest than the previous Labour government.

Labour opposed the bill and argued it is unfair, citing figures from think tank The Resolution Foundation showing 68 per cent of households affected are in work.

Liam Byrne, shadow secretary of state for work and pensions, criticised the government for cutting benefits and cutting the top rate of income tax for the richest. He said: ‘How can he justify a £3.4 billion tax giveaway to Britain’s richest citizens?’

Labour tabled an amendment calling for a compulsory jobs guarantee for long term unemployed adults funded by limiting tax relief on pension contributions for people earning more than £150,000. Under Labour’s plan if they don’t take up the offer of work they would lose their benefits.

The Chartered Insitute of Housing has expressed ‘serious concerns’ about the bill.

Chief executive Grainia Long said: ‘Inflation on household essentials has been high throughout the recession, further eroding the living standards of those on the lowest incomes – including those in work, the “strivers” government says it wants to support. 

‘Capping benefit rises at 1 per cent will hit families who are already struggling to pay for basics like housing, food and fuel, and who are turning to food banks in increasing numbers.’

An impact assessment published shortly before the debate confirmed capping benefit rises will save around £3 billion over two years, with poorer families hit hardest.

The assessment states: ‘Households towards the bottom of the income distribution are more likely to be affected and have a slightly higher average change because they are more likely to receive the affected benefits.’