Tens of thousands of struggling families on universal credit will be told in the run-up to Christmas that their benefit payments are to be capped – leaving them potentially hundreds of pounds a month worse off and at risk of destitution. Many claimants who lost their jobs in March under the first coronavirus lockdown and have been unemployed since then will be informed in December by the Department for Work and Pensions (DWP) that their benefits will be slashed unless they find work. If they are capped, these households face benefit income losses averaging about £250 a month from January. For some families living in high rent areas such as London, being capped could leave them several hundred pounds a month out of pocket. Official figures published on Thursday show 170,000 households in Great Britain – the vast majority with children – had benefits capped in August, marginally down on July when record numbers of households were capped. More than 40% of capped families had children under the age of five. The anticipated pre-Christmas surge of capped claimants follows the end of a nine-month “grace period”, which protected some new universal credit claimants from the cap at the start of the pandemic. A further surge is expected in January, when the grace period ends for thousands who made a claim in April. Separate research published on Thursday said the financial shock of the benefit cap increased the risk of poor mental health among claimants. A study by the London School of Economics concluded: “[The cap] may actually push people further away from the labour market because it undermines their wellbeing.” The increase in benefit-capped households is likely to heighten concern that ministers are failing to protect many low-income people from falling into deeper poverty as a result of the pandemic. The chancellor on Wednesday refused to commit to retaining the £20-a-week Covid top-up to universal credit beyond March. Shelter urged ministers to scrap the benefit cap. “It limits families’ basic incomes to the point where parents have to choose between paying their rent or feeding their children. And too many get to the point where they have no choice, and homelessness becomes unavoidable,” said the housing charity’s chief executive, Polly Neate. Alison Garnham, the chief executive of the Child Poverty Action Group, said: “Families are being capped at a time when the shrinking labour market leaves them little or no hope of finding extra hours or new jobs to escape the cap … They are losing crucial support just as we enter a coronavirus recession. That isn’t right.” The DWP has said up to 160,000 people who started a universal credit claim in March will see their grace period end in December, though it does not know how many will be capped. Claimants are exempt if they work and earn more than £604.59 a month, or are in receipt of some disability benefits. The cap – a limit on the total amount of benefit people can get – was introduced in 2013 to provide an “incentive” for jobless claimants to find a job. Ministers have since made it even less generous, despite evidence – including from the DWP’s own research – that capped claimants were less likely to find work. About 440,000 households have been capped at some point in the last seven years. The cap restricts jobless universal credit or housing benefit couple claimants to household benefit payments totalling £20,000 a year (£385 a week) outside London and £23,000 (£442 a week) in the capital. These limits have remained unchanged since 2016. The government’s official social security adviser, the Social Security Advisory Committee (SSAC), has called for the cap to be suspended or made more generous during the pandemic, because it is unfair to put low-income families at risk of homelessness when employment opportunities are scarce. A DWP spokesperson said: “To help them adjust to receiving welfare support, households will have already received a nine-month exemption from the cap and many still won’t be capped because, for example, they are exempt or their total benefit income is below the cap level. “The benefit cap … provides a strong work incentive and fairness for taxpayers, whilst providing a reasonable safety net of support for the most vulnerable.”