The government has suffered a humiliating court defeat after it was found to have unlawfully discriminated against thousands of severely disabled people who were left financially worse off after moving on to universal credit.

The court of appeal dismissed a challenge by the Department for Work and Pensions to two previous high court decisions that protected claimants in receipt of severe disability premium against a drop in income under the new benefit.

The cases were brought by two disabled individuals, known as TP and AR, who had sought justice after their benefit income was reduced by £180 a month when they were required to claim universal credit after moving house into a different local authority area.

Responding to Wednesday’s decision, AR said: “We hope that the court of appeal ruling will finally bring an end to our fight for severely disabled people not to be disadvantaged by universal credit. It is still so shocking to us that we have had to fight so long and so hard just to get the government to see that their policy is unfair.”

Tessa Gregory from the law firm Leigh Day, which represented AR and TP, said the ruling was a “wake-up call” for the DWP.

“We hope that the government will waste no more time or resources fighting this legal case and will instead get on with what it should have been doing in the first place: protecting this acutely vulnerable cohort of claimants and overhauling universal credit to make it fit for purpose.”

The DWP has seven days to decide whether to continue its attempt to overturn the two judgments by applying to the supreme court. A DWP spokesperson said: “We will continue to make transitional payments to those previously receiving the severe disability premium where eligible, and have already paid £51.5m to more than 15,000 people. We are carefully considering this judgment.”

The court ruled in the first case in June 2018 that the cut was unlawful because claimants who had moved to a different local authority area where universal credit was in operation had been treated differently to those who had moved within their home borough where the new benefit had not yet arrived. TP and AR were awarded compensation plus continuing £180-a-month payments to meet their benefit shortfall.

The government subsequently proposed new regulations to prevent other severely disabled people moving on to universal credit and to compensate those who already had done so. But it decided those who had moved on to the new system before 19 January 2019 would get just £80 a month in compensation.

TP and AR launched another legal challenge to this decision and in May 2019 the high court ruled this was unlawful, as the estimated 10,000 people who moved before 19 January would receive significantly less in compensation than those who moved afterwards, despite their needs being the same.

While appealing against both judgments in July, the government increased the proposed top-up payments to £120 a month, and a third legal challenge to this is pending, depending on whether the DWP decides to appeal the case further.

Michael Bates from Central England Law Centre, which represented a third claimant in the second case, said: “There is no justification for the way these vulnerable claimants have been discriminated against and they [the government] should think very carefully about how to properly protect people in the transition to universal credit.”

Severe disability premium and the enhanced disability premium are benefit supplements specifically aimed at meeting the additional care needs and costs of severely disabled people living alone with no carer. They were scrapped under universal credit.