The government suffered a sixth and huge defeat on its welfare bill when peers overwhelmingly backed calls to prevent single parents being charged to use the child support agency.

Ministers suffered one of the heaviest defeats of the parliament as the lords voted by 270 to 128 to reject the government proposal to charge. It had been seen as a way of discouraging single parents from using the agency to collect maintenance from their estranged partners.

The rebellion was led by the former lord chancellor Lord Mackay of Clashfern, and had the support of the former social security minister Lord Newton, and former Conservative Party chairman Lord Mawhinney, and many Liberal Democrats.

On Monday peers agreed amendment proposed by the Bishop of Ripon and Leeds, the Rt Rev John Packer, to remove child benefit from the £26,000-a-year cap on household benefits. But the scale of this defeat means ministers will have to rethink on this proposal.

Lord de Mauley, the government spokesman, said the loss of charging would make the scheme unaffordable. He said the government did not want to go back to the days when the state was encouraging parents to enter a dispute over payments. Lord Newton, the former social security secretary, repeatedly grimaced and shook his head in disagreement at de Mauley's explanation. Lord Mawhinney had pleaded with his front bench to make some kind of concession or else he would be forced to vote against the government.

Ministers had hoped to deduct a levy from payments to single parents, usually mothers, who receive payments from the other parent after going through the agency.

Lord Mackay said the proposals could put single mothers off seeking the financial support they were entitled to.

He said: "The motivation for these charges is said by the government to bring people to voluntary agreement. "I am entirely in favour of that, but if that proves impossible where the woman is at the stage where there is nothing more she can do, the only thing she can do is pay.

"And what does that do? If anything that might make her not go to the agency at all and the child may lose their maintenance.

"I can't see that asking for money at that stage is an incentive for anything that the government wants to do". He said it was not fair to charge single parents when they are not responsible for creating the need to use the service. He pointed out that 97% of CSA cases are initiated by mothers seeking money from their father.

He said he did not believe his proposals would act as a disincentive for a voluntary agreement or mean the creation of a quasi-judicial bureucratic system.

Labour peer Lord Morris of Aberavon said he was "aghast" at the government's plans. "What is the purpose of imposing on the most vulnerable people a charge of this kind?" he said.

Tory peer Lord Newton said the proposals were "not just". He added: "I don't think this is fair or right or productive.

"I have no problem with the case for reform. I have no problem with the desire to cut the costs. I have no problem with the desire to get people to co-operate voluntarily.

"What I have a problem with is that I don't think those general points connect to the conclusion that the amendment is wrong and I am going to vote for it if it is pressed."

Cross-bencher Lady Butler-Sloss, a former family barrister and judge, said there were fathers "who would simply not pay". She told peers: "The idea that a mother in very poor circumstances, where the father has left her with young children, who finds herself having to seek social benefit from the state which she may not have sought before ... she then has to pay a fee for the welfare of her children, where she may not have any money and he may have some, it is profoundly unfair." The department for work and pensions said in a statement: "We are disappointed that the Lords seem content to leave in place a system that has consistently failed children, and we will seek to overturn this in the Commons. The fact is that child maintenance needs to be reformed, because it does not work.

Our reforms would see a doubling of support for families going through a break-up to come to their own financial arrangements with a far improved statutory scheme in place for those that really need it.

"It is right and fair there is a charge for using a service that can cost the taxpayer £25,000 per case and almost half a billion pounds per year."