The work and pensions secretary wants to restrict child benefit to two children for new claimants (Lihee Avidan)

BENEFITS for the disabled could be taxed and child benefit capped for those with more than two children under plans to further cut the welfare bill.

Iain Duncan Smith, the work and pensions secretary, is arguing that disabled benefits should be increased for the poor and subsidised by taxing the handouts for better-off claimants.

He is also pressing a reluctant David Cameron and the chancellor George Osborne to restrict child benefit to two children for new claimants. As well as saving money, he believes it would encourage welfare claimants to have smaller families.

Senior government sources say restricting child benefit could save around £1bn a year after three or four years while taxing disability handouts would raise “several billions”.

At present the disability living allowance