MPs have voted to back the Government's plans for a 1% cap on annual rises in most working-age welfare payments and tax credits.
After heated exchanges during a Commons debate, politicians voted in favour of the legislation at a second reading by 324 to 268 - a majority of 56.
The Welfare Benefits Up-rating Bill limits rises in most working-age benefits to 1% in 2014/15 and 2015/2016 instead of linking them to inflation. Similar measures for 2013/14 will be introduced separately.
The plan is aimed at slashing £5bn from the welfare bill over the next five years.
Ministers say the cap is needed because it is unfair that state handouts have been rising twice as fast as wages during recent years of austerity.
Labour voted against the move to end inflation-linked rises and branded it a "strivers' tax" as 68% of households caught by the below inflation rise in benefits were in work.
But Work and Pensions Secretary Iain Duncan Smith accused Labour of tying working families into the benefits system and "buying votes" by increasing handouts.
He claimed the previous government had created a system in which nine out of 10 families with children could claim tax credits, including those on £70,000-a-year.
He said: "They (Labour) think that helping people is about trapping more and more people in benefits. What is really interesting is that under the tax credit system, nine out of ten families with children were eligible for tax credits.
"This went in some cases up to over £70,000 in earnings. What a ridiculous nonsense they have created."
Former Liberal Democrat minister Sarah Teather rebelled and warned attacks on the poor could lead to the "fragmentation" of society.
Other Lib Dem rebels were David Ward (Bradford East), Julian Huppert (Cambridge) and John Leech (Manchester Withington).
The Institute for Fiscal Studies (IFS) has estimated seven million working families will be £165 worse off a year, compared to £215 for the 2.5 million workless households.
Mr Duncan Smith says the £165 figure only reflects the benefits cap and claims working families will actually be £125 better off each year due to the rise in the income tax threshold.
He said that since the beginning of the recession incomes for those in work have risen by about 10%, while for those on benefits they have risen by about 20%.
He said: "What we are trying to do over the next few years is get that back to a fair settlement and then eventually it will go back on to inflation."
Shadow work and pensions secretary Liam Byrne claimed the Bill was a "hit and run on working families" who were paying the price for the Chancellor's economic failure.
A Labour bid to block the Bill and insist on a "compulsory jobs guarantee" was defeated by 328 votes to 262, a majority of 66.