Parents of children aged between one and two will get an extra £200 a year per child as part of family-friendly Budget measures.
Work and Pensions Secretary Yvette Cooper said the “Toddler Tax Credit” would go to 885,000 families earning less than £50,000 a year.
And she also unveiled a benefit boost, worth up to £56 a week, for grandparents and other family “unsung heroes” who look after children “at times of family difficulty”.
Payments made by local councils for “kinship care” will no longer be counted against their claims for housing and council tax benefit.
Both changes will be paid for by £200 million savings the Department for Work and Pensions aims to realise through automating benefit processing and reducing accidental overpayments.
“This toddler tax credit gives parents more help and choice when they need it most,” Ms Cooper said, detailing the change. “It will give families with young children an extra £200 a year in their pockets at a time when many parents want to stay at home or work part time. We will spend £10 million to put more money into the pockets of family members like grandparents who step in and bring up their grandchildren when their families are going through hard times.
“These people are often unsung heroes, who have not been properly recognised by the benefit system up to now.
“They will now be up to £56 a week better off as they will be able to keep the money they receive to care for their grandchildren, as well as their housing and council tax benefit.”
The Family Rights Group, part of the Kinship Care Alliance, welcomed the shift in benefit rules for grandparents and other family carers.
But chief executive Cathy Ashley said: “We believe significantly more still needs to be done, including the introduction of a national financial allowance and support system to enable more children who are in the care system to live safely and securely with their wider family and to assist many children who are currently living with impoverished family and friends carers.”