More than 1.1 million low-income families in rented homes face a "cost of housing" crunch without action from John Healey in next month's budget, the Resolution Foundation thinktank has warned.
Local housing allowance (LHA) has been frozen in cash terms since autumn 2024.
In a new report, Saving Private Renters, the thinktank found that rising rents since then have led to a widening gap between what families claiming LHA can afford, and the realities of the market.
It said a low-income family renting a typical two-bedroom flat now faces an average shortfall of £158 a week. That rises to more than £300 a week in parts of London.
The Resolution Foundation rejects the suggestion that relinking LHA with local conditions would mainly benefit private landlords, by driving up rents.
By analysing previous changes in LHA, it finds that 90p of every £1 tends to fall to tenants, instead of feeding through into price changes.
Resolution Foundation economist Stephen Hunsaker said: "The gap between average rents and Local housing allowance levels is set to reach a record high this October, and failing to repeg LHA to actual rents in next month's budget could lock in a freeze for another year, and see the gap reach 30% by March 2028."
He added that "with many tenants receiving housing support already going without essentials to pay their rent today, the government should restore the automatic annual linking of LHA to relieve the pressure on low-income families in the private rented sector."
Relinking LHA to rents would cost £2bn a year by the end of this parliament in 2029-30. The Resolution Foundation suggests funding that change by increasing the "taper rate" at which universal credit (UC) is withdrawn as recipients' income rises.
The report argues this would involve a transfer within the UC system, towards claimants with the most need.
The thinktank pointed to survey evidence suggesting one in five working-age adults in families on housing support in private rental accommodation were unable to afford to keep their homes warm, and one in eight were unable to afford three meals a day.
When LHA was first introduced in 2008 it was pegged to the median level of local rents, and in 2011 that was reduced to the 30th percentile. It has been frozen for nine of the past 14 years.
A chorus of charities and campaigners have called for the restoration of the link, including Crisis, the Joseph Rowntree Foundation and Citizens Advice.
The chancellor will present his budget on 28 October. He is under pressure to fulfil Labour's promise of giving voters a "breathing space" amid rising costs, but likely to be constrained by rising inflation and interest rates.
A government spokesperson said: "Local housing allowance rates are reviewed annually, and future decisions will be taken in the context of the government's welfare priorities, and the fiscal context."