Universal Credit: a preliminary analysis
Mike Brewer, James Browne and Wenchao Jin
© Institute for Fiscal Studies
Background
• Universal Credit will be a substantial welfare reform, integrating
all means-tested benefits and tax credits for working-age adults
• Fast-moving policy area
– Consultation over the summer
– Spending Review: £2bn to pay for introduction
– White Paper in November 2010
– Welfare Reform Bill in February 2011
– Universal Credit to begin in 2013
• Government’s view based on Centre for Social Justice report
– Mirrlees review of tax system recommended integrating benefits and
tax credits
(http://www.ifs.org.uk/mirrleesreview/dimensions/ch2.pdf)
© Institute for Fiscal Studies
Outline
• What is Universal Credit
– Government’s objectives
– How will it work?
• Our new empirical work
– Winners and losers, and cost to government
– Work incentives
• Not covering administration, operational details, conditionality or
impact on poverty
• Based on details in White Paper, and is a preliminary assessment
– Some of this analysis now redundant given Impact Assessment for WR
Bill
© Institute for Fiscal Studies
What is Universal Credit?
• Universal Credit is a means-tested benefit, based on family
income, which will replace means-tested benefits and tax credits
for working-age adults
– Replaces Income Support, income-based Jobseeker’s Allowance (JSA)
and Employment and Support Allowance (ESA), Housing Benefit,
Child Tax Credit, Working Tax Credit
– Unclear what will happen to Council Tax Benefit
– Pension credit not replaced
– Administered by DWP, and paid monthly based on previous month’s
circumstances
© Institute for Fiscal Studies
Perceived problems with the current system
Rapid
withdrawal;
weak
incentives
Receive three
different
£500
means-tested
benefits/TCs£450
Different inand out-of
work
benefits
Multiple
(simultaneous)
withdrawal; weak
incentives and
horrible interactions
Benefit income, £/wk
£400
£350
IS/JSA
£300
Working tax credit
£250
Housing benefit
£200
Child tax credit
£150
Child Benefit
£100
£50
£0
0
5
10
15
20
25
30
Hours/wk @ £6.50/hr
35
40
Assumes: couple with 2 children, 1 earner @ £6.50/hr, £80/wk LHA or eligible rent
© Institute for Fiscal Studies
45
50
The brave new world
£500
Same
entitlement
£450
to benefits
if do not £400
work
Benefit income, £/wk
Slower
withdrawal
Earnings
disregard
Single system: no
horrible interactions,
less churn between
programmes, and less
chance of non-take-up
£350
IS/JSA
£300
Working tax
credit
Housing benefit
£250
£200
£150
Child tax credit
£100
Universal Credit
£50
£0
0
5
10
15
20
25
30
Hours/wk @ £6.50/hr
35
40
45
50
Assumes: couple with 2 children, 1 earner @ £6.50/hr, £80/wk LHA or eligible rent. Ignores child benefit.
© Institute for Fiscal Studies
How is Universal Credit calculated
• Calculate maximum entitlement
• Calculate size of earnings disregard
• Calculate earned income, unearned income and imputed income
from capital
• Calculate final award
© Institute for Fiscal Studies
Universal Credit: calculating maximum
entitlement
Universal Credit
Personal amount
Child additions
Housing addition
Disability or carers
addition
© Institute for Fiscal Studies
Current system
Example: couple, 2
children, LHA rate of
£80/wk
Universal Credit: calculating maximum
entitlement
Universal Credit
Current system
Example: couple, 2
children, LHA rate of
£80/wk
Personal amount
Income support/
jobseekers allowance
£113.40/wk
Child additions
Housing addition
Disability or carers
addition
© Institute for Fiscal Studies
Universal Credit: calculating maximum
entitlement
Universal Credit
Current system
Example: couple, 2
children, LHA rate of
£80/wk
Personal amount
Income support/
jobseekers allowance
£113.40/wk
Child additions
Child tax credit
£119.90/wk
Housing addition
Disability or carers
addition
© Institute for Fiscal Studies
Universal Credit: calculating maximum
entitlement
Universal Credit
Current system
Example: couple, 2
children, LHA rate of
£80/wk
Personal amount
Income support/
jobseekers allowance
£113.40/wk
Child additions
Child tax credit
£119.90/wk
Housing addition
Housing benefit
£80/wk
Disability or carers
addition
© Institute for Fiscal Studies
Universal Credit: calculating maximum
entitlement
Universal Credit
Current system
Example: couple, 2
children, LHA rate of
£80/wk
Personal amount
Income support/
jobseekers allowance
£113.40/wk
Child additions
Child tax credit
£119.90/wk
Housing addition
Housing benefit
£80/wk
Disability or carers
addition
Disability premia in
means-tested benefits
£0/wk
© Institute for Fiscal Studies
How is Universal Credit withdrawn as income
rises?
• Net-of-tax earned income subject to 65% withdrawal rate
– Lower withdrawal rate than out-of-work means-tested benefits, so extends
further up earnings distribution (and means WTC not needed)
– Higher withdrawal rate than tax credits (65% of net earnings is greater than
41% of gross earnings)
– The earnings disregard depends on family type & housing costs
• Unearned income (including income from some other benefits)
subject to 100% withdrawal rate with no disregard
– Same withdrawal rate as out-of-work means-tested benefits
– Higher withdrawal rate than tax credits (100% is greater than 41%)
• Income from savings is imputed and capital rules mean those with
savings > £16,000 get nothing
– Same rules as out-of-work means-tested benefits
– Much harsher than tax credits: £16,000 of savings would reduce tax credit
eligibility by £1.42/wk
© Institute for Fiscal Studies
Universal Credit example: single adult, no
No “notch” at
children
Same out of
£300
work income
£250
Net income (£/wk)
30 hrs/wk
Slower
withdrawal,
so stronger
work
incentives
£200
£150
£100
Current
£50
Universal Credit
£0
£0
£50
£100
£150
£200
Gross earnings (£/wk)
Assumes: £6.50/hr, £60/wk LHA or eligible rent
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£250
£300
£350
Universal Credit example: lone parent
Slower
withdrawal,
so stronger
work
incentives
Same out of£500
work income
Net income (£/wk)
£450
Faster withdrawal, so
weaker incentives to
earn more, & long-run
loser
No “notch” at
16 hrs/wk
£400
£350
£300
Current system
£250
Universal Credit
£200
£0
£50
£100
£150
£200
Gross earnings (£/wk)
Assumes: 2 children, £6.50/hr, no rent
© Institute for Fiscal Studies
£250
£300
£350
Universal Credit example: couple with
children
Slower withdrawal,
Slower
withdrawal, so
much stronger
work
incentives
Net income (£/wk)
£600
Same out of
work income £550
No “notch” at
24 hrs/wk
so stronger
incentives to earn
more
Faster withdrawal,
so weaker
incentives to earn
more
£500
£450
£400
Current system
£350
Universal Credit
Better off under
Universal Credit
regardless of
hours worked
£300
£0
£50 £100 £150 £200 £250 £300 £350 £400 £450 £500 £550 £600 £650 £700
Gross earnings (£/wk)
Assumes: £10/hr, £100/wk LHA or rent
© Institute for Fiscal Studies
Universal Credit example: 2nd earner
in couple without children
Net income (£/wk)
£550
Winner if do
not work
£500
Faster
withdrawal, so
weaker work
incentives
£450
£400
£350
Current system
£300
Universal Credit
£250
£0
£50
£100
£150
£200
Gross earnings (£/wk)
Assumes: Main earner on £245/wk, 2nd earner on £6.50, £80/wk LHA or rent
© Institute for Fiscal Studies
£250
£300
£350
Timetable for transition
From October 2013
No new claims of out-of-work
benefits: will claim Universal Credit
instead
Families leaving out-of-work benefits
will claim Universal Credit
From April 2014
No new claims of tax credits: will
claim Universal Credit instead
April 2014 to October 2017
Remaining claimants of benefits and
tax credits moved to Universal Credit
Transitional protection: families
protected in cash-terms at point of
transition while circumstances
unchanged
© Institute for Fiscal Studies
Winners and losers
• 2.5 million working-age families will gain
• 1.4 million will lose out in the long run
• 2.5 million will receive as much payment as they do under the
existing system
• Cost (given our assumptions)
• Total gain of the winners is £3.6 billion per year
• Total loss of the losers is £1.9 billion per year (ignoring
transitional protection)
• Long-run cost of £1.7 billion per year (WR Bill says £2 bn)
• Short-run cost depends on how families are moved across and
nature of transitional protection
© Institute for Fiscal Studies
Winners and losers from Universal Credit
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
the
poorest
2
3
4
5
6
7
8
income decile group
9
the
richest
loser (ignoring transitional protection)
not affected because UC entitlement matches current entitlement to MTBs and TCs
not affected and currently not receiving any means-tested benefits or tax credits
winner
Notes: Income decile groups are based on equivalised family income using the McClements equivalence scale.
Source: Authors’ calculations using the IFS tax and benefit microsimulation model, TAXBEN, run on uprated data
from the 2008–09 Family Resources Survey.
© Institute for Fiscal Studies
Change in income by income decile group
£ change
% change
£6.00
6%
£5.43
£5.00
5%
£4.58
£4.20
£4.00
4%
£3.64
£3.00
3%
£2.00
2%
£1.40
£0.73
£1.00
£0.00
1%
0%
income decile group
-£1.00
the
poorest
2
3
4
5
6
-£0.55
-£0.48
7
8
£ change without transitional protection (LHS axis)
% change without transitional protection (RHS axis)
Notes: Income decile groups are based on equivalised family income using the McClements equivalence scale.
Source: Authors’ calculations using the IFS tax and benefit microsimulation model, TAXBEN, run on uprated data
from the 2008–09 Family Resources Survey.
© Institute for Fiscal Studies
-£0.23
-£0.18
-1%
9
the
richest
Change in income by family type
withoutwithout
transititional
protection
transititional
protection
£ change
£5
£4
£3
£2
£1
£0
-£1
-£2
Single adult
© Institute for Fiscal Studies
Couple without
children
Couple with
children
Lone parent
Change in income by family type and employment
status (without transitional protection)
Family
type
single adults
Number of
adults in
work
1
0
couples
without
children
2
1
0
couples
with
children
2
1
0
lone parents
1
0
© Institute for Fiscal Studies
Fraction of
that family
type
Change in
income, %
73%
0.1
27%
0.4
76%
<0.1
19%
1.0
6%
0.5
61%
<0.1
33%
1.7
6%
-0.9
56%
0.1
44%
-1.0
•Personal amount under UC >
WTC
•Gain from earnings
disregards
Unearned income to be treated
more harshly under UC than
under CTC
Effect of Universal Credit on participation tax
rates
• Universal Credit strengthens the incentive for single individuals to
do low-paid work
• Universal Credit particularly strengthens the incentive for couples
to have one person in work rather than none...
• ... but weakens the incentive for both members of a couple to
work, rather than just one
• Why?
– Universal Credit gives more support to single-earner couples than the
current system, but this extra support is taken away more quickly
when the second earner moves into work
© Institute for Fiscal Studies
Changes in METRs among workers
• Around 1.7 million workers see their METRs fall, in particular
– 600,000 see METR fall from between 77% and 96% to 76.2%
• Taxpayers who face withdrawal of multiple benefits under the current system
– 350,000 see METR fall from >80% to 65%
• Non-taxpayers who face withdrawal of multiple benefits or an out-of-work benefit
in the current system
– 400,000 see METR fall from more than 70% to around 32%
• Taxpayers who lose entitlement to tax credits
– 200,000 see METR fall to zero
• Second earners in couples who lose entitlement to benefits and tax credits
© Institute for Fiscal Studies
Changes in METRs among workers
• Around 1.8 million see their METRs increase, in particular
– 900,000 see their METRs increase from 73% to 76.2%
• Withdrawal rate of Universal Credit is higher than that for tax credits alone
– 300,000 see their METRs increase from 32% to 76.2%
• Taxpayers who become entitled to Universal Credit
– 350,000 see their METRs increase from 0% or 41% to 65%
• Second earners in couples who face withdrawal of Universal Credit, but are nontaxpayers
© Institute for Fiscal Studies
Average METRs by earnings
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How does this vary by different types of worker?
– single individuals
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How does this vary by different types of worker?
– single earner couples
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How does this vary by different types of worker?
– two-earner couples
© Institute for Fiscal Studies
Summary: impact on family incomes
• 2.5 million winners, 1.4 million losers, and 2.5 million not affected
• Cost £1.7 bn a year in the long run (or without transitional
arrangements)
• Across the income distribution
– Bottom six-tenths will, on average, be better off, with a progressive pattern.
The richer ones will lose slightly on average.
• Different family types
– Couples will fare better than single people
• Lone parents will lose, on average, in the long run;
• Couples with children have the highest average gain
– But substantial differences in impact within each family type
• No simple explanation for pattern; reflects parameters chosen by
government for Universal Credit
© Institute for Fiscal Studies
Summary: impact on work incentives
• Incentive to work for low earnings stronger under Universal Credit
for single people and those in couples whose partner doesn’t work
– Higher earnings disregard and lower withdrawal rate than current
out-of-work benefits
– These individuals have the weakest work incentives under the current
system
• However, Universal Credit will weaken incentive for couples to
have both members in work rather than just one
– This is because it will have a higher withdrawal rate than current tax
credit system
• Similarly, those with weakest incentives to increase earnings at
the moment (low earners with children) will see METRs reduced...
• ...but METRs increase slightly for those on higher earnings and for
low-earners in 2-earner couples
© Institute for Fiscal Studies
Concluding thoughts
• Many details unresolved, or unclear, in White Paper
• Some thorny policy issues include
– Council tax benefit: inside or outside Universal Credit, and how to
localise?
– Childcare element of working tax credit: how to replace?
• Decisions also needed on
– conditionality: who is subject, and how much Universal Credit to
sanction
– in-kind passported benefits
– support for mortgage interest
– disability additions
– rates for students and those under 25
© Institute for Fiscal Studies
© Institute for Fiscal Studies
Average PTRs by earnings
© Institute for Fiscal Studies
How does this vary by different types of
individual? – single individuals
© Institute for Fiscal Studies
How does this vary by different types of
individual? –in couple, partner doesn’t work
© Institute for Fiscal Studies
How does this vary by different types of
individual? –in couple, partner works
© Institute for Fiscal Studies
Universal Credit: full example of withdrawal
• Couple with 2 children, earning £400/wk, renting at £80/wk,
savings of £10,000
Calculate maximum entitlement
Calculate earnings disregard
Calculate net earnings
Calculate imputed income from
capital
Final calculation:
© Institute for Fiscal Studies
Universal Credit: full example of withdrawal
• Couple with 2 children, earning £400/wk, renting at £80/wk,
savings of £10,000
Calculate maximum entitlement
Calculate earnings disregard
Calculate net earnings
Calculate imputed income from
capital
Final calculation:
© Institute for Fiscal Studies
£313.30/wk
Universal Credit: full example of withdrawal
• Couple with 2 children, earning £400/wk, renting at £80/wk,
savings of £10,000
Calculate maximum entitlement
£313.30/wk
Calculate earnings disregard
£5,700 – 1.5*£4,160, but minimum of
£1,300 for this family
Calculate net earnings
Calculate imputed income from
capital
Final calculation:
© Institute for Fiscal Studies
Universal Credit: full example of withdrawal
• Couple with 2 children, earning £400/wk, renting at £80/wk,
savings of £10,000
Calculate maximum entitlement
£313.30/wk
Calculate earnings disregard
£5,700 – 1.5*£4,160, but minimum of
£1,300 for this family
Calculate net earnings
£322.31/wk (equivalent to £400/wk
after deducting NI and income tax)
Calculate imputed income from
capital
Final calculation:
© Institute for Fiscal Studies
Universal Credit: full example of withdrawal
• Couple with 2 children, earning £400/wk, renting at £80/wk,
savings of £10,000
Calculate maximum entitlement
£313.30/wk
Calculate earnings disregard
£5,700 – 1.5*£4,160, but minimum of
£1,300 for this family
Calculate net earnings
£322.31/wk (equivalent to £400/wk
after deducting NI and income tax)
Calculate imputed income from
capital
(£10,000-£6,000)/250 = £16
Final calculation:
© Institute for Fiscal Studies
Universal Credit: full example of withdrawal
• Couple with 2 children, earning £400/wk, renting at £80/wk,
savings of £10,000
Calculate maximum entitlement
£313.30/wk
Calculate earnings disregard
£5,700 – 1.5*£4,160, but minimum of
£1,300 for this family
Calculate net earnings
£322.31/wk (equivalent to £400/wk
after deducting NI and income tax)
Calculate imputed income from
capital
(£10,000-£6,000)/250 = £16
Final calculation:
£313.30
–£16
–0.65*(£322.31 – £25)
=£104.05/wk
© Institute for Fiscal Studies