Rebalancing
universal credit
Making it work for everyone
Universal credit aims to create a much simpler and more flexible benefit system that
makes work pay, “ensuring claimants are better off in work than on benefits ... clearly
showing how increasing hours increases earnings ...while continuing to provide support
for those who need it most”. Lord Freud, Capita Welfare Reform Conference, 27 January 2014
This report summarises our analysis of the financial impact of universal credit on different
groups of people. It focuses particularly on low income parents and disabled people as our
analysis indicates that these groups are the most likely to struggle to make work pay.
Whilst we support the principles of universal credit, our analysis demonstrates that without
changes it will fail to meet its aims.
Work Incentives
An extra shift at work should mean more money in your pocket. Under universal credit, as
currently configured, this will happen only for some. Single people without children and relatively
higher earners will generally gain for each hour of work. Couples where one person is in work, and
the other is seriously ill or disabled, will also see much better incentives to work than in the current
system. However our analysis shows that under universal credit:
•
Many low income working parents will not see any financial gain if they increase their hours
of work. Extra earnings will be eaten up by reduced financial support and greater childcare
costs. In some cases, they will even end up worse off working more hours.
•
Many disabled people will find that though they face extra costs when working, they are not
able to access extra financial support. Others will find it is beneficial for them to reduce their
hours of work to access the extra financial support they need. Some will find that they lose
money by staying in work.
Out of work support
Under universal credit, whilst most out of work support remains the same, there are a few changes
which are likely to cause significant problems for particular groups of people:
•
There is a very significant reduction in the financial support for seriously ill or disabled
people who live on their own or just with dependent children and don’t have a carer.
•
Those who have income such as an occupational pension or maternity allowance will be no
better off as a result of having previously worked, as their universal credit will be reduced
pound for pound.
Many of the low-income households who face the poorest work incentives under universal
credit are in the groups who the Government particularly wants to support into work –
disabled people and lone parents. Poor work incentives for these groups damages
economic growth and equality. Last year in their United Kingdom Overview, the OECD
concluded “low to medium wage second earners and lone parents… respond particularly
strongly to improved incentives”.
We have 10 recommendations to rebalance universal credit. They will help ensure that as
many people as possible see a genuine gain from every hour of work and the most
disadvantaged are protected. They are cost neutral because they include a 5 percentage
point increase in the rate at which universal credit is withdrawn as earnings rise, using the
money thus released to spread gains from work more equally.
1 Our recommendations are based on the following broad criteria:
Measures to improve work incentives for as many people as
possible:
Most
important
criteria
• As far as possible remove extra costs which some groups face.
• Ensure that groups who face extra costs are not excluded from extra support.
• Raise work allowances and additional work allowances so each individual has
an incentive to work.
• Ensure there are no perverse rules which incentivise reducing hours or not
working
• Lower the taper only if the above are met, otherwise increase and use the
savings to ensure they can be met.
Support for those who are unable to work:
• Ensure those who the evidence demonstrates are most disadvantaged and face
the highest risk of social exclusion receive the most help.
• Ensure those that have paid into the system for many years but are not able to
work at that point see some advantage from having worked.
Under current proposals universal credit will reduce by 65p for every £1 earned. However
this does not give a true picture of the amount someone gains for the extra work done. It
does not take into account someone’s extra costs when working or the loss of entitlement
to other financial support as hours of work increase. Changing the taper so universal credit
reduces by 70p not 65p for every pound earned may seem counter-intuitive. However our
analysis demonstrates that if the money saved is used to ensure that gains from work are
spread more evenly then it would ensure a more equitable solution. More households could
receive a genuine gain from work and the most disadvantaged could be protected.
Increasing the taper and using the savings to increase work incentives for the
most disadvantaged helps rebalance universal credit.
2 Recommendations
Cost
1.
£780
million
Provide free school meals for all school children who live in households in
receipt of Universal Credit.
2. Increase the subsidy for childcare costs to 90%.
£130
million
£200
million
3.
Allow the second earner in a household to keep an additional £50 a month
of earnings before their income from universal credit is reduced.
4.
Increase the amount that someone can earn before their Universal Credit is
reduced, by:
a) £100 a month if there is an adult with limited capability for work or work
related activity in their household and
b) £150 if there are two adults with limited capability for work or work related
activity in the household.
£100
million
5.
a) Award those who are awarded more than 0 points but less than 15 points
in the work capability assessment the disability work allowance without the
Work Related Element.
b) Treat those who are challenging a decision that they are ‘fit for work’ as
being in the WRAG for conditionality purposes.
£50
million
6.
Remove the requirement for those likely to have limited capability for work
but earning more than the equivalent to 16 hours at the minimum wage, to
be entitled to DLA or PIP, before they can undergo a work capability
assessment to access the extra support they are likely to need.
Cost
neutral
7.
Include mortgage interest in the maximum amount of Universal Credit of a
household even when someone is working if no one in the household is
under conditionality to work.
Cost
neutral
8.
Introduce a self-care element for those who live on their own or with
dependent children and don’t have a carer. (Additional cost after savings
from support component).
£60
million
9.
Ensure women on maternity leave get the same support in Universal Credit
whether they are in receipt of maternity allowance or statutory maternity
pay.
£140
million
10. Treat any income from an occupational pension and Widowed Parents
Allowance to a taper of 95%.
£70
million
TOTAL GROSS COST (Rounded to nearest £100 million)
£1,500
million
£1,500
million
TOTAL SAVING:
Raising taper to 70%
TOTAL NET COST
£0
!
*Funding for free school meals has been devolved to Wales, Scotland and Northern Ireland. Decisions on
provision are for devolved administrations to make. However, as the savings would come out of universal
credit as a whole, our costings have included all of the UK. They assume that funding to cover paying for
free school meals for all children in households receiving universal credit in those countries would be made
available to Wales, Scotland and Northern Ireland to use as they see fit.
3 *
Analysis of the issues and the impact of our recommendations
Recommendation 1: Provide free school meals for all school children who live
in households in receipt of universal credit.
Issue
Our analysis shows that under universal credit the loss of free school meals for junior and
secondary school children will create a much more significant barrier to take on extra work
than under the current system.
The graph below shows the gains from work as hours of work increase, for a lone parent with two
children. It assumes that there are some childcare costs during school holidays and also after work
as hours of work increase.
Under the current system (grey line on graph below) free school meals are lost at the point
(point 1) that the parent in the household is working sufficient hours to be entitled to working tax
credits. They are therefore lost at the point when their disposable income receives a significant
boost.
Under Universal Credit, (orange line) because gains from work will increase gradually rather
than in one leap, there will be a sudden drop in income if meals have then to be paid for (point 2).
A lone parent with 2 children at primary school will have to work for an extra twelve hours just to
recover the loss in disposable income caused by the loss of free school meals.1 Even if she has no
childcare costs she will have to work an extra seven hours to recover the loss.
Under Citizens Advice proposals (blue dotted line) there is a steady gain from work despite the
increase in the taper.
Gains from work for a lone parent earning £6.50 an hour, living in rented accommodation
with two children aged eight and ten.
1 The Government has not announced what the criteria for receiving a free school meal will be in universal credit but
have stated that they want it to be cost neutral. We therefore think that it is likely that if there is an earnings threshold
over which free school meals will be lost it will be about £6,000. Any other alternative options which don’t involve
increasing spending on free school meals are likely to also damage work incentives.
4 Recommendation 2: Increase the subsidy for childcare costs to 90%
Issue
We welcome the Chancellor’s Budget announcement that all parents on universal credit will
have up to 85% of their childcare costs covered. However, our analysis shows that this
additional support to childcare costs is not enough to make extra hours of work pay for
many parents. As the graph above demonstrates when a parent has childcare costs for any time
out of school hours it is likely to be very difficult for many to increase hours of work beyond the
earnings point when free school meals are lost. It is also likely to be very difficult for some parents
of children under five to move into work. Having to pay for 15% of any childcare costs (potentially
£45 a week) on top of other extra costs of working such as transport means that many may
struggle to make extra work pay. The graph below shows the gains from work for a lone parent
with two children aged one and three2. Under the current system (grey line) many low income parents who work 16 hours or more
receive support with 90% or sometimes 95% of their childcare costs (70% through tax credits, 20%
through an increase in housing benefit and 5% through an increase in council tax support). The
graph below demonstrates that a single parent will lose money if they work less than 16 hours per
week. However once they work 16 hours per week or more she will have a gain of £68 rising to
£79 for 30 hours work.
The orange line on the graph shows her gains from work under the current proposals for
universal credit. It doesn’t fall, but it flat-lines at a much lower level than in the current system, at
about 10 hours of work. There is a gain of only five pounds for increasing weekly hours from 10 to
32. It is very likely that it would actually cost the lone parent to work much more than 10 hours
once she pays extra travel costs.
Under our proposals, (dotted blue line), there would be a small but significant increase in
income. This could be enough to prevent a lone parent losing out by working more hours.
Gains from work for a lone parent earning £6.50 an hour, living in rented accommodation
with two children aged one and three.
2 It assumes that formal childcare is needed and that costs are the average for the UK. It also assumes that the lone
parent is able to access the 15 hours free offer for her three year old during her working hours.
5 Under our proposals: When this measure is combined with allowing every child in a household
on universal credit free school meals it also helps ensure that lone parents with children at school
who will need formal childcare after school and holidays can still make work pay.
Recommendation 3: Allow the second earner in a household to keep an
additional £50 a month of earnings before their income from universal credit is
reduced.
Issue
Under current proposals for universal credit, the first earner in a couple has an initial gain
from work because of the work allowance. However, the second earner in a couple has
more difficulty in making any work pay as they have no work allowance; anything they earn
will be subject to the taper straight away. If working means incurring childcare costs then it
will be difficult to accrue any significant gains from work.
The graph below shows the gains from work for a couple as hours of work increase for the second
earner. Under the current system (grey line) the combined impact of the taper in tax credits and
housing benefit means that there is only a small gain from work.
Under the current proposals for universal credit there is a slow gain from work as hours of
work increase.
Under Citizens Advice proposals, (dotted blue line), there would be a small but significant
increase in income when first entering work which would help cover the initial costs of work.
Gains from work for second earner in a couple. One of the couple is earning £200 a week,
the other is earning £6.50 an hour. They have two children aged eight and ten and some
childcare costs as hours of work increase. Rent is £90 a week.
6 Recommendation 4: Increase the amount that someone can earn before their
universal credit is reduced, by:
a) £100 a month if there is an adult with limited capability for work or work related activity in
their household and
b) £150 if there are two adults with limited capability for work or work related activity in the
household.
Issue
Many disabled people are unable to work fulltime. The graph below shows gains from work
for a single person who has been placed in the work related activity group.
Under the current system (grey line) those doing supported work are able to earn up to £100 a
week and keep all their ESA and housing benefit (point 1)3. Disabled people who are working but
not in supported work can earn £100 for a year but then can only earn up to £20 a week for the
next year (dotted grey line). Disabled people who work 16 hours or more a week can claim working
tax credit with the disability element.
However universal credit (orange line) allows a smoother increase as hours rise but for those
disabled people who are only able to work part-time gains from work are small especially as this
group are likely to face extra costs of being in work.
Citizens Advice proposals for universal credit (blue dotted line) maintain this smooth increase
but at a higher gain throughout and boosting income particularly for those disabled people only
able to work a few hours.
Single disabled person earning £6.50 an hour and living in rented accommodation
1
If there are two disabled people in the household they don’t get any extra help for the second
worker. This worker is also likely to face extra costs of working.
3 Those claiming ESA who are not in supported work can only earn up to £100 for a year and then have to reduce
earnings to £20 or less. 7 Recommendation 5 a): Award those who are awarded more than 0 points but less
than 15 points in the work capability assessment the disability work allowance
without the Work Related Element
Issue
Many disabled people who are entitled to disability element of WTC will not get any more
help under Universal Credit than non-disabled.
A disabled person will only be entitled to additional support in work under universal credit
(orange line) if they are found to be ‘not fit for work’. This is a much higher threshold than under
the current system (grey line) so many fewer disabled people will qualify for additional support
under universal credit. Citizens Advice proposals for universal credit (blue dotted line) would
retain some additional support for this group.
Gains from work for a single disabled person living in rented accommodation found ‘fit for
work’
Recommendation 5 b): Treat those who are appealing a decision that they are ‘fit
for work’ as being in the WRAG for conditionality purposes.
Issue
Our evidence demonstrates that some ESA decisions are wrong by a very large margin. It is
not unusual for advisers to represent clients who are given zero points in their WCA and are
subsequently placed in the group for the most severely disabled (support group) at tribunal. It
is of great concern that people in this position may not be entitled to any benefit for over a year
if they are unable to sign on.
Under the current system someone who wishes to challenge a decision that they are ‘fit for work’
receives the basic rate of ESA once the decision has been reconsidered and they have put in an
appeal.
Under universal credit in order to receive any benefit they will have to sign on as ‘fit for work’ until
their appeal is heard.
Citizens Advice proposals for universal credit would require them to fulfil the same level of
conditionality as those in the WRAG though they would only be eligible for the basic rate of benefit.
8 Recommendation 6: Remove the requirement for those likely to have limited
capability for work but earning more than the equivalent to 16 hours at the
minimum wage, to be entitled to DLA or PIP, before they can undergo a work
capability assessment to access the extra support they are likely to need.
Issue
Under universal credit, people with a deteriorating condition or receiving the disability element
of tax credits with transitional protection have a strong incentive to reduce their hours of work.
The graph below shows gains from work as hours of work decrease for someone with a
deteriorating condition who needs to reduce their hours of work4.
Under universal credit (orange line) a disabled person will only qualify for additional support if
they are found to be ‘not fit for work’. Those with a deteriorating condition who have previously not
been entitled to any additional support cannot have an assessment to test this unless they earn
less than about £100 a week or are entitled to PIP. This produces a significant incentive to reduce
hours of work to earn below this threshold. There is a similar perverse incentive under the current
system (grey line).
Citizens Advice proposals for universal credit (blue dotted line) would remove the perverse
incentive.
Gains from work as hours of work reduce for a single person with a deteriorating condition,
earning £10 an hour and living in rented accommodation
Recommendation 7: Include mortgage interest in the maximum amount of
Universal Credit of a household even when someone is working if no one in the
household is under conditionality to work.
Issue
Disabled people who have a mortgage and can only work part-time may find that they
cannot afford to work at all.
4 It assumes that the person would qualify for the WRAG if they had a WCA 9 The graph below shows the gains from work for a single disabled person in the work related
activity group and paying mortgage interest.
Under universal credit (orange line) mortgage interest is paid when the claimant is not working.
However as soon as they do any work at all they lose all support with mortgage interest. This
particularly affects those who work part-time. If they earn less than their mortgage interest they will
actually be worse off than doing no work at all. Under the current system (grey line) it pays to do
some work but there is a variable threshold at which extra work doesn’t pay until working 16 hours.
Citizens Advice proposals for universal credit (blue dotted line) would enable a steady gain
for each hour worked.
Gains from work for a single disabled person earning £8.50 an hour (mortgage of £80 a
week, council tax £15 a week)
It does not make economic sense to have a system where people under no conditionality to work
are actually incentivised to not work. Under the permitted earnings rules of ESA in the current
system, many people ensure they limit their earnings as they can’t afford to lose their ESA. We
believe these proposals would drive behavior in a similar way preventing many disabled people
with a mortgage keeping in touch with the labour market by doing a few hours work.
Recommendation 8: Introduce a self-care element for those who live on their own
or with dependent children and don’t have a carer.
Issue
Severely disabled people who live on their own and don’t have a carer will be much worse off
under universal credit.
In the current system the severe disability premium (worth about £60 a week) is added on to the
means tested benefits of ‘severely disabled’ people who live on their own or just with dependent
children and don’t have a carer.
10 Universal credit has no equivalent of the severe disability premium. The Government has said
that money saved will be used to increase the amount someone in the support group receives.
This money will now be spread amongst many more people including those who don’t face the
extra costs of living on their own. Because of this those who live on their own and are in the
support group will be almost £40 worse off than under the current system. Households with adult
carers with a partner in the support group will gain significantly from the rise in the support group
element and also because they keep the carers element even if in full-time work. Single parent
households with young carers however will be significantly worse off.
Under Citizens Advice proposals for universal credit severely disabled people who live on
their own or just with dependent children would receive the self care element worth the same as
the carers element. For those in the support group, this would reduce the loss to about £6
compared to their income in the current system.
Recommendation 9: Ensure women on maternity leave get the same support
in Universal Credit whether they are in receipt of maternity allowance or
statutory maternity pay.
Issue
Women who receive Maternity Allowance will be much worse off than those who receive
Statutory Maternity Pay under universal credit even if they receive the same amount of
maternity benefit and have worked for the same length of time and paid the same
contributions.
Someone who has been working fulltime until going on maternity leave will be entitled to maternity
allowance of £138 a week or statutory maternity pay of £138 a week.
In the current system, a lone parent on either of these benefits will be about £70 a week better
off than someone who hasn’t been working and so is not entitled to a maternity benefit.
Under universal credit the parent receiving statutory maternity pay will still be about £70 better
off. However the parent on maternity allowance, even though they are in exactly the same
circumstances as the parent on statutory maternity pay and have paid the same contributions, will
be no better off under universal credit than someone who hasn't been working.
This is because universal credit treats statutory maternity pay as earnings and so the parent keeps
the first £60 plus 35% of the rest – a further £27 (there is likely to be a reduction in council tax
support) overall leaving them about £70 better off. Universal credit however treats maternity
allowance as income other than earnings and so takes any income from maternity allowance
pound for pound from their universal credit.
The following charts show:
Gains in the current system and in universal credit for a lone parent on maternity leave
compared to a lone parent with no entitlement to maternity benefits
11 Recommendation 10: Treat any income from an occupational pension and
Widowed Parents Allowance to a taper of 95%
Issue
Any income which doesn’t count as earnings, will be taken pound for pound off entitlement
to universal credit, so someone who has paid into an occupational pension will find they
are no better off as a result.
The graph below shows the gain in disposable income from an occupational pension as the
amount of the occupational pension rises. It assumes the person is in the work related acitivity
group and is entitled to contribution based ESA.
Under the current system those who have paid NI contributions and also have an occupational
pension are better off as a result. This is because under housing benefit someone keeps 35p in
every pound of any income above the applicable amount.
Under universal credit they will be no better off than if they had never worked or paid into a
pension because any income apart from wages is taken off universal credit entitlement
pound for pound.
Citizens Advice proposals for universal credit would at least give a small gain in recognition of
having paid into the system.
Gain from an occupational pension for a single person paying rent £120 a week
12 Conclusion
Universal credit has the potential to deliver on its aims. It offers some very significant advantages
compared to the current system. It enables work to pay for many of those only able to work for a
few hours (or who can only find part-time work). Under the current system claimants of working tax
credit must work for at least 16 or 24 or 30 hours a week depending on their circumstances. Lone
parents who cant find work of at least 16 hours a week or couples who cant find work of at least 24
hours a week will still gain from working and will be able to claim childcare costs if needed.
Disabled people who are unable to work for 16 hours or more will be able to work less than 16
hours without time restriction. Those who need to vary their hours of work will no longer need to
face the complexity of moving between in work benefits and tax credits and out of work benefits.
However, for many of those groups, such as lone parents, who are likely to respond well to
increased work incentives, the incentives beyond a few hours a week are poor and significantly
worse than under the current system. Some people, such as those with a mortgage, will find that
they lose money by working if they are only able to do a few hours work because of caring
responsibilities or because of a disability or health condition.
Although keeping more (35p) of every extra pound earned appears good, our analysis has shown
that many will actually see a much smaller gain or even a loss once other costs such as child care
and school meals are taken into account.
Our recommendations on changes to the structure of universal credit would ensure that:
• Those on a low income who also face extra costs or a withdrawal of support such as free school
meals in working more hours have a greater proportion of these costs paid so that they can
see a genuine gain from extra work
• Work also pays for those disabled people who may not have the highest level of impairment but
who are most disadvantaged
• Each individual within a household has an incentive to work
• There are no perverse rules which incentivise reducing hours or not working
13 • Those who the evidence demonstrates are most disadvantaged and face the highest risk of
social exclusion receive the most help.
• Those who have paid into the system for many years but are not able to work at that point see
some advantage from having worked.
Citizens Advice recommendations (covering particularly households with children and households
with disabled people) would cost £1.5 billion but could be paid for by raising the earnings taper to
70%. This would mean that (assuming their maximum amount of universal credit stayed the same)
someone’s initial income would rise by 30p instead of 35p for every pound of net earnings. Our
analysis shows that these proposals would result in a more equitable structure. Those who would
find, under the current structure of universal credit, their gain from work is high, would gain slightly
less. However those, who under the current structure of universal credit would keep much less or
even lose by moving into work or increasing their earnings, would be better off.
Our recommendations would therefore rebalance universal credit.
14 Our aims
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© Citizens Advice 2014
Produced by: Citizens Advice
Published: December 2014