Universal Credit (UC) is a new benefit which is to replace means-tested social security benefits and tax credits for working-age claimants by 2021. UC work allowances, the maximum a claimant can earn before their award is withdrawn, will be reduced from April 2016. Limits to support for new claimants will also apply from April 2017. This paper provides an introduction to Universal Credit and analyses the impact of these proposed changes.Jump to full report >>
Universal Credit (UC) is a new benefit which is to replace means-tested social security benefits and tax credits for working-age individuals and families. The aim is to simplify and streamline the benefits system, improve work incentives, tackle poverty among low income families, and reduce the scope for error and fraud. UC was first introduced for a small subset of new claimants in certain areas in 2013, and is gradually being rolled out to new claimant groups. The benefit is not expected to be fully introduced until 2021.
Summer Budget 2015 announced a series of changes to Universal Credit and, in advance of the full introduction of UC, to tax credits:
Following the Government’s defeat in the House of Lords on 26 October, the Chancellor announced in Autumn Statement 2015 that the planned reduction in the tax credits income threshold and increase in the taper rate would not now go ahead. The other changes listed above are, however, being implemented.
Had the proposed changes to tax credits gone ahead, the total package of tax credit and UC measures announced in the Summer Budget and Autumn Statement 2015 would have delivered savings of £3.73 billion in 2016-17, rising to £5.71 billion in 2019-20. Having reversed the tax credit changes, the Chancellor is now expected to save £0.36 billion in 2016-17 and £4.81 billion in 2019-20. Some commentators point out that welfare savings have not been abandoned completely, but merely postponed.
The limits to the child element of tax credits and UC, and the removal of the family element/first child premium, are being introduced via the Welfare Reform and Work Bill 2015-16. The changes to the UC work allowances are being introduced via the Universal Credit (Work Allowance) Amendment Regulations 2015. These regulations were subject to the negative procedure, but were considered by a Delegated Legislation Committee on 19 November, and discussed during the Lords Committee Stage of the Welfare Reform and Work Bill on 14 December.
The work allowance is the amount an individual or family can earn before their maximum Universal Credit award starts to be reduced. The level varies according to household circumstances, and whether the maximum UC award includes an amount to cover housing costs. From the start, the 2010 Government made it clear that, along with the unified, responsive benefit structure and single taper, work allowances set a more generous level than the existing earnings disregards in “legacy” benefits and tax credits were integral to the offer under UC that “work pays, and more work pays.” However, even before the Summer Budget announcement, changes to the work allowances meant that they were less generous than originally envisaged.
The reductions to the UC work allowances announced in the Summer Budget will ultimately have a similar impact to the changes to tax credits which are not now going ahead, the main difference being that while families would have been affected by the tax credits immediately from April 2016, the full impact of the UC changes will not be felt until UC is fully introduced. Although the impact varies according to household circumstances, overall the changes mean a significant reduction in the generosity of UC, and for some groups a reduced incentive to enter or progress in work.
The Department for Work and Pensions has not produced an Impact Assessment for the work allowance changes. The Social Security Advisory Committee expressed concern about whether there was an adequate evidence base to assess and evaluate the changes. Analysis by the Resolution Foundation suggests that, taking into account the broader package of tax and benefit changes in the Summer Budget and Autumn Statement, and the proposed National Living Wage, working households on UC are set to lose an average of £1,000 in 2020, rising to £1,300 for those with children. The Social Mobility and Child Poverty Commission warns that the impact of fiscal pressures on work incentives and the extent of in-work support risks undermining the original aspirations for Universal Credit. It recommends reversing the cuts to the work allowances before they are implemented in April 2016.
The Government states that most analyses of the impact of the UC changes fail to take into account the full package of policy measures affecting families, including elements such as increases in the personal tax allowance, the National Living Wage, and better childcare provision. Furthermore, it points out that analyses fail to account for the dynamic impact of UC, including changes in behaviour in response to improved opportunities to move into and progress in work. The Government also envisages providing help and support to seek more or better paid work, to “recoup the loss” from the work allowance changes. The Social Mobility and Child Poverty Commission believes however that it will be “very difficult” for many families to increase their hours and pay to avoid big cuts to their incomes compared to the current system.
For individuals and families already receiving UC, there will be no “transitional protection” to protect them from the reductions in the work allowances from April 2016. Families moving from “legacy” benefits and tax credits to UC as part of the “managed migration” will however, if they would receive less under UC, have their UC ward topped up so that they do not lose out in cash terms. This transitional protection will last until the family’s UC award catches up, or there is a “significant” change in circumstances triggering the loss of protection. Transitional protection will not however be available for those moving onto UC as a result of a new claim, or for those on existing benefits transferred to UC as a result of a change in circumstances.
The Institute for Fiscal Studies estimates that, taking into account all the announced changes to Universal Credit including the limits to the child element, the long-term impact not taking into account transitional protection will be reduction in entitlements totalling £3.7 billion compared with the existing legacy benefits and tax credits system. The IFS estimates that working families would face a total cut of £1.5 billion a year, with more working families losing than gaining (2.6 million lose an average of £1,600 a year, and 1.9 million gain an average of £1,400 a year). There is concern that families transferring to Universal Credit as part of the managed migration whose entitlement to UC is substantially lower than their existing benefits and tax credits might be reluctant to move into work or increase their hours if this would trigger a loss of transitional protection, thereby undermining the UC incentives structure.
Commons Briefing papers CBP-7446
Authors: Richard Keen; Steven Kennedy