Universal Credit: Part 1 - Roll up, Universal Credit

Universal Credit (UC) represents a radical transformation of the current working age benefit system, the biggest reform in a generation. There are two key principles at the heart of this reform:

1. A simpler benefit system.
2. One in which work always pays.

These laudable aims are why UC, for all its recent problems, still enjoys cross-party support.

WHICH BENEFITS?

The new scheme places six key in- and out-of-work benefits into a single system:

• Child Tax Credit.
• Employment Support Allowance.
• Housing Benefit.
• Jobseekers Allowance.
• Working Tax Credit.
• Income Support.

It will not replace all working age benefits. So child benefit, disability living allowance andcouncil tax support, among others, are unaffected.

WHO IS ELIGIBLE?

Currently around 600,000 families are on the system and most of these are single, unemployed people. But this is starting to change. The DWP is planning for all new benefit claims from all family types – single people, couples with children, renters and people with ill-health or disability – to be on UC from the end of next year. The final stage will involve transferring existing benefit claimants to the new system. The roll-out is forecast to be complete at some point in 2022.

HOW IS IT CALCULATED?

In the way it is calculated, UC is broadly similar to the current system, especially for out-of-work families. An award is built from different blocks of entitlement, each depending on a family’s characteristics (see above). There is a standard allowance for adults of up to around £318 per month, a child element of around £232 per month per child, a housing element to provide support with rental costs, and additional elements for people who are disabled or with limited capability for work-related activity. Working families can also claim for support with their childcare costs.

WORK PAYS

Under UC, people can enter work and earn a certain amount without any of their benefit entitlement being reduced, thus ensuring work always pays. This threshold – called a ‘work allowance’ – is set at £397 per month for homeowners (equivalent to 12 hours a week on the National Living Wage) and £192 per month for renters.

Once working families have reached their work allowance, the next stage of UC applies – their benefits are withdrawn as their earnings grow. Benefit entitlement is reduced by 63p for every additional pound of net earnings greater than the work allowance. Crucially this is calculated after payment of National Insurance and income tax, so many families will actually receive just 25p of every extra pound earned.

Put all these parts together and a couple with one parent in work and two children, earning the National Living Wage (NLW), would have an income of £21,200 a year in 2017-18. That consists of £12,600 of net earnings, £6,800 of UC and £1,800 of child benefit (see pie chart, main image).

PLUS AND MINUS

Universal Credit presents an array of benefits and problems, from its treatment of self-employed income to family savings and childcare costs, but it is worth pausing to consider the merits and failings of the overall system.

Combining six benefits into a single payment brings some welcome simplification to a system that recipients can often find bewildering. One clear advantage is that it has the potential to boost income from increased take-up of entitlements.

By straddling the in- and out-of-work boundary, UC also helps to clarify whether or not people will be financially better off in work. The answer is unambiguously yes. However, the supplementary question of ‘how much better off?’ is more ambiguous, and something we’ll return to.

But not understanding the system means people often don’t realise what they can claim. That may boost the Treasury coffers, but it is bad news for hard-pressed families.

And of course the apparent simplicity of the new system can rub up against the complexity of people’s lives – something we have heard lots about. UC attempts to copy salary payments by paying families monthly in arrears. But for new UC claims from people falling out of work that has meant a first payment taking six weeks to be made.

Waiting over a month for a first payment is always going to be tough if you fall out of work with little income left, especially when 58 per cent of people moving onto UC are paid either weekly or fortnightly. The wait can also prove problematic for people in the private rented sector, who are automatically pushed into arrears with their landlord.

That is why it is welcome that the Government has removed the seven days that people must wait before making a new claim. It has also allowed a longer housing benefit run-on for new claims, which should help prevent short-term rent arrears building.

But these are by no means the only problems facing UC. Far bigger issues will arise, particularly when families are moved from the old benefit system to the new universal one that is £3bn a year less generous.

David Finch is a senior economic analyst at the Resolution Foundation