The Universal Credit combines both in-work and out-of-work benefits for those on low incomes within a single unified model. This represents the biggest change to the benefits system in 60 years. New benefit claimants will be paid Universal Credit from 2013, with existing claimants being transferred to Universal Credit between 2013 and 2017. Further details are set out in the 'Universal Credit: Welfare that Works' White Paper.
The amount of Universal Credit that people will be able to receive will depend upon income and family circumstances, and will be paid to cover households’, instead of individuals’, needs. A key aim is to ensure that people are always better off in work, and are better off for every extra hour that they work. The Government hopes that Universal Credit will increase work incentives through:
- Simplification of the benefits system so that it is easier for people to see that they will be better-off in work.
- Increased earnings disregards, or the amount that can be earned before benefits are withdrawn.
- A single taper for the withdrawal of benefits above the disregard level, so that benefits are withdrawn gradually and consistently as earnings increase.
- Introducing stronger conditionality to the benefits system – i.e. those who can work or can prepare for work will be expected to do more as a condition of receiving benefit. However in practice, the conditionality regime is broadly the same as now – the primary difference under Universal Credit is that penalties for non-compliance will be greater.
The Government set out in its consultation document 21st Century Welfare that it would reform welfare in order to strengthen the incentive to work, simplify the system (for claimants and those administering it) and reduce fraud and error. Its key principles were to:
- Ensure that the financial benefits from finding work are seen to outweigh the costs.
- Improve the financial reward for those moving from benefits into low hours or low paid work, with people able to keep more of their income as they increase their hours or earnings.
- Continue to ensure that the most disadvantaged are supported in having basic needs met and in reducing child poverty.
- Promote greater responsibility for individuals, by expecting more from those who can work or take steps towards work.
- Strengthen the family.
- Reduce the scope for fraud, error and overpayments by making the system simpler.
- Create a more responsive and immediate system, that can adjust benefit awards at the same time that earnings change.
- Make the benefits and tax systems more affordable.
Five models of reform were proposed in the 21st Century Welfare document, with Universal Credit the favoured approach.
Universal Credit replaces the Working Tax Credit, Child Tax Credit, Housing Benefit, Income Support, Jobseekers’ Allowance and Employment and Support Allowance. In the current system there are over 50 benefits and many combinations of benefits and additional premiums. Each benefit and tax credit has their own rules and criteria. These are administered by The Department for Work and Pensions, HM Revenue and Customs and Local Authorities. The Universal Credit is to be delivered solely by the Department for Work and Pensions.
Simplification of the benefits system
It is hoped that by combining in-work and out-of-work benefits in a single system with a single set of rules, the system will be easier to administer and people will be clearer on their entitlements. In addition Universal Credit will be paid monthly, whereas different benefits and Tax Credits currently are paid at different frequencies.
Universal Credit will be administered by the Department for Work and Pensions and the system will be fully automated, so claimants will not need to deliver the same information to different agencies. Once an initial application is made, claimants should only have to report changes of circumstance. This should all help to reduce the scope for fraud and error.
Housing Benefit for renters will be integrated into Universal Credit and delivered by DWP. It will be paid direct to tenants as part of their Universal Credit award, rather than to landlords. Currently, Housing Benefit for those living in private rented accommodation is paid direct to tenants, while Housing benefit for those in social housing is paid to landlords.
Universal Credit will not be replacing the following payments:
- Council Tax Benefit
- Carer’s Allowance
- Contributory Jobseeker’s Allowance and contributory Employment Support Allowance
- Disability Living Allowance
- Child Benefit
- Bereavement benefits, Statutory Sick Pay, Statutory Maternity Pay, Maternity Allowance and Industrial Disablement Benefit
There are two forms of financial incentive:
- The incentive to enter work if you are out of work – so that as far as possible individuals are better off in work than they would be out of it
- The incentive to progress in work if you are in work – so that as far as possible people see the financial benefits of increasing their hours or earnings
Universal Credit seeks to tackle both this incentive to enter and incentive to progress. It will do this by introducing a single system of earnings disregards and a single taper.
- The level of earnings disregard is the level of earnings that a claimant needs to have before their benefit starts to be withdrawn. The higher the disregard, the more income the claimant can keep in full. Disregard levels for individual claimants will be determined according to the household status (single or couple), the number of children, whether anyone is disabled, and the level of rent (if applicable). The intention is to make disregards larger for those with higher costs from returning to work.
- The taper is the rate at which additional income is withdrawn once it goes above the disregard level. A lower taper means that the claimant keeps more of their additional income. In Universal Credit there will be a single taper of 65% - so for every extra pound earned, the claimant keeps 35 pence of it. However for those earning above the tax threshold, they would lose part of this in tax (meaning that there is a combined taper of 76%). This is a significant improvement for many claimants, who can face combined tapers of more than 90%.
Overall, Universal Credit is forecast to improve the financial incentive to work for 2.7 million claimants and worsen financial incentives for 1.7 million. The biggest benefits will be felt by those who move into work at the lowest hours or earnings (because currently the Working Tax Credit financially rewards people only when they work more than 16, 24 or 30 hours.
Under Universal Credit, all claimants will be required to sign a ‘Claimant Commitment’ which sets out the steps that they will take to move into (or closer to) work. This will be similar to the Jobseeker’s Agreement that exists for Jobseeker’s Allowance claimants now.
There will be four ‘conditionality groups’ in Universal Credit:
- Full conditionality (jobseekers): as stated in Universal Credit: Welfare that Works: “Recipients in this group will be subject to the same requirements to actively seek work and to be available for work as they would under Jobseeker’s Allowance.” (Although the Government has since said that “the norm should be job search as a full time activity” - in Supporting Youth Employment: An Overview of the Coalition Government’s Approach.)
- Work preparation group – this will include disabled people and those with health problems who may have a limited capability to work but are assessed as being likely to be able to work in the future. The requirements on this group will be broadly the same as for people currently in the Work Related Activity Group in the Employment and Support Allowance.
- Keeping in touch with the labour market - this group will include lone parents and lead carers with a child below aged between one and four. They will be required to attend periodic interviews to discuss plans to return to work, in line with the current regime for lone parents on Income Support.
- No conditionality - covering disabled people and those with health conditions that mean that they are unlikely to be able to work in the future; as well as carers and lone parents with a child under one, and those caring for someone severely disabled.
As noted, the conditionality rules are broadly the same as they are currently.
Universal Credit will also, for the first time, introduce “in work” conditionality for those who earn below an earnings threshold. The threshold will be set at the equivalent of working full time at the national minimum wage (i.e. £212.80), although it will be lower for claimants with caring commitments. This in-work conditionality is intended to help to strengthen the incentive to increase hours and earnings for those on low incomes.
Under the Universal Credit, the penalties for failing to comply the conditionality regime have been made significantly stronger:
- Failure to prepare for work (for those in the full conditionality category) will lead to payments ceasing until claimants re-comply. Initially payments will be ceased for one week, then two weeks and then four and so on.
- Failure to actively seek work or be available to start work will lead to ceased payments for one month and then three months for a second offence.
- Failure to apply for a job, accept a reasonable job offer, or attend the new Mandatory Work Activity will lead to payments being ceased for three months.
Sanctions will not be applied to the whole Universal Credit award. Rather, it will apply only to the equivalet amount sanctioned under the current benefits system, so equivalent to Jobseeker's Allowance or Employment and Support Allowance.
Where claimants fail to comply on numerous occasions, they can face sanctions of up to three years – although hardship funds will be available to cover part of the sanction period.
Universal Credit is expected to cost £2.6 billion to introduce. Universal Credit is to be phased in for those already on benefits and Tax Credits, so no one will be worse off at the point of introducing Universal Credit.
The Government estimates that 950,000 people will be lifted out of poverty through Universal Credit: 350,000 children and 600,000 working-age adults. Currently, the UK has the highest proportion of children growing up in workless households of any EU country. Couples with children under five are likely to benefit more from changes. In these couples one individual will be recognised as carer, with no conditionality, and the other individual will have the same obligations as a single person.
A total of 2.7 million households will receive increased entitlements as a result of Universal Credit. 85% of the higher entitlements will go to households in the bottom two quintiles.
There will be 1.7 million households who will have lower entitlements under Universal Credit and 1.2 million of these households are within the bottom two quintiles. These negative impacts are largely for couples without children.
Recent Developments (November 2011 to March 2012)
- 27 March: The ‘Universal Credit: the impact on passported benefits’ paper was relesed which reconsiders eligibility for passported benefits as Universal Credit is rolled out. Read more here.
- 13 March: Save the Children published 'Ending child poverty: ensuring Universal Credit supports working mums' which found that the Universal Credit system could undermine progress to ending child poverty in Britain. Read more here.
- 23 February: The government describes Universal Credit as a weapon against benefit fraudsters. Read more here.
- 17 November 2011: £300 million has been set aside to help to meet childcare costs for Universal Credit claimants that return to work.
- 1 November 2011: The timetable for rollout of Universal Credit was announced. By 2014 one million people are expected to be on Universal Credit.
Responses to the Department for Work and Pensions consultation document 21st Century Welfare
DWP reported that consultation responses expressed:
- Support for simplifying the benefit system
- Agreement that people should be better-off working than on benefits
- Concern at how conditionality would be applied for vulnerable people
- Some support for sanctions which may include community work
- Concern whether there will be sufficient numbers of sustainable jobs
- The view that work is not necessarily the most immediate appropriate option for all
- Some fear that paying the housing element directly to the Universal Credit recipient may lead to collection problems for landlords and tenants falling into arrears
- The view that the benefit and tax credits system is not the only disincentive to work (for instance, lack of affordable childcare and health issues can have an impact).
Inclusion welcomes the fact that the benefit system will be simplified and financial incentives will be improved. However, as the White Paper acknowledges, improving work incentives also means ensuring transparency for claimants and efficiency in how the system is administered. If claimants are unclear on the returns to work, or are concerned about whether and when they will be paid, then this can act as major barriers.
While Universal Credit is a welcome simplification, the complicated system for disregards means that claimants will still require professional advice in order to understand how much better off they will be in work. In addition the very short timescales for implementation, combined with the move to monthly payment of benefit, increases the risks that claimants could feel less secure in returning to work. In addition:
- The failure to include Council Tax Benefit in Universal Credit means that there are risks that the system could be more complicated than it needs to be, and could lead to worse financial incentives.
- The high cost of childcare is also a major barrier to work, particularly in London, and needs greater consideration.
- Universal Credit will also penalise families who have saved, as it will reduce capital limits that were previously available under Tax Credits to £16,000.
Advice UK argues that:
- Consistency, simplicity and reduced bureaucracy are positive features of the Universal Credit.
- Top-down welfare design is risky, as it is not based upon front-line knowledge and experiences.
The IPPR response argues that:
- Universal Credit should take into account that costs differ by locality for working people (in particular childcare and transport costs).
- The lack of jobs, not disincentives to work, is the main driver of unemployment.
- Childcare costs are a major barrier, yet the government has reduced childcare financial support from 80% to 70% of the full costs.
In their response to 21st Century Welfare, Crisis:
- Welcomes the introduction of a simpler benefits system and greater incentives to progress in work.
- Argues there is a need for careful consideration of how housing support is delivered, given that prices differ by areas, and housing stability is of central importance.
- Argues that sanctions should be a last resort after all appropriate and personalised support is given, and safeguards should be in place for the vulnerable.
- Is concerned that the ‘fairness’ between benefit recipients and taxpayers principle in the report could cause stigma for benefit recipients.
Oxfam has developed a gender analysis for the reforms which argues that:
- Payment of Universal Credit to one household member only, most likely to be male, could increase women’s dependence.
- The move away from universal, non-means tested benefits will disadvantage women as they are most likely to receive these benefits.
- Lone parents, most likely to be women, will be affected by the tougher sanctions regime.
- As women are more likely to be second earners in a household, they will also be worse off as a result of weaker financial returns for second earners under Universal Credit.