Universal credit: why the numbers don’t add up

Chancellor Philip Hammond is under growing pressure ahead of the Budget to reverse some of the cuts to universal credit, the government’s much criticised welfare reform. Politicians promised that combining six benefits into one would “make work pay”, but flaws in the system are so deeply embedded that making significant changes will be hard work, and very costly.

Universal credit replaces six means-tested benefits — housing benefit (help with rent); working and child tax credit (boosting low wages); income support (boosting income for non-working households), and the income-related versions of jobseeker’s allowance and employment and support allowance for those who are seeking work, or too sick to do so.

Universal credit is currently claimed by about 600,000 people but will be extended to millions more, starting with all new claimants in every Jobcentre Plus by November 2018, and then to all existing claimants of the six benefits by March 2022.

Campaigners say the new benefit itself is sound, but cuts made in the name of austerity have left it unfit for its important purpose.

The Delay

The six-week delay between claiming universal credit and the first payment being received has attracted the most media attention, and is the top candidate for change. In fact, the delay is more than six weeks and administrative errors can make it a lot longer.

Once a claim is made, there are seven days before it is considered. These are called “waiting days” and also apply to other working age benefits. This was extended from three days by George Osborne in October 2014 to save £275m a year.

After the waiting days, there is a consideration period of one calendar month which adds as many as 31 days (the average is 30.4).

Then there is another seven-day wait until the first payment is actually made. So the average delay is 44.4 days — nearly six and a half weeks.

That month-long consideration period is supposed to parallel the world of work where politicians imagine wages are always paid monthly in arrears. However, research by the Resolution Foundation found that was not true for most universal credit claimants.

In fact, 47 per cent of them had been paid weekly, and a further 11 per cent fortnightly. For new claimants, moving to a 44- or 45-day wait will be extremely difficult, increasing the risk of taking out expensive short-term debt. Resolution found that only one in seven claimants had savings of more than one month’s pay to tide them over.

Even Iain Duncan Smith, the architect behind the reforms, has called for changes in the waiting time.

The Taper

One of the main claims for universal credit is that it will make work pay. But every extra pound that is earned reduces the amount of benefit which is paid. The amount that families with children and some others can earn before other benefits are reduced has been cut this year to £192 per month. For others, the taper starts with the first pound earned.

Once the limit is reached, claimants will lose 63p of every extra pound earned — an effective marginal tax rate of 63 per cent. In fact, most claimants lose more.

Universal credit excludes a seventh means-tested benefit called Council Tax Support (CTS). That is paid by local authorities and reduces council tax bills for low-income households. CTS is withdrawn at the rate of 20p per pound of extra income, applied after universal credit is worked out. That raises the marginal rate of tax to 70p in the pound for the 55 per cent of universal credit claimants who get help with their housing costs.

If claimants are in work, the withdrawal rate could be even higher after national insurance and income tax are factored in. The NI threshold applies to weekly pay of £157 or more, and that 12 per cent deduction boosts the marginal tax rate to 74 per cent if CTS is also claimed.

Someone who earns more than £221 a week will also pay 20 per cent income tax, raising their marginal tax rate to 80 per cent if they also claim CTS. In a few English districts where the CTS taper is 30 per cent, the marginal tax is even higher at 82.4 per cent. In these areas, universal credit claimants keep just 17.6p in every extra pound they earn. This hardly makes work pay!

Some people say that the withdrawal of benefits is not the same as a tax. Yet the chancellor Philip Hammond disagrees. When he announced a cut in the universal credit taper rate from 65 to 63 per cent at the Autumn Statement a year ago, he said he was “cutting tax for 3m families on low incomes”.

Campaigners are hoping for a further cut in the Budget — perhaps back to the 55 per cent level already planned.

The minimum income floor

People who earn money through self-employment — as nearly 5m now do — seldom have the luxury of a regular monthly income. Yet their universal credit is calculated as if they earned at “minimum income floor”, normally set at the national minimum wage for 35 hours per week.

For someone over 25, that would be £262.50 per week. Statistics on self-employed earnings are scrappy and out of date. But in 2014-15 the Resolution Foundation said average earnings of self-employed people were £240 per week. The Office for National Statistics recently revealed that 58 per cent of self-employed people earned less than £300 a week in 2015-16.

So it is likely that most self-employed people will have earnings below the minimum income floor — yet their universal credit will be assessed as if they did earn that much. Some claimants may also be told they must search for work to boost their total earnings to reach the floor, or their benefit will be cut.

Number crunching

Universal credit has undergone various arithmetic fiddles in order to save money. Here are some of the most egregious examples:

• When calculating housing benefit, the rent paid will be understated if it is above the bottom 30 per cent of rents locally (as calculated at April 2016 and then frozen until 2020). It will also be reduced if there are too many bedrooms.
• 18-21 year olds will not normally get anything for housing, saving £35m a year.
• A premium paid to families worth more than £10 a week was scrapped from April 2017 saving £410m a year.
• The number of children that count may be limited to two from November 2018 — which would produce an overall annual saving £700m.
• The total benefit paid may not exceed a reduced cap — the annual saving from this reduction alone is £360m in 2018/19.
• The rates of universal credit benefits have been frozen from April 2016 until April 2020, despite inflation currently running at 3 per cent a year. This is projected to save about £4bn a year.

Taking these factors into account, universal credit is a benefit for which the phrase “not fit for purpose” could have been coined.

Paul Lewis presents “Money Box” on BBC Radio 4, on air just after 12 noon on Saturdays, and has been a freelance financial journalist since 1987. Twitter: @paullewismoney