Universal Credit: Welfare that works

Anne Miller reviews the Department of Work and Pensions’ white paper, Universal Credit: welfare that works, Cmd 7957, briefly summarising the main proposals, and assessing to what extent the changes are moving in the direction of a Citizen’s Income.

The current Social Security system comprises a contributory National Insurance scheme and a means-tested safety net (Social Assistance) based on the Beveridge Report of 1942. The original conception has become compromised over time, and the structures of the society and the economy for which they were designed then are very different now. The National Insurance and Social Assistance schemes now fail Beveridge’s basic, but still relevant, principles of ‘the right of every citizen to a minimum level of subsistence’, and ‘the need to preserve incentive, opportunity and responsibility’.

The Department of Work and Pensions’ white paper, Universal Credit: welfare that works, (Cmd. 7957, 11 November 2010, £19.75) identified two significant problems inherent in the current, complex, means-tested benefit (MTB) system:

1) the benefits and Tax Credits (TCs) have to be claimed from up to four different agencies, (Jobcentre Plus, and The Pension, Disability and Carers Service, both within the DWP, together with HM Revenue and Customs, and Local Authorities), involving duplicated, extensive form-filling, uncertainty about outcomes, and increased incidence of error and fraud;

2) the extremely high Marginal Deduction Rates (MDRs), arising from the interaction of the deduction of income tax and National Insurance contributions with the application of several separate tapers (benefit withdrawal rates). Some benefit claimants can find themselves facing an MDR as high as 95.95%, which acts as an inbuilt deterrent to entering or increasing paid-employment.

The white paper proposes two key improvements. The first is the replacement of four out-of-work benefits and two in-work benefits by a ‘Universal Credit’ (UC), based on similar rates to the benefits that it replaces. The four benefits that are being replaced are Income Support (IS), income-based Jobseeker’s Allowance (JSA), income-related Employment and Support Allowance (ESA), and Housing Benefit (HB). The in-work benefits are Working Tax Credit (WTC) and Child Tax Credit (CTC). The second improvement is the combination of several benefit tapers into a ‘Single Unified Taper’ of 65% on net earnings, thereby reducing the MDR to 65% on incomes below the income tax and NI thresholds, and about 76% above them, until the benefit entitlement is exhausted.

‘The Universal Credit will have a simple structure designed to:

  • provide a basic income for people out of work, covering a range of needs;
  • make work pay as people move into and progress in work; and
  • help lift people out of poverty.’ (p.14, para 5)

The UC (which could be called more accurately a ‘Unified Credit’) consists of a basic personal amount with additional amounts for disability, caring responsibilities, housing costs and children. ‘The purpose of the personal amount is to provide for basic living costs. It will broadly reflect the current structure of personal allowances in Income Support, Jobseeker’s Allowance and the assessment phase of Employment and Support Allowance, with single people and couples getting different rates. As now there will be different rates for younger people, (p.18, paras. 19 & 20). IS, JSA and ESA entitlements currently give different amounts for lone parents by age, and for dependent children; they give premiums for family and carers, and add extra for disability, (by degree of disability, age and whether a single person or a partner of a couple).

Application is expected to be made online in most cases, and claims ‘will be made on the basis of households rather than individuals and both members of a couple will be required to claim Universal Credit … through a single application.’ (p.33, para 5). ‘When an existing award to a current benefit ends and the recipient is to be instead awarded Universal Credit, that award will be a household award. In couple households, therefore, the other member will cease to be entitled to existing benefits and will become part of the household award for Universal Credit.’ (p.37, para 20)

‘The Government is committed to providing the financial support less well-off families need to cover children’s living costs. We will therefore include fixed amounts within Universal Credit to provide for these costs. The amounts will be based on those currently provided through Child Tax Credit. They will be additional to Child Benefit. … The Government intends to keep the current principle in benefits and Tax Credits that, where parents are separated and provide shared care, only one of them will be eligible to receive the child element of Universal Credit.’ (p.21, paras. 38 and 40)

‘We assume that ordinarily with a joint claim, only one of the partners would receive the Universal Credit payment. However, we will consider the scope to arrange payments to parents in couples, so that support for children goes to the mother or main carer, as now in Tax Credits.’ (p.68, para. 10)

The ‘upper age limit for Universal Credit will be the age at which people are eligible for Pension Credit, which is currently linked to State Pension age for women and, on current plans, will be 65 for both men and women in 2018.’ (p. 22, para. 50)

The amount of the UC for those out of work will be similar to that of the replaced JSA, but the simplified system could lead to some claimants receiving their full entitlement for the first time, by receiving components of the UC to which they did not realise that they were previously entitled. Take-up is expected to increase, since it will be easier for new claimants to understand the new system, and their application will be made to only one agency, the DWP.

‘By virtue of the changes to entitlement and improved take-up, Universal Credit will have a substantial positive impact on poverty, for both children and adults: Universal Credit could lift as many as 350,000 children and 500,000 working-age adults out of poverty. This is before we consider the positive impact of more people moving into work.’ (p.52, para. 9)

‘This is a significant project, affecting 19 million individual claims and an estimated eight million households.’ (p.37, para.18)

The assessment for UC will have two stages: 1) a gross entitlement calculated by the DWP based on circumstances, and income other than earnings; 2) recipients with earnings from employment will have the earnings taken into account, and the single unified taper will be applied, (p.35). Real-time details of earnings, which will be passed by employers to HMRC, means that immediate adjustments can be made to the UC received, rather than by the former year-end adjustments for under- or over-payments. Information about significant changes of circumstances, (moving into work, becoming sick, losing a job, having a new baby, moving house), all will also normally be entered on-line.

Since the emphasis in this reform is to get people back into work, if it were found that the reduced MDRs do not provide enough financial incentive for certain categories of out-of-work recipients to seek paid employment, then conditionality (applied to all recipients as individuals) and financial sanctions will be brought into play.

‘There will be four broad conditionality groups:

  • full conditionality – jobseekers;
  • work preparation – people with a disability or those with a health condition which means they
    have limited capability for work at the current time;
  • keeping in touch with the labour market – lone parent or lead carer in a couple with a child over
    age one but below age five; and
  • no conditionality – people with a disability or health condition which prevents them from
    working, carers, lone parents or lead carers with a child under the age of one.’ (p.24)

The Government expects that the Universal Credit reform will reduce the number of workless households by around 300,000 within two or three years of implementation, (p.59, para. 38).

For those in work:

The single constant taper will reduce the MDR from its current varying, unpredictable, high rates, and make the outcome of entering paid employment or increasing paid work more predictable. By reducing the MDR facing low earners from around a possible 96%, as now, to about 76% at most, the Government expects to improve the work incentives of around 700,000 low earners, (p.50, para. 1b).

‘For long-term benefit recipients, small amounts of work can be a very positive way in which to refresh skills, gain valuable experience and rebuild confidence. However, small amounts of work are discouraged by the current benefits system.’ (p.43, para. 10)

For selected groups there will be a system of Earnings Disregards before the taper is applied. In Annex 3, examples are given for a couple, a lone parent and a disabled person, but actual amounts will be set closer to the date of implementation. However, it is envisaged that these Earnings Disregards will be reduced by one-and-a-half times the recipient’s eligible rent or mortgage interest support. Further, the reduction in housing costs is capped by a ‘disregard floor’. Thus, the actual earnings disregard has a possible range with a maximum value and a floor, (p. 66).

The distributional impact of UC is expected to be such that in ‘the bottom decile, the average impact of Universal Credit will be to increase net incomes by around 1.5 per cent – a cash value of £2.40 per week. In decile two this figure is around 1 per cent, which equates to more than £3.60 per week. This is before we take the impact of increased take-up into account, so is likely to significantly understate the gains to those on the lowest incomes’, (p. 52, para.12). ‘We expect to see average net incomes reduce in the long term in only deciles 7 to 10, and even there the average reduction will be small – less than 15 pence per week in deciles 8 to 10.’ (p.52, para 14)

The simplification of the system, with the UC being administered only by the DWP, rather than HMRC and Local Authorities as with the benefits that UC replaces, reduces the amount of duplication, and thus the resultant waste and inefficiency, and also the risk of error and fraud. Similarly the single unified taper, by reducing the MDR, reduces the incentive towards fraud, and it is hoped that the use of an integrated computer system will also lead to a reduction in errors and fraud, and will free claimants from the anxiety associated with paper-based self-assessment. The DWP’s program to deter fraud, imposing penalties and recovering debt, will be renewed, (pp.43-44, paras. 13-19).

‘The greater simplicity of the Universal Credit system will lead to a streamlined administration, which we anticipate will lead to savings of more than £0.5 billion a year’, (p.51, para. 7).

Of course, there are many more details in the white paper than we have space for here.

Retained benefits

Alongside the new UC, several of the other state benefits will be retained, although some of these may be reviewed and reformed.

‘Contributory benefits, which are paid on the basis of National Insurance contributions, will be reformed but will continue to exist in parallel to the Universal Credit,’ (p.46, para. 4), ‘but in most circumstances would only be paid for a fixed period, only to facilitate a transition back to work.’ (p.46, para. 6)

With respect to the Social Fund, elements that can be automated, such as Budgeting Loans, Sure Start Maternity Grants and Cold Weather Payments, will be come part of UC. More discretionary elements, such as community care grants and crisis loans, will be devolved to Local Authorities in England and Wales, (pp. 45-47).

‘The current benefit dependent thresholds for access to a range of passported benefits (for example, free school meals and health benefits) will no longer exist. We will replace the current rules with an income or earnings-related system that gradually withdraws entitlements to prevent all passported benefits being withdrawn at the same time.’ (p.45)

The ‘government has already announced in the Budget that it will fundamentally reform Disability Living Allowance from 2013-14. … We plan to consult shortly on our proposals, which will complement the support provided to disabled people by Universal Credit.’ (p.48, paras. 17 & 20)

The government is still considering ways of changing Council Tax Benefit, and of offering childcare support.

Table 1 shows which current benefits are unified and which are retained or modified.


[table id=30 /]

* = non-means-tested benefits (that will not be replaced by UC).

Source: DWP, Benefit and Pension Rates, BRA5DWP, April 2010


How can one assess whether the proposed changes to the benefit system are moving in the right direction?

Since a Citizen’s Income (CI) scheme is a set of instruments rather than a program of policies, (although we believe that the instruments that comprise the CI will lead to benign outcomes), one can assess a policy proposal by comparing the features of that proposal with those of a CI scheme. Thus, in Table 2 below, the main features of any benefit and income tax system are listed in column 1, the elements of the current system that it is proposed be replaced are detailed in column 2, and the key aspects of the DWP proposal is given in column 3, while the main features of a CI are indicated in column 4. An examination of the table reveals that, although the DWP’s proposed scheme demonstrates a small but important shift in the right direction, which we welcome, many features of the current benefit system are retained.


[table id=31/]

Key to the table:

out-of-work benefits, (for those who are unable to work, or for those who are willing to work and are seeking work), ie: IS = Income Support; JSA = income-based Jobseeker’s Allowance; ESA = income-related Employment and Support Allowance:

In-work benefits: TC = Tax Credit, as support for working people on low earnings; ie: WTC = Working Tax Credit; CTC = Child Tax Credit.

HB = Housing Benefit. CTB = Council Tax Benefit. CB = Child Benefit. CI = Citizen’s Income. NI = National Insurance.

MDR = Marginal Deduction Rate, (combination of deduction of income tax, National Insurance contributions, and benefit withdrawal rates (tapers)).

  • ==> slight improvement.

It is obvious from the white paper that the whole impetus for these reforms is to get people off benefit and back into paid work. The government hopes that the reduction of the MDR from nearly 96% for some claimants, to 65% for those with incomes below the income tax and NI thresholds, and about 76% for those with incomes above these thresholds, will be a sufficient incentive for many who are out-of-work to seek work, and those suffering from in-work poverty to increase their earnings.

A single person working 35 hours per week, on the National Minimum Wage of £5.93 per hour, would earn a gross wage of £207.55. The first £124.18 will attract an MDR of 65%, yielding a net amount of £43.46, and the remaining £83.37 will be subject to 76%, leaving £20.01. The net earnings from 35 hours work will be a total of £63.47, representing an average net wage of £1.81 per hour, with an average MDR of 69%. It is not surprising that a stiff regime of conditionality and sanctions, and thus of expensive monitoring, has to be in place to enforce this incentive.

These MDRs are extremely high, especially when compared with an MDR of 42% (40% income tax + 2% NI contribution) for higher rate tax-payers. This makes the system highly regressive overall.

Throughout the white paper, reference is made to supporting claimants to participate fully in society, by which is meant, of course, participation in paid work. The equating of society with paid-work reveals the government’s attitude to society, which does not augur well for David Cameron’s idea of The Big Society.

The household basis for couples as the benefit unit is retained. A joint application has to be made, and the benefit is paid to one partner. An extreme case occurs when a spouse, usually but not exclusively a woman, with caring responsibilities for children or disabled or otherwise infirm people, is financially dependent on a partner who is wealthy enough not to be eligible for a UC. As the Social Security law stands, cohabiting partners of all categories are required to support each other, but it could be ‘in-kind’, and does not have to be in the form of cash. However, despite ubiquitous references to ‘the common purse’, a financially dependent partner even in a formal union does not have legal rights to an income from the wealthier partner. The redress for this is an important part of a Citizen’s Income. A further aspect of this repressive attitude to couples is that they receive less than that of two single people, thus further penalising them, and sometimes driving them apart.

This ‘Universal Credit’ is not universal, as it does not apply to all members of the population who have the legal right to permanent residence in the UK. Paradoxically, if a universal CI system were adopted, and income tax expenditures (which subsidise the richer part of society) were rescinded, then the MDR could have been much less, certainly no more than 50%, for most people.

These changes detailed in the white paper, though welcome as far as they go, are not radical, since they merely remove some of the accretions that have been bolted on to earlier versions of the system, usually in the name of radical reforms. It is still the same non-universal, means-tested system, with claimants lumped together as households, thus retaining the concept of a ‘financially dependent adult’, and in which a significant section of society is excluded on the basis of her/his relationship with a wealthier person, from whom they have no rights to an income. Couples are still penalised, and the system can add to their problems, driving them apart. Too many adults and children will still live in poverty. As is well known, means-tested benefits almost always involve inherent high disincentives to work, which in turn lead to the imposition of conditionality and sanctions. The system is still regressive, and tax expenditures still subsidise tax-payers. It is a pity that the opportunity for really radical new thinking, in the form of a Citizen’s Income, presented by the need to reduce the public deficit drastically, was not seized, to try to rectify many of these other aspects of the current system.