The Great Welfare Experiment. Universal Credit… and the rest.

By Lee Healey

The long awaited Welfare Reform Bill was introduced to Parliament today, outlining the Coalition Government’s plans for modernising the welfare system.

The bill provided further information on key elements of change previously announced by the Government, including:

  • The introduction of Universal Credit
  • Household benefit caps
  • Uprating the Local Housing Allowance using the Consumer Price Index
  • Time limiting Contribution-based Employment & Support Allowance for claimants in the Work Related Activity Group 
  • Removing the Youth Condition within Contribution-based Employment & Support Allowance
  • Disability Living Allowance Reform
  • Fraud procedures and sanctions

Universal Credit

The introduction of Universal Credit has been by far the most dramatic change planned by the Government but unfortunately there was still a lack of detail on certain issues. For this particular benefits geek it was a bit like waking up on Christmas Day and finding you had no presents to open.

There was no further detail on the level of ‘tailored earnings disregards’ nor the help available for childcare costs and carers, or what will replace Council Tax Benefit.

There are still huge questions to be answered on the system of ‘transitional payments’ for those that may lose out financially when transferred to the new system and exactly how much the elements of Universal Credit will be, although we now know that it will be made up of a standard allowance, an amount for responsibility for children or young persons, an amount for housing, and amounts for other particular needs or circumstances.

Work and Pensions Secretary Iain Duncan Smith must have known there would be disappointment on the lack of detail on Universal Credit, quickly clarifying on BBC Breakfast that more detail will now be added at the committee stage of the bill.    

So what were we able to confirm about Universal Credit today? In a nutshell:

That there will be larger, personalised earnings disregards which will make it more beneficial for people on low incomes to work.

Basically, claimants will keep more of their wages AND their Universal Credit, meaning that it will be difficult for anyone to argue that “it’s not worth working as I’ll be worse off”. Larger earnings disregards will be particularly useful for those who want to start working a few hours. In fact, the Government have developed a new phrase, conceding that there will be particular incentives for claimants to take on ‘mini jobs’. Reading between the lines, you can only assume that the Government see the taking on of a ‘mini-job’ as an important stepping stone to full-time work.

There will be a standard 65% Universal Credit taper rate.

This is an essential element of making the Universal Credit simpler and easier to understand.

The 65% taper rate will be applied to Universal Credit payments after any earnings disregard. We are still awaiting further details, but one can only assume that it will follow a similar model to tapers currently applied to benefits such as Tax Credits or Housing Benefit.

The following is a very, very basic idea of how the 65 % UC taper might work, using (just so you are clear) completely made up UC and disregard figures! 

Minnie is a 45 year old single person renting a room and she has a current Universal Credit entitlement of £100 PW which includes help with rent.  

Minnie has a UC earnings disregard of £25 (meaning that Minnie can earn £25 PW without it affecting her UC). Minnie takes on a ‘mini job’ earning £50 PW.

The first £25 of Minnie’s earnings are ‘disregarded’. The remaining £25 is subject to the 65% taper.

65% of £25 is £16.25. Minnie’s Universal Credit will therefore be reduced by £16.25.

Minnie’s new income is now Universal Credit of £83.75 and Wages of £50 = £133.75

Minnie would therefore be something like £33.75 better off working under a Universal Credit type scheme (again, please remember I've made up the UC Amounts and the UC Disregard as they are not known at present).  

So how would Minnie’s case work at present, under the existing system?

Let’s say that Minnie currently gets JSA of £65.45 per week and Housing Benefit of £34.55 per week – income total of £100 PW

If Minnie took a ‘mini job’ earning £50 PW here is what would happen…

Minnie would be entitled to a £5 disregard on her JSA. Everything else she earned would be deducted from her JSA.

Minnie’s new income would be:

JSA = £20.45

Wages = £50

Housing Benefit = £34.55

Total income = £105  

So Minnie would be just £5 per week better off working under the current system.

You can see why the Government want to increase (and tailor) the earnings disregards for Universal Credit and introduce a 65% taper rate, as it (should) act as a big incentive for people to at least work part-time. 

It is worth highlighting that the Government plan to have larger earnings disregards for disabled people and parents with children (carers as well??) meaning that these customer groups should keep EVEN MORE of their earnings and their Universal Credit entitlement when they work.

Ultimately the Government, by using a 65% taper, want to ensure that claimants on the lowest incomes are better off by £0.35 for every £1 they earn over the income disregard rate. The Government also want to ensure that claimants ‘know where they stand’ as they start to increase their hours.

So what if, for example, a Universal Credit claimant wants to do some overtime and earn an extra £10 one week?

Assuming that the UC claimant is already earning over the earnings disregard level, the claimant will know that they will earn £10, lose £6.50 from their UC and keep £3.50.

It is when you drill down to it at this level that you realise that it is all a bit of an experiment. The Government are banking on the larger disregards and standard taper rate to act as an incentive to work. Will it be enough to entice people into work?

Maybe, but lets not forget that tougher conditionality may force claimants hand anyway.

Which brings me on to…

Tougher Conditionality

Underpinning all of this is a tougher regime of conditionality, meaning that there will be harsher and tougher sanctions for refusing to take a job.  

For claimants needing to meet work-related requirements, there will be a work-focused interview requirement, a work preparation requirement, a work search requirement and a work availability requirement.

There will also be a ‘claimant commitment’ which will be a record of a claimant’s responsibilities in relation to an award of universal credit.

Claimants failing to meet their responsibilities may be subject to ‘higher level’ sanctions.

That Universal Credit is being aligned to support those at the lower end of the income spectrum

The Coalition Government are making a bold clear step towards culture change with the creation of the Universal Credit. 

From 2013, welfare in Great Britain will mainly be aimed at supporting those on the lower income spectrum, with welfare no longer providing support to moderate/middle income families that may have benefited from the current generosity of Tax Credits.

The Coalition Government estimates that 1.7 million people will have reduced entitlement under the Universal Credit.

This will make the issue of transitional payments an important one. The Coalition Government have stated that no-one will be worse off financially as the new system is implemented, Mr Duncan Smith boldly saying that “nobody will be worse off, they will be cash-protected.” Having witnessed the Tax Credits overpayments problems over the years, please forgive me if I am slightly sceptical about that statement.

There is one area of contradiction here. IDS says people will be cash protected, yet the Government plan to cap benefit payments to £500 per week for couple and lone parent households and to £350 per week for single person households. How will this all fit together? It is common knowledge that families with higher numbers of children and housing benefit claimants will be the losers under these plans. But will these families be offered transitional protection? Let’s hope the Government stick to their promise to ensure that disabled people do not become worse off under the benefit cap proposals.

And the rest…

It will take time for the Government to piece all of this together. There is still so much detail required. What support will there be for carers? The Government have already admitted that they may need to widen their consultation on the Personal Independence Payment, which will replace Disability Living Allowance.

What help will there be for Childcare costs? And for Council Tax Benefit? What will be the impact of time limiting Contribution-based ESA?

IncomeMAX eagerly await the next instalment of information so that we can make an informed decision on whether the planned programme of welfare reform will create a fair and just system that supports people adequately.   

Lee Healey

IncomeMAX Managing Director

17th February 2011