Broken promises: What has happened to support for low-income working families under universal credit

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Today’s Guardian covered new analysis by CPAG and IPPR on the impact of cuts to universal credit. This analysis shows that universal credit cuts will hit families with children hardest, and will be poverty-producing to the tune of around a million children (comparing universal credit as originally designed with its current form).

The Guardian article quoted a spokesman for the Department of Work and Pensions stating that “Starting work is the best way for people to improve their lives… and this report mistakenly assumes that people on benefits will never progress in work”. 

Yet our analysis looks at precisely the question of what happens if people move into work, or increase their hours, in an attempt to increase their income. It finds that, for many people, the rewards from work have been reduced by cuts to universal credit. Last autumn’s reduction in the taper rate means that families keep an extra 2p in every pound they earn (37p instead of 35p), but this is poor compensation for cuts which will leave people hundreds, if not thousands, of pounds worse off. Many will have to work more hours – in some cases as much as an extra two days per week - just to reach the income which universal credit originally promised them.

A single parent with two young children living in an average cost area, working 16 hours per week on the minimum wage, will be more than £1,600 worse off (after housing costs) per year thanks to cuts to universal credit, compared with her income under universal credit as originally designed. She would have to work 14 additional hours per week – almost doubling her working hours - just to recoup this difference.

A couple family with two young children living in outer London, with one full-time earner on the median wage and one stay-at-home-parent, will be £1,308 worse off (after housing costs) thanks to cuts to universal credit. The second earner would have to work almost a day a week to recoup this difference.

The government argues that work incentives have been improved under universal credit because families keep that extra 2p in the pound. But none of the families we looked at in this report will be better-off as a result of this change.

One of the explicit aims of universal credit was to help single parents to use mini-jobs as a stepping stone into higher-earning work. Yet the incentives for single parents to move into low-paid part-time work have been reduced overall by changes to universal credit, in spite of this change to the taper, because of the heavy cuts to their work allowances. 

A single parent not in work (because they have young children) in an average cost area will be worse off by £1,167, after housing costs, as a result of the cuts. If they start work at 16 hours on the minimum wage, their effective hourly pay (after all deductions and housing costs) will be £3.75 per hour, less than it would have been in the absence of all the changes to universal credit when they could have expected £4.33 per hour, in spite of the change to the taper rate. 

Even if this single parent claims childcare costs and thus benefits from the increased childcare subsidy (the other main giveaway within universal credit), they will still only have an effective hourly rate of £3.23 per hour after childcare costs are taken into account (rather than £3.30 per hour under universal credit as originally designed).

From April 2017 single parents with three year-olds and above will be expected to seek work that fits with childcare or school hours in order to receive universal credit. Yet many stand to gain less from working these hours than was originally promised. 

Couple families with young children, with one full time worker on low to medium wages and a second earner working more than part time, who use a lot of hours of paid childcare, in contrast, stand to gain from changes to universal credit overall because while most elements of universal credit have seen substantial cuts, support for childcare costs has been increased. 

This increased support for childcare is very welcome  - and something CPAG campaigned to secure - but it seems odd that while officially parents of children under-three are not required to seek work – because the government recognises that when children are this young, working patterns ought to be a matter of personal choice – the allocation of money within universal credit clearly favours those who work longer hours and use childcare for their young children, while penalising those who work less in order to care for their children (or who use informal childcare such as grandparents). 

Low-paid single parents with young children lose out whether working or not - for a single parent on the minimum wage, the increased support for childcare does not offset losses from cuts to universal credit unless they work more than 40 hours per week. Few single parents of pre-school children would be in a position to work this many hours, or wish to. 

Returning to the question of the poverty impacts of universal credit, the briefing ends by examining the potential of several proposed improvements to universal credit to tackle child poverty. Reversing all the cuts to universal credit and making a series of substantial enhancements could keep around 1.7 million children out of poverty. This may be a pipe dream at the moment, but even making more modest changes could have a profound effect. Restoring the work allowances, for example, would not only strengthen work incentives but could keep up to 300,000 children from poverty. And applying a triple lock to the child element – giving the security to children’s incomes that has been given to pensioners – could keep up to 500,000 children from poverty. 

We are asking the chancellor to take steps such as this, to make universal credit fit for families in next week’s budget.