Universal credit: universal panacea?

Issue 219 (December 2010)

David Simmons takes a look at the Government’s intention to replace the main means-tested benefits for working-age claimants with a universal credit.

Introduction

Following the consultation paper 21st Century Welfare, which set out various options for fundamental structural reform of the social security system (see Bulletin 218), the Government has decided to proceed with the universal credit. It appears most of the respondents to the consultation agreed with the need for fundamental reform and with the principles underpinning the universal credit, including simplification and enhancement of work incentives, although many reserved judgment pending more details and expressed concern about the effects of reform on support for those unable to work.1

The Government has now published a White Paper on the Universal credit,2which it intends to enact via a Welfare Reform Bill in January 2011. Claims for Universal credit will begin in October 2013 and existing claimants of working age means-tested benefits will be transferred onto Universal credit between April 2014 and October 2017. The White Paper describes the Universal credit as ‘the most significant change to the welfare system since the Beveridge reforms in 1947’.

The case for reform is set out in Chapter 1 of the White Paper, which basically repeats the analysis in 21st Century Welfare which was examined in our article in Bulletin 218. The main problems with the current system are said to be:

  • poor work incentives due to the high proportion of earnings lost when claimants enter employment because of tax and withdrawn benefits, resulting in the widespread perception that people are better off on benefits than in work, ‘trapping’ claimants in worklessness and welfare dependency and failing to reduce to poverty;
  • complexity, which causes high levels of fraud and error and which makes it difficult for people to understand and secure their entitlement to a range of benefits, administered by different agencies; to calculate the financial implications of entering work; and to have confidence that their benefits will be accurately and quickly adjusted when they move in and out of work;
  • the spiraling cost of the system.

The White Paper claims that the universal credit will solve these problems by:

  • increasing work incentives by introducing a standard benefit withdrawal rate of 65%, higher earnings disregards and increased conditionality;
  • radically simplifying the system by merging the main means-tested benefits for working age claimants into one benefits, payable in and out of work and administered by one agency (the DWP) via extensive use of online technology;
  • reducing costs through streamlined administration and better targeting.

This could result in:

  • 350,000 children and 500,000 adults being lifted out of poverty and a 300,000 reduction in the number of workless households;
  • improved benefit ‘take-up’, higher entitlements for low paid working households and a reduction in losses due to fraud and error by more than £1 billion per year;
  • a more ‘work-focussed benefit system’ resulting in ‘better health outcomes, higher educational achievements, and reduced crime’.

Whether the Universal credit will fulfil such high expectations remains to be seen, but there are many unanswered questions and concerns, some of which are considered below.

Key features

Universal credit is an integrated means-tested benefit for people under pension age who are not working or are in low-paid work. It will replace income support (IS), income-based jobseeker’s allowance (JSA), income-related employment and support allowance (ESA), housing benefit (HB), child tax credit (CTC) and working tax credit (WTC).

Universal credit will be calculated on a household basis and will comprise basic personal amounts payable for single adults and couples (with lower rates, as now, for claimants under 25), plus additional amounts for disability, caring responsibilities, housing costs and children.

With regard to disability additions, it is intended to ‘mirror’ the ESA model, with additional ‘work-related activity’ and ‘support’ components, rather than the ‘existing structure of overlapping disability premiums’, which is ‘overly complex and causes confusion’. Consideration is also being given to ‘what extra support may be needed for disabled people in universal credit’ (and the future of carer’s allowance – see below).

Housing costs will be paid for eligible rent and mortgage interest payments. Rent support will be based on the current system of local housing allowances (as recently cut – see Bulletin 217) and rent rebates and consideration will be given as to ‘whether changes are needed to the current approach to calculating help with mortgage costs to ensure it is consistent with universal credit principles’.

Fixed amounts will be paid for children, ‘based on those currently provided through CTC’, and ‘additional to child benefit’, but, as now, only one parent of a separated couple providing shared care will qualify for a payment. There will also continue to be assistance with childcare costs for working parents, but the Government wants to simplify the current system and is considering providing support through vouchers, discounts, or additional earnings disregards as an alternative to additional payments. It has no definite proposals, however, and is seeking views from ‘key stakeholders’.

As a means-tested benefit, Universal credit will have the same household capital limits and ‘tariff income’ rules which currently apply to IS (note that there are currently no capital limits relating to tax credits). Actual net earnings from employment will automatically be taken into account by using the Revenue’s ‘real time’ PAYE system. Earnings from self-employment at levels equivalent to the minimum wage may be assumed where they are reported as lower than this. Income other than earnings will be taken into account as now, with a full disregard for disability living allowance.

Universal credit will have a single withdrawal or ‘taper’ rate of 65%, which would apply to household income and net earnings above the Universal credit threshold. There will also be earnings disregards, depending on family circumstances. The actual amount of the disregards will be set nearer to October 2013, but are envisaged as being around £3,000 per year for couples without children, £5,700 for couples with children, £7,700 for lone parents, and £7,000 for couples with a disabled partner. The White Paper states, ‘we do not expect to include a disregard for a single person without children – any earnings would be tapered off straight away’. The disregards will be reduced, however, by 1.5 times the recipient’s eligible rent or housing costs to a minimum ‘disregard floor’, likely to be around £520 per couple and £1,560 for a lone parent, plus £520 for a first child and £260 for second and third children, and £2,080 for disabled claimants.

Unlike the current situation with IS, JSA, ESA and WTC, there will be no rules precluding or determining entitlement relating to the number of hours a person is working. The Universal credit will be payable to people in or out of work, subject only to its tapered withdrawal as earnings rise.

There will, however, be a cap on the total amount of universal credit and other benefits (e.g. child benefit and contributory ESA and JSA) which can be paid, in line with the announcement made in the Spending Review..

Eligibility for national insurance credits for universal credit recipients is being ‘reviewed’ but it is envisaged that those currently receiving credits, including carers, will continue to do so.

Administration

The White paper claims the introduction of universal credit will transform the administration of the benefit system into an efficient, seamless, streamlined and user friendly service, with less bureaucracy, form filling, error and fraud.

Claims will be made by ‘households’ with both members of a couple required to claim. ‘Claims will normally be made through the internet and we expect that most subsequent contact between recipients and the delivery agency will also be conducted online’, enabling claimants to have an online account, ‘similar to online banking services’, through which changes of circumstances can be notified. Assessments and awards will also be made automatically, with earnings from employment notified directly by the Revenue, rather than the claimant, via its ‘real-time’ PAYE system. It is recognised, however, that ‘there will continue to be a minority of people who cannot use online channels’ for whom ‘alternative access routes’ will be offered, including the telephone, and ‘face to face for those who really need it’.

With regard to awards, the Paper states, ‘we are considering whether the period of the assessment and the frequency of payments should be monthly’ to coincide with most payments of earnings and to encourage ‘personal responsibility’.

The DWP will be responsible for the implantation and administration of the universal credit. The abolition of HB and tax credits will, of course, have significant implications for the Local Authorities and the Revenue, as well as Jobcentre Plus and the Pension, Disability and Carer’s Service whose roles and responsibilities will all change.

The transition to universal credit will, of course, be a phased and ‘significant project, affecting 19 million individual claims and eight million households’. The DWP is ‘confident’, however, of being able to implement the new IT systems needed for universal credit, including the developments needed to link into the Revenue’s PAYE system. The Government promises that ‘no-one will experience a reduction in the benefit they are receiving as a result of the introduction of universal credit. At the point of transition . . . those households whose circumstances remain unchanged and who would otherwise experience a reduction in income will receive cash protection’.

Other attendant changes

IS, income-based JSA, income-related ESA, HB, CTC and WTC will be phased out from April 2014 and abolished by October 2017.

Other benefits will remain outside the scope of universal credit, but some are being, or will be, changed as part of the Government’s wider welfare reform programme.

  • Carer’s allowance is being reviewed ‘to take account of the introduction of universal credit and to provide ‘clearer and more effective support for carers.
  • Council tax benefit is being reduced by 10% from 2013/14 and local authorities will be able to determine their own local rebate schemes.
  • Pension credit will continue but will be expanded to include payments for rent and dependent children to replace the abolition of HB and CTB. With the abolition of WTC, however, the Government is ‘considering the option of allowing those pensioners who choose to extend their working lives to claim universal credit, rather than pension credit . . . ’
  • Contributory JSA will continue in its current form, but with the same earnings rules as universal credit.
  • Contributory ESA will also continue, subject to the same earnings rules but will be paid for a maximum of 12 months to those in the ’work-related activity group’. There is also an intention to ‘simplify the support for people aged under 25 who have been unable to pay the normal amount of national insurance contributions’.
  • DLA will continue but will be ‘fundamentally reformed’ from 2013/14 with the introduction of an objective assessment.
  • ‘Passported benefits’ such as health benefits and free school meals will no longer be paid on the basis of receipt of a qualifying benefit but will be subject to an income threshold test.
  • The social fund ‘has not kept pace with welfare reform and parts of the scheme are poorly targeted and open to abuse’, and will therefore be ‘reformed’. Budgeting loans will be restricted to an ‘advance-of-benefit facility available in certain circumstances’. Community care grants and crisis loans will be replaced by discretionary local authority payments ‘tailored to local circumstances and targeted only at genuine need’.
  • Child benefit, bereavement benefits, statutory sick pay, statutory maternity pay, maternity allowance and industrial injuries disablement benefit will continue as present.

Conditionality

The need for increased conditionality and sanctions is one of the major elements of the Universal credit, reflecting the principles set out in 21st Century Welfare. The changes are being phased in prior to the introduction of Universal credit and will be carried forward into the new system.

There will be four levels of conditionality:

  • Full conditionality, which will apply to most claimants (unless they fall into one of the groups below), including JSA claimants, which will eventually encompass those with a youngest child over the age of five. They will be required to be available for and actively seek work.
  • Work preparation, which will apply to claimants with limited capability for work who are currently in the ‘work-related activity group’, who will be required to take reasonable steps to prepare for work.
  • Keeping in touch with the labour market, which will apply to lone parents (or main carers in a couple) with a child between the ages of one and five, who will be required to attend work-focused interviews.
  • No conditionality, which will apply to disabled claimants who would qualify for a ‘support component’, or lone parents or main carers with a child under the age of one.

Conditionality under the universal credit will also be applied to people working below a ‘conditionality threshold’, which will initially be set at the level at which claimants currently lose entitlement to out-of-work benefits but could be raised in the future to ‘encourage’ people to increase their earnings or hours of work. It is unclear whether the threshold will be based on income, hours, or some other basis.

Conditionality will be extended to include ‘mandatory work activity’ for those subject to full conditionality comprising full-time placements for up to four weeks (the much publicised ‘litter picking’ and other community tasks). Conditionality will continue to include a requirement to attend interviews and training courses and to apply for and accept job offers, and personal advisers will have greater powers to require claimants to carry out further work-related activity.

Sanctions for failure to comply without good cause will be increased and range from loss of benefit for fixed periods of 1, 2, or 4 weeks for failures relating to work preparation up to 3 months, 6 months or 3 years loss of benefit for failures to apply for and accept jobs, or take part in mandatory work activity (the 3 year sanction will only apply in the most extreme cases of ‘serial’ failures). ‘Hardship payments’ will continue to be available but may be more limited in scope and consideration is being given to replacing them with loans ‘to the extent that this is possible’.

Questions and concerns

Behind the ‘hype’, there are many unanswered questions about how the Universal credit will affect claimants and how and whether it will achieve the aims and outcomes set out in the White Paper.

Simplicity

This is a worthy goal and easy to ‘sell’ to the public, media and politicians but it is difficult to see how it can be achieved where entitlement continues to based on the application of hundreds of rules relating to a claimant’s income and capital, housing costs, disabilities, family circumstances, immigration and residence status, and capacity and availability for work, all of which are subject to frequent changes of circumstances and all of which will presumably be transplanted from the current ‘out of work benefits’ into Universal credit.

There will, of course, be some ‘streamlining’, and having one benefit which can be paid in and out of work, without any ‘hours rules’, is likely to ease the transition. It appears, however, that most of the detailed rules of entitlement to current means-tested benefits will continue, and, as the introduction of ESA illustrates, the amalgamation of different benefits under one name does not necessarily result in ‘simplification’. Also, despite its name, the Universal credit will not encompass a range of non-means-tested benefits which will continue to have their own rules and to interact with the new benefit in complex ways.

The new system will also, inevitably, create new areas of complexity. ‘Transitional protection’ rules are always complex and will make the calculation of entitlement and losses when taking up employment difficult for a number of years. The transition period will require the transfer of millions of claimants to the new benefit and the administration of old and new systems. Establishing a choice for working pensioners to claim Universal credit rather than Pension credit will create new ‘better-off’ issues. The proposed ‘earnings disregard’, rules with maximum and ‘floor’ allowances look complicated and likely to compromise the aim of simple and transparent ‘better-off’ calculations for claimants considering employment. Introducing a means-test for all claimants seeking access to health benefits and free school meals will result in more form filling and bureaucracy.

Work incentives

Much is predicated on the proposal for a single taper rate of 65%. It is difficult to assess the likely impact of this in the light of the scanty analysis presented in the White Paper, but it appears a 65% taper rate actually represents little if any improvement on the current system for the majority of claimants, particularly when the effects of the withdrawal of council tax benefit and other benefits are factored in. Although it appears that marginal deduction rates of over 90% will be eliminated, this will only affect a small minority of claimants, while the number of claimants subject to marginal deduction rates of less than 60% will decrease.

There also appears to be no evidence that allowing claimants to keep 35 pence of every £1 of earnings will act as significant work incentive and no analysis of the influence of low pay, poor conditions of employment, lack and costs of child care provision, transport costs and, crucially, the regional labour market, as work disincentives. The proposed earnings disregard scheme with provision for reductions to disregard floors is less generous and more complex than appears and there will be no disregards at all for single claimants, while a new threshold for eligibility for health benefits may set up a new ‘cliff-edge’ poverty trap.

Cuts in entitlement

There is concern that ‘simplification’ and enhancement of work incentives will be achieved by cuts in out-of-work benefits (in the latter case by increasing the differential between benefits and low pay). There is little detail in the White Paper about benefit rates, although it is stated that these will ‘generally be the same as under the current system’ for people not in work, and that those in the bottom income decile (i.e. bottom 10% of income distribution) will see their income increase by around £2.40 per week, those in decile 2 (i.e. the next lowest 10%) will gain by £3.60 per week, and those deciles 7-10 will experience small losses of less than £1 per week.

There are worrying indications, however, of possible cuts in particular areas of provision including:

  • the application of capital limits for help with payments in respect of children (there are currently no limits for tax credits);
  • ‘simplification’ of the current provision of disability premiums;
  • ‘changes’ in the calculation of help with mortgage costs;
  • the absence of proposals relating to childcare costs and the possible replacement of payments by vouchers or discounts;
  • a ‘review’ of carer’s allowance and support for carers within universal credit;
  • the ‘localisation’ of council tax rebate schemes;
  • ‘reform’ of the social fund which appears to include the abolition of DWP crisis loans, community care grants and most budgeting loans.

All this must also be seen against the background of the £18 billion of cuts announced in the June Budget and October Spending Review, some of which appear to be directly contradictory to the principles behind the universal credit (e.g. the increase in tax credit taper rates, the more stringent WTC hours rules for couples, and the reduction in maximum childcare payments). The ‘benefits cap’, which is to be carried forward into the universal credit, appears to be arbitrary and unfair. The White Paper also confirms the further erosion of contributory benefits by time limiting contributory ESA and there is also a worrying reference to ‘simplifying’ support for those who qualify for ESA in youth. The reform of DLA is likely to see many fewer claimants qualify, pushing more disabled people into reliance on means-tested support.

Administration

The proposed reliance on computers and IT to deliver and administer the universal credit is risky given the poor record of large-scale Government IT projects. There are also concerns that significant numbers of vulnerable claimants will be unable to use the internet to initiate and manage their claims and will receive a second class service from reduced numbers of DWP staff. If something goes wrong with a claim or award, a claimant could be left without money for living expenses and housing costs for lengthy periods, while a move to monthly payments could also cause hardship and difficulty for some claimants.

Conditionality

This need for more conditionality almost comes across as a ‘moral crusade’ in the White Paper, rather than being evidence-based. In fact, the evidence on the effectiveness of conditionality in getting people into work is, at best, equivocal. There are concerns that some of the most vulnerable claimants, including those with ongoing mental health problems, could be subject to repeated sanctions for failing to conform with the demands of the system, and that personal advisers will have too much power and discretion to impose unreasonable requirements on claimants. It is also noteworthy that increased conditionality is expected ‘in return’ for the guarantee that the universal credit will make work pay, but that it is to be imposed several years before that guarantee is implemented.

 


Please be aware that welfare rights law and guidance change frequently. Therefore older Bulletin articles may be out of date. Use keywords or the search function to find more recent material on this topic.

  • 1. Consultation responses to 21st Century Welfare, DWP Command Paper Cm 7971, November 2010
  • 2. Universal Credit: welfare that works, DWP Command Paper Cm 7957, November 2010