What is Universal Credit?
Universal Credit is the replacement of most of the current benefit system with one single payment which will include money for each family member, as well as their housing costs. Universal Credit will be paid monthly in a lump sum, and will be paid to those in and out of work.
Which benefits will it replace?
- Income Support (both for disabled people and parents)
- Income-based Jobseekers Allowance
- Income-based Employment & Support Allowance
- Incapacity Benefit
- Housing Benefit
- Child Tax Credits
- Working Tax Credits
Which benefits will remain?
- Attendance Allowance
- Carer’s Allowance
- Child Benefit
- Contributory Jobseekers and Employment & Support Allowance
- Guardian’s Allowance
- Pension Credit
- Statutory Sick Pay
- Statutory Maternity, Paternity and Adoption Pay
- Winter Fuel Payments
- Disability Living Allowance (until it becomes the Personal Independence Payment)
How is it different to the current system?
At present the amount of money someone receives while in work is determined by the number of hours they work. Under Universal Credit, it will no longer be based on the number of hours they work, but the amount of money they make. This means that those working part time will benefit, especially if they work less than 16 hours per week.
However, the government may expect claimants to increase the amount of money they earn by applying conditions to their claim. This means that they could be sanctioned or have their benefits reduced if they do not increase the amount of money they earn by increasing their hours or getting a better paid job.
Different benefits currently reduce at different rates as a person’s earnings increase. Sometimes the combined effects of these reductions can mean that some claimants lose up to 97% of their earnings through deduction made to their benefits. By applying a consistent “taper” rate of 65%, no claimant should lose more than 65p for every pound they earn. This is why Universal Credit is said to remove work disincentives.
Self-employed people will, after their first year of self-employment, be expected to make at least £100 a week, and their benefits will not increase if the amount they earn falls; they will be treated as if they had earned that much regardless of their actual take home pay after expenses.
There will be a greater expectation that lone parents and sick people will begin preparing for work, including by attending courses and interviews at the Jobcentre. Failure to do so may incur a sanction or lead to a reduction in their benefits.
As Universal Credit will be paid directly to the claimant, and include their housing costs, most social housing tenants will have to begin paying their rents themselves, rather than having this paid for them. There will be exceptions for ‘vulnerable’ claimants, but this will largely be at the discretion of the Jobcentre.
Her Majesties’ Revenue and Customs will collect monthly data from employers on the amount of money their employees earn. This should mean that benefits will increase and decrease with, rather than after, wages.
Who will be affected?
Universal Credit is an in and out of work benefit, which means that anyone of working age, regardless of their circumstances, will eventually receive Universal Credit. Anyone who is claiming Pension Credit will NOT be affected, unless their partner is of working age, in which case they will have to jointly claim Universal Credit. Those who are not yet at pension age will receive Universal Credit until they begin receiving Pension Credit.
When will claimants be affected?
The DWP will begin transferring people to Universal Credit from October 2013, but the process will take several years. There will be no new claims for Housing Benefit or Tax Credits from April 2014, and the government intends for everyone to be receiving Universal Credit by October 2017.
We expect lone parents, disabled people, carers, and those in work claiming only Housing Benefit and/or Tax Credits will be the last to be transferred over.
Will claimants lose money?
There are a complicated range of winners and losers under Universal Credit. The Institute of Fiscal Studies estimates that there will be 2.5 million winners; 1.4 million losers; and 2.5 million who will not be affected at all. People who are working part time are the most likely to benefit from Universal Credit, but many people, particularly lone parents and two earner couples with children will lose out.
The government has promised that no one will be worse off when they are transferred to Universal Credit. This is because the amount of benefits they receive will remain the same, even if they would have been worse off. However, this ‘transitional protection’ may be lost and the new amount applied if the household’s circumstances change. This is likely to be where someone moves in and then out of work.
Those working under 16 hours a week will benefit from Universal Credit’s new taper rate, meaning their benefits will increase with every hour worked, rather than at present where their benefits jump at 16 or 24 hours as they become entitled to Working Tax Credits.
As the current system for assisting with childcare costs will be replicated within Universal Credit, lone parents who want to increase their hours will find that after 16 hours their childcare costs begin to eat away at any additional earnings. There will also be fewer incentives for second earners to increase their hours, as the taper rate under Universal Credit is higher than that which exists under the current system.
As the new in-work conditionality provisions will require part time workers to increase their hours, it is likely that many will be forced into the situation where they become losers, as they increase their hours for fear of losing their benefits or being sanctioned under the new conditions.