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BRIEFING PAPER

Number CBP7446, 16 November 2016

Universal Credit changes from April 2016

By Richard Keen, Steven Kennedy

Inside: 1. What is Universal Credit? 2. How and when is Universal

Credit being rolled out? 3. What changes were

announced in the Summer Budget 2015 and Autumn Statement 2015?

4. What savings have been made from Universal Credit?

5. How will families be affected in practice?

6. Will transitional protection be available for claimants?

7. What have other commentators said?

8. Appendix

Number CBP7446, 16 November 2016 2

Contents Summary 3

1. What is Universal Credit? 5 Calculating a household’s Universal Credit award 5

2. How and when is Universal Credit being rolled out? 7 Universal Credit roll-out forecasts 7 Development delays and the 2013 reset 8 The latest roll-out schedule 9 Current caseload 10

3. What changes were announced in the Summer Budget 2015 and Autumn Statement 2015? 12 Cuts to Universal Credit work allowances 12 Limiting support for new claimants 14

4. What savings have been made from Universal Credit? 15 Autumn Statement 2015: tax credit changes reversed 15 Office for Budget Responsibility: revised savings estimates 15 Savings still to be made from Universal Credit 15

5. How will families be affected in practice? 17 Work incentives under Universal Credit 17 Impact on example families 19

6. Will transitional protection be available for claimants? 21 Support for working families affected by the changes in April 2016 22

7. What have other commentators said? 24 The Social Security Advisory Committee 24 The Social Mobility & Child Poverty Commission 24 Institute for Fiscal Studies 25 Resolution Foundation 27 Centre for Social Justice 30 Government response 31

8. Appendix 32

Contributing Authors: Richard Keen (Social and General Statistics) Steven Kennedy (Social Policy Section) Vyara Apostolova (Social and General Statistics)

Cover page image copyright: Richard Keen, “Coppers”

3 Universal Credit changes from April 2016

Summary Universal Credit (UC) is a new benefit which is to replace means-tested social security benefits and tax credits for working-age individuals and families. The aim is to simplify and streamline the benefits system, improve work incentives, tackle poverty among low income families, and reduce the scope for error and fraud. Universal Credit was first introduced for a small subset if new claimants in certain areas in 2013, and is gradually being rolled out to new claimant groups. The benefit is not expected to be fully introduced until 2022.

Summer Budget 2015 announced a series of changes to Universal Credit and, in advance of the full introduction of Universal Credit, to tax credits:

• A reduction in the income threshold in tax credits, and an increase in the tax credit withdrawal rate (“taper”), from April 2016

• Reductions in the “work allowances” for most Universal Credit claimants, from April 2016

• Limiting the child element of tax credits and Universal Credit to two children for new claims and births after April 2017

• Removing the family element in tax credits (and the corresponding first child premium in Universal Credit) for new claims from April 2017

Following the Government’s defeat in the House of Lords on 26 October 2015, in the Autumn Statement 2015 the then Chancellor, George Osborne, reversed planned changes to the income thresholds and taper rate within tax credits.

The other changes listed above are, however, being implemented. Measures to limit the child element of Universal Credit and the remove the first child premium are being introduced via the Welfare Reform and Work Bill 2015-16; equivalent changes will also be made to tax credits and Housing Benefit. Changes to the Universal Credit work allowances were introduced via the Universal Credit (Work Allowance) Amendment Regulations 2015. These regulations were subject to the negative procedure, but were considered by a Delegated Legislation Committee on 19 November 2015, and discussed during the Lords Committee Stage of the Welfare Reform and Work Bill on 14 December 2015. The Commons also debated an Opposition motion calling on the Government to reverse the UC work allowance cuts on 6 January 2016.

The Universal Credit work allowance is the amount an individual or family can earn before their maximum Universal Credit award starts to be reduced. The level varies according to household circumstances, and whether the maximum Universal Credit award includes an amount to cover housing costs.

From the start the 2010 Government made it clear that work allowances set a more generous level than the existing earnings disregards in “legacy” benefits and tax credits. This was integral to the offer under Universal Credit that “work pays, and more work pays.”

Even before the Summer Budget announcement, however, changes to the work allowances meant that they were less generous than originally envisaged. The work allowance reductions from April 2016 will ultimately have a similar impact to the changes to tax credits which are not now going ahead, though the impact of changes to UC work allowances will not be fully felt until the roll out of Universal Credit is complete. Although the impact varies according to household circumstances, overall the changes mean a

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reduction in the generosity of Universal Credit and, for some groups, a reduced incentive to enter or progress in work.

There have been a number of calls on the Government to reconsider the UC work allowance cuts. The Resolution Foundation argues that boosting the work allowances is “potentially the most targeted way to support low to middle income households that make up the government’s ‘just managing’ cohort”, particularly for single parents and second earners. The Centre for Social Justice – which is again chaired by Iain Duncan Smith – is calling on the Government to reverse the work allowance cuts to “return Universal Credit to its original design” and to target support on those who are “just about managing.” It suggests that this could be funded by delaying planned increases in the income tax personal allowance.

5 Universal Credit changes from April 2016

1. What is Universal Credit? Universal Credit is a new benefit which will replace a range of existing means-tested benefits and tax credits for working-age households.

‘Legacy’ benefits and tax credits replaced by Universal Credit

Universal Credit combines both in- and out-of-work support to create a single system for working age households. By doing so, the Government hopes to: • Make easier a claimant’s move in and out of work • Improve claimants’ incentives to work • Improve claimants’ incentives to seek better paid work • Create a benefit easier to understand than the existing system

Calculating a household’s Universal Credit award Awards will be claimed on a household basis, where a “household” is a single person or couple along with any dependent children. Figure 1 shows, in summary, how a household’s award is calculated via a series of steps. Note these calculations are for an in-work household; calculations for an out-of-work household would stop after step 2. Figure 1 Universal Credit award of a lone parent household with one child Working on the NLW, 2016-17, no housing costs

Working Tax Credit

Child Tax Credit

Income-based JSA

Income Support

Income-related ESA

Housing Benefit

Universal Credit

Steps 1 & 2 Maximum award (in this case, £594.90)

Step 4 Single taper rate (65%)

Step 3 Work allowance

(in this case, £397)

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Step 1 - A household’s maximum amount is calculated by totalling the Universal Credit allowances and elements for which they are eligible. A household’s “maximum amount” is comprised of any of the following allowances and elements for which the household is eligible: • Standard allowance – the basic allowance for all. Amount

depends on whether the claimants live alone or has a partner. Lower rates apply for those under 25

• Child element – an additional ‘Child Element” is paid for each child or qualifying young person. Further additions are payable for disabled and severely disabled children

• Childcare costs element - for working parents paying for registered childcare. Note that the benefit received via the childcare element does not count towards the household benefit cap

• Limited capability for work elements For those who satisfy a Work Capability Assessment

• Carer element For those with regular and substantial caring responsibilities for a severely disabled person

• Housing costs element For those who pay rent or have a mortgage

Step 2 - Any unearned income is deducted from this maximum amount. Any unearned income is then deducted from this maximum amount. “Unearned income” is income other than from employment or self-employment; it includes most income replacement benefits such as contribution-based Jobseeker’s Allowance. Step 3 - A household’s work allowance, dependent on their personal circumstances and whether or not they receive the housing costs element of Universal Credit, is identified. A household’s work allowance is the amount they are allowed to earn before their maximum Universal Credit award starts to be reduced. The work allowance varies according to household circumstances and whether the household is in receipt of the Universal Credit housing costs element. Step 4 - The household’s award is tapered away by 65p for every £1 over which the household’s net earnings exceed their work allowance. If a family has earned income, their remaining award is then tapered away by 65p for every £1 over which the household’s net earnings exceed their work allowance.

7 Universal Credit changes from April 2016

2. How and when is Universal Credit being rolled out?

Universal Credit was first introduced for a small subset of new claimants in certain areas in 2013. DWP’s initial efforts targeted claimant groups whose claims were comparatively simple to manage, such as single, childless, out-of-work adults. Having learnt from these initial experiences, the Department intends to expand the scheme by rolling out to successively wider areas and more complex caseloads. Roll-out has, however, been “substantively delayed” several times.1, 2

Universal Credit roll-out forecasts Figure 2 shows successive revisions to the DWP’s ‘Universal Credit roll-out assumption’ up to November 2015, and to the Office for Budget Responsibility’s own assumptions about future roll-out up to that point. Figure 2 Successive revisions to the Universal Credit role out assumption Average caseload, millions

Source OBR Economic and Fiscal Outlook, November 2016, Chart 4.7, table 4.25

The OBR’s March 2013 assumption was that by 2016-17 there would be 6.1 million Universal Credit claimants, but as of 8 September only 338,519 people were on UC.2

Since the publication of the chart above, DWP has announced a further “reshaping” of the remaining phases of the UC roll-out and the benefit is now not expected to be fully introduced until March 2022. The November 2015 caseload projections in the Figure 2 above therefore no longer apply.

Further information on the roll-out of UC to date – and on the latest schedule for the remaining stages of the roll-out – is given below.

1 Autumn Statement 2015: Policy Costings; pg. 33 2 DWP, Universal Credit Statistics: Data to 6 October 2016, 19 October 2016

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Number CBP7446, 16 November 2016 8

Development delays and the 2013 reset The roll out of Universal Credit involves not simply the creation of a new benefit but development of entirely new administrative systems to support it. This includes development of the Digital Service, the online IT system via which claimants and DWP will manage awards, and training staff to administer a new conditionality and sanctions regime that imposes requirements on in-work as well as out-of-work claimants.

The DWP was criticised for its initial handling of the Universal Credit programme. In September 2013 Amyas Morse, head of the National Audit Office, wrote:

“The Department’s plans for Universal Credit were driven by an ambitious timescale, and this led to the adoption of a systems development approach new to the Department. The relatively high risk trajectory was not, however, matched by an appropriate management approach. Instead, the programme suffered from weak management, ineffective control and poor governance.”3

DWP reset the Universal Credit programme in February to May 2013 following serious concerns expressed by the Major Projects Authority.4

Since this time DWP has been developing and rolling out Universal Credit using a ‘twin-track’ approach. This involves rolling out Universal Credit using IT systems developed prior to the 2013 reset (the “Live Service”) while, simultaneously, DWP develops the Digital Service (now known as the “Full Service”) from which Universal Credit will eventually be operated.

In February 2016 the House of Commons Public Accounts Committee (PAC) acknowledged that Universal Credit had stabilised and made progress since 2013, but added that it still had “a long way to go” and called for greater transparency and a clearer set of milestones for the programme. Following the announcement in July 2016 of yet further delays in the roll-out schedule, the PAC’s latest report, while welcoming DWP’s acceptance of the need for better contingency planning, states that the UC programme is ”still at a very early stage.” It also reiterates the Committee’s previous recommendation that the DWP set out clearly how policy and other changes have affected the business case for Universal Credit and the programme’s expected costs and benefits.

Initial roll out started with a small number of new claimants whose cases are comparatively simple to manage. Subsequently, roll out will expand to successively more complex caseloads and wider geographies. At each stage the DWP hopes to learn from its experiences before expanding the Universal Credit programme.

3 National Audit Office; Universal Credit: early progress; 5 September 2013 4 National Audit Office; Universal Credit: progress update; 26 November 2014. The

MAP has since merged with Infrastructure UK to form the Infrastructure and Projects Authority

National Audit Office reports Universal Credit: early progress (September 2013) Universal Credit: progress update (November 2014) Welfare reform – lessons learned (May 2015) Public Accounts Committee reports Universal Credit: early progress (November 2013) Universal Credit: progress update (February 2015) Universal Credit: progress update (February 2016) Universal Credit and fraud and error: progress review (November 2016)

9 Universal Credit changes from April 2016

Box 1: How will people move onto Universal Credit?

When it is fully introduced, it is expected that between 6 and 7 million individuals and families will receive Universal Credit. People will move onto Universal Credit by one of three routes:

• Making a new claim for benefit, where the person isn’t already getting benefits. Where the person would previously have claimed one of the “legacy benefits” UC is replacing, they will have to claim UC instead. At present, in most parts of the country this is limited to single persons (and couples in certain areas) with relatively straightforward circumstances (i.e. satisfying the “gateway conditions”). In areas where the UC Full Service operates, new claims will however be taken from all claimant groups.

• “Natural migration” – where the claimant is already receiving a benefit but experiences a change in their circumstances such that they would have had to claim a different benefit or tax credit. They will instead claim UC. In Live Service areas, migration to UC will only occur if the claimant satisfies the gateway conditions. In Full Service areas, migration is triggered in any situation that would have involved a new claim.

• “Managed migration” – where the claimant has no change of circumstances, and is notified by DWP that they need to transfer to UC. This will be the final stage of the roll-out of UC, and precise details of the timetable for the transfer of the remaining claimants to UC, and the order in which they will be processed, aren’t yet available.

Where existing claimants migrated to Universal Credit are entitled to less support under UC than they were receiving through legacy benefits and tax credits, they may be entitled to a top-up payment so that they do not lose out in case terms at the point of transfer. However, this “transitional protection” will only be available to claimants moved onto UC by managed migration – see section 6 of this briefing for further details. Further information: Revenuebenefits, Universal credit: Roll-out timetable, updated 26 July 2016 Revenuebenefits, universalcreditinfo: check whether you can claim universal credit Simon Osborne, Universal credit and ‘natural migration’, Welfare Rights Bulletin 254, October 2016

The latest roll-out schedule Universal Credit is now available in all Jobcentres across Great Britain, but in most areas is only available for new claims from people with relatively simple circumstances. This should change with the roll-out of the “Full Service” (formerly the Digital Service), when UC will expand to all claimant groups and new claims for existing benefits and tax credits being replaced by UC will no longer be possible. Once this is achieved, the remaining benefit and tax credit claimants will be moved onto UC by “managed migration.” The latest final end date for the introduction of UC is now March 2022.

In summary, the latest plans are as follows:

• “National expansion” of Universal Credit was completed by Spring 2016, so that Universal Credit is available in all Jobcentres in Great Britain – although initially for new claims only, for select claimant types. In most areas UC is still limited to new claims from single unemployed people (or people with very low earnings) satisfying the “gateway conditions”

Number CBP7446, 16 November 2016 10

• Roll-out of the Full Service, starting from 2016. Initial trials started in Sutton, Croydon and Southwark. Where the Full Service has been introduced UC claims will be taken from all claimant groups.

In his Written Ministerial Statement on 20 July 2016, the new Secretary of State for Work and Pensions, Damien Green, announced that the Government was “reshaping” the next phase of UC and, accordingly, set out a new plan for rolling out the Full Service, which involves:

─ Introducing the Full Service in 5 jobcentres a month to June 2017;

─ Expanding it by 30 jobcentres a month from July 2017;

─ Following a break over summer 2017, “scaling up” the roll-out of the Full Service to 55 jobcentres a month between October and December 2017;

─ Accelerating the roll-out to 65 jobcentres a month by February 2018; and

─ Finishing roll-out with the final 57 jobcentres in September 2018.

DWP has only announced the areas where the Full Service will go live up to March 2017 – see Transition Rollout Schedule – Phases 1 to 3: May 2016 to March 2017 (updated 20 July 2016) on GOV.UK.

As the Full Service is rolled out, new claims for “legacy” benefits – the benefits UC is replacing – will be progressively closed down so that under the latest timetable, by September 2018 UC will be available to all claimant groups across the country, and no new claims for working-age means-tested benefits and tax credits will be possible.

• The final “managed migration” stage when the remaining legacy benefit and tax credit claimants are moved over to Universal Credit. The Written Ministerial Statement on 20 July 2016 announced that there would be a new “contingency” period following the achievement of national roll-out of the Full Service, before the commencement of managed migration. Managed migration is now expected to start in July 2019, and to be completed by March 2022.

Current caseload The map below shows the number of Universal Credit claimants by Westminster parliamentary constituency, as of October 2016. As of October 2016 there around 401,900 Universal Credit claimants in Great Britain, around 241,100 of whom were not in employment and 160,700 of whom were in employment.5

5 Data from DWP Stat Xplore

11 Universal Credit changes from April 2016

Universal Credit claimants by Westminster parliamentary constituency, October 2016

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3. What changes were announced in the Summer Budget 2015 and Autumn Statement 2015?

The Summer Budget 2015 announced a package of measures expected to save £12 billion in 2019-20 via changes to tax credits, Universal Credit and other benefits. Proposed changes to tax credits and Universal Credit included measures to:

• Reduce the income thresholds in tax credits and increase the tax credits withdrawal rate (taper) from 41% to 48%

• Reduce Universal Credit ‘work allowances’ from April 2016 • Limit the child element of tax credits and Universal Credit to

two children for new claims and births after April 2017 • Remove the family element in tax credits and Universal Credit

for new claims from April 2017

In Autumn Statement 2015, the Chancellor reversed planned changes to tax credits announced in the Summer Budget. Specifically, the Chancellor reversed changes which would have reduced the income thresholds over which tax credit awards are reduced (‘tapered’) and increased the rate at which they are withdrawn (the first of the four bullets above). This reversal will cost the Exchequer £3.4 billion in 2016-17 and 0.9 billion in 2019-2020.6

The planned changes to Universal Credit (the second, third and fourth bullets in the above list) would, nonetheless, go ahead as planned, starting from 2016-17.7

Cuts to Universal Credit work allowances Under Universal Credit families are allowed to earn a certain amount each month before their maximum award begins to be reduced (“tapered away”). These amounts are known as the Universal Credit work allowances; see section 1 for further details.

DWP’s original vision for Universal Credit emphasised the generosity of these work allowances compared to the equivalent income thresholds with current, ‘legacy’ benefits. For example, DWP’s October 2014 publication Universal Credit at Work stated that by creating a single system for those in and out of work, “Universal Credit ensures that work pays, and more work pays, for everyone.”8

“By creating a single system, for those in and out of work, Universal Credit ensures that work pays, and more work pays, for everyone:

• with the transition to/from work no longer putting household income at risk: the underlying entitlement to Universal Credit is simply adjusted to reflect earnings;

6 Office for Budget Responsibility; Supplementary forecast information release: Tax

credits costings – November 2015; Table 5 7 Autumn Statement 2015; paragraph 1.123, page 36 8 DWP; Universal Credit at Work, October 2014; page 6

13 Universal Credit changes from April 2016

• with claimants in work able to retain all their Universal Credit while their earnings remain within the new Work Allowances, which are more generous than the equivalent earnings disregarded in the legacy system; and

• with a standard rate at which Universal Credit is then reduced as earnings increase, at 65% this is significantly lower than in the legacy system for many claimants, so that claimants see a financial increase from completing a few more hours of work.”

DWP, Universal Credit at Work, October 2014, page 6, our emphasis

The Summer Budget 2015 announced cuts to Universal Credit work allowances for most claimants from April 2016. Figure 3 shows annual work allowances in 2015-16 and, following the reductions, 2016-17. Note that for purposes of this table “disabled” indicates a limited capability for work. Also note that different work allowances apply to claimants with and without housing costs.

Figure 3 Universal Credit work allowances £ per year

Source

House of Commons Library briefing paper, 2016 Benefits Uprating

Figure 3 shows that from April 2016:

• The work allowance of childless claimants whose capability for work is not limited reduced to £0. That is, the Universal Credit award of childless claimants will begin to reduce as soon as they enter paid work.

• Lone parents without housing costs experienced the largest reduction in their work allowance, from £8,808 in 2015-16 to £4,764 in 2016-17.

• The work allowance of all claimants without housing costs with children and/or a limited capability for work reduced to £4,764 in 2016-17.

• The work allowance of all claimants with housing costs and with children and/or a limited capability for work is £2,304 in 2016-17.

Note that the change in the work allowance (indicated in red in Figure 3) is not the change in the household’s Universal Credit award. It is the change in the amount the household can earn before their maximum UC award begins to taper off. The actual impact on a household will depend on its level of earnings, but for those whose earnings affect their UC entitlement a £1 reduction in their work allowance can result a reduction in their Universal Credit award of up to 65p.

The changes to Universal Credit work allowances came into effect on 11 April 2016 and were implemented by the Universal Credit (Work

2015-16 2016-17 Change 2015-16 2016-17 Change

Single or couple: no children (not disabled) £1,332 £0 -£1,332 £1,332 £0 -£1,332

Lone parent (adults not disabled) £8,808 £4,764 -£4,044 £3,156 £2,304 -£852

Couple with children (adults not disabled) £6,432 £4,764 -£1,668 £2,664 £2,304 -£360

Single or couple: one or both are disabled £7,764 £4,764 -£3,000 £2,304 £2,304 £0

Without housing costs With housing costs

Number CBP7446, 16 November 2016 14

Allowance) Amendment Regulations 2015 (SI 2015/1649). The regulations were subject to the negative resolution procedure. Negative instruments automatically become law unless either House objects within 40 days of their having been laid; these regulations were laid before Parliament on 10 September 2015.

The regulations were considered by a Commons Delegated Legislation Committee on 19 November 2015, and discussed during the Lords Committee Stage of the Welfare Reform and Work Bill on 14 December 2015. The Commons also debated an Opposition motion calling on the Government to reverse the UC work allowance cuts on 6 January 2016.9 The Opposition motion was defeated by 308 votes to 273.

Limiting support for new claimants The 2015 Summer Budget also announced that, from April 2017, the per child element within Universal Credit would be limited to two children for new claims and births after that date (with certain exceptions). Equivalent changes will be made to tax credits

In addition, the ‘first child premium’ within Universal Credit (and the equivalent family element within tax credits) will be abolished for new Universal Credit claims from April 2017. In 2015-16 this element was worth up to £545 a year.

Existing families will receive transitional protection for both measures. That is, families with three or more children whose claim started prior to April 2017 will continue to get support for each child; existing Universal Credit claimants benefiting from the first child premium, and tax credit claimants receiving the family element, will continue to receive it.

These changes to support for new claimants are expected to yield savings of £590 million in 2017-18, rising to £2.2 billion in 2020-21,10 although the IFS estimates that the long-run savings (once transitional protection for existing families is exhausted) could be around £5 billion (around £2 billion from the abolition of the family element, and around £3 billion from the two child limit).11

Section 6 of the Library briefing paper prepared for Second Reading of the Welfare Reform and Work Bill 2015-16 gives further details.

9 HC Deb 6 January 2016 cc290-348 10 HM Treasury, Budget 2016, HC 901 2015-16, March 2011, Table 2.2 11 Andrew Hood, Benefit changes and distributional analysis, IFS presentation, 9 July

2015

15 Universal Credit changes from April 2016

4. What savings have been made from Universal Credit?

The Budget 2016 and Autumn Statement 2015 – and accompanying OBR tables – announced a series of changes to measures announced in the Summer Budget 2015 as well as revisions to the savings expected from them.

Autumn Statement 2015: tax credit changes reversed At the Autumn Statement 2015 the Chancellor reversed planned changes to tax credits (specifically, changes to the income thresholds and taper rate within tax credits) previously announced in the Summer Budget 2015.12 Nonetheless, the Autumn Statement 2015 confirmed that all previously announced changes to Universal Credit would go ahead as planned.13 Cuts to Universal Credit work allowances took effect in April 2016.

Office for Budget Responsibility: revised savings estimates Also at the Autumn Statement 2015, the Office for Budget Responsibility highlighted that the Treasury over-estimated its original estimates for savings made from changes to tax credits (now reversed).

Reasons for these errors are summarised by section 6.2 of the Library briefing paper Spending review and Autumn Statement 2015: a summary; pages 138-139 of the OBR’s Economic and Fiscal Outlook November 2015 and the OBR’s supplementary Tax Credits Costings note provide full detail.

Savings still to be made from Universal Credit Figure 4 shows savings made from changes to tax credits and Universal Credit announced in the Summer Budget 2015 and Autumn Statement 2015; note that savings made from changes to the Universal Credit roll out schedule have been excluded. The light grey bar shows revised estimates for savings that would have been made had the changes to tax credits mentioned above gone ahead. As Figure 4 shows, even before changes to tax credits were reversed savings made from Universal Credit accounted for a greater proportion of total savings from tax credits and Universal Credit towards the end of this Parliament compared to at its beginning. This is as claims made to tax credits are expected to be ‘shut down’ and ‘legacy’ claimants migrated onto Universal Credit as the roll out of Universal Credit proceeds. Had proposed changes to tax credits gone ahead, the Chancellor would have saved a total of £3.7 billion in 2016-17 and £5.6 billion in 2019-20

12 For further information, see the House of Commons Library briefing Tax Credit

changes from April 2016 13 Autumn Statement 2015; page 36

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from changes to tax credits and Universal Credit announced in the Summer Budget 2015 and Autumn Statement 2015. Having reversed these changes, the Chancellor will now save £0.3 billion in 2016-17 and £4.7 billion in 2019-20.14 The Chancellor is expected to save £0.12 billion in 2016-17 from changes to Universal Credit work allowances specifically, rising to £2.85 billion in 2019-20 and £3.19 billion in 2020-21.15

Figure 4 Savings from changes to tax credits and Universal Credit announced in the Summer Budget 2015 and Autumn Statement 2015 Exchequer savings, £ billions

Notes Excludes savings from changes to the Universal Credit roll out schedule Savings from changes to tax credit income thresholds and taper rate – shaded in grey – reversed in the Autumn Statement 2015 “Other measures” includes reducing the income rise disregard within tax credits. “Limits to support for new claimants” includes removing the family element in tax credits and UC, and the family premium in Housing Benefit, for new claims from April 2017; and limiting the child element to 2 children for new births and new claims in tax credits and UC Sources Summer Budget 2015 Table 2.1 Autumn Statement 2015 Table 3.1 OBR Supplementary forecast information: tax credits costings November 2015, Tables 1 and 5

14 House of Commons Library calculations based on policy costings announced in the

Summer Budget 2015, Autumn Statement 2015, the OBR’s Economic and Fiscal Outlook November 2015 and supplementary Tax Credits Costings tables

15 Budget 2016, table 2.2

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17 Universal Credit changes from April 2016

5. How will families be affected in practice?

Multiple, seemingly contradictory assessments of the impact of changes to Universal Credit on families are available in the media and from political commentators. When assessing these statements it is useful to distinguish between those that relate to the impact on specimen or example families – that is, hypothetical families under a combination of circumstances selected for purposes of the analysis – and the impact across all families on average – that is, macro modelling that takes all families in the UK, or a subset of them, into account.

This section presents calculations for example families produced by the Library; see the appendix for full details.

Work incentives under Universal Credit Reductions to Universal Credit might, in some circumstances, reduce claimant’s incentive to increase their number of hours worked. Figure 5 shows, for comparison’s sake, a lone parent’s net income when in receipt of ‘legacy’ benefits – i.e. Jobseeker’s Allowance (JSA) and/or tax credits. The chart shows the ‘work incentives’ for a lone parent– that is, it shows how much they stand to receive in net income per week if they increase their number of hours worked on the National Living Wage. When out of work, this lone parent is eligible for Child Tax Credits and JSA. Once this particular individual starts working over 2 hours a week on the NLW (marker 1) their JSA award starts to be reduced. JSA is reduced (‘tapered away’) on a one to one basis, meaning that for every extra £1 earned the claimant’s JSA award reduces by £1 (markers 1 to 2). This lone parent’s JSA award tapers away to zero once they work 13 hours or more on the NLW (marker 2). Upon increasing their hours to 16 a week (marker 3), they become eligible for Working Tax Credits (and continue to receive Child Tax Credits also). Upon increasing their hours to 30 a week, they become eligible for the 30 hour element of Working Tax Credits (marker 4).

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Figure 5 Work incentives for a lone parent in receipt of JSA and/or tax credits, 2019-20 Lone parent aged 25 or over, 1 child, no housing costs, earning at the National Living Wage £ per week, nominal terms

Note Calculations do not include Child Benefit Source House of Commons Library calculations; inflation estimates from IFS Winter is Coming report (November 2016)

Figure 6 shows the same lone parent’s net income if in receipt of Universal Credit in 2019-20. This chart shows two scenarios: one in which cuts to Universal Credit work allowances, in place since April 2016, are maintained (dark blue), and one in which work allowances are restored to their 2015-16 levels (light blue). If cuts to Universal Credit work allowances are reversed, the chart shows, this lone parent would be able to achieve a net income of £316 per week (equivalent, under these circumstances, to working 21 hours a week on the NLW) before their Universal Credit award starts to be tapered away. This is represented by the light blue line on the chart. In the case of this lone parent, Universal Credit is roughly equal to or more generous that the ‘legacy’ benefits system until the lone parent increases their hours to 30 per week or more. If cuts to Universal Credit work allowances are maintained, however, this lone parent would be able to achieve a net income of £233 per week (equivalent, under these circumstances, to working 11 hours a week on the NLW) before their Universal Credit award starts to be tapered away. This is represented by the dark blue line. In the case of this lone parent, Universal Credit is less generous that the ‘legacy’ tax credits system once they work 16 or more hours per week.

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Figure 6 Work incentives for a lone parent in receipt of Universal Credit, 2019-20 Lone parent aged 25 or over, 1 child, no housing costs, earning at the National Living Wage £ per week, nominal terms

Note Calculations do not include Child Benefit Source House of Commons Library calculations; inflation estimates from IFS Winter is Coming report (November 2016)

Impact on example families The table over page shows the impact of introducing Universal Credit, and the impact of cuts to Universal Credit work allowances, on a number of example families. These examples are ‘case studies’ based on Library calculations; they do not represent the impact of changes across families on average. Full details and working for these examples are available in the Appendix of this briefing.

The table over page shows the net income of example families under three different scenarios:

Scenario 1 shows the net income of families in receipt of ‘legacy’ benefits; that is, in receipt of tax credits and – in one case – Housing Benefit.

Scenario 2 shows the net income of families in receipt of Universal Credit. This scenario ignores the cut to Universal Credit work allowances in place since April 2016 – that is, it shows these family’s potential UC award should cuts never have been implemented.

Scenario 3 shows the net income of families in receipt of Universal Credit should cuts to UC work allowances remain in place.

All three scenarios assume families are ‘existing’ benefit claimants whose claims started prior to April 2017. Therefore, they are not affected by upcoming changes to Universal Credit, tax credits and Housing Benefit for new claimants from April 2017 (namely, by limiting, in most cases, support provided via these benefits to two children and abolishing the ‘first child’ or ‘family’ premium within each of these benefits).

£0

£50

£100

£150

£200

£250

£300

£350

£400

£450

0 5 10 15 20 25 30 35 40

Net

inco

me

Hours worked

'Legacy' claimant (JSA and/or tax credits)

Universal Credit (work allowances restored)

Universal Credit (work allowances cut)

£233 (11 hrs)

Work Allowance reduced

£316 (21 hrs)

Number CBP7446, 16 November 2016 20

Net income of example 'case study' families claiming Universal Credit and/or 'legacy' benefits

£ per annum, nominal terms

2016-17 2020-21

Couple, 2 children, 1 x 35 hrs, 1 x 16 hrs a week on NLW, no housing costs

Scenario 1 - 'legacy' claimant, receives tax credits 25,570 28,383

Scenario 2 - recieves UC, work allowances restored 24,401 26,790

Scenario 3 - receives UC, work allowances cut 23,317 25,617

Loss due to work allowance cut (difference between scenarios 2 and 3) -1,084 -1,173

Couple, 2 children, 1 x 35 hrs a week on NLW, no housing costs

Scenario 1 - 'legacy' claimant, receives tax credits 22,026 23,781

Scenario 2 - recieves UC, work allowances restored 24,096 25,897

Scenario 3 - receives UC, work allowances cut 19,424 21,048

Loss due to work allowance cut (difference between scenarios 2 and 3) -4,672 -4,849

Single adult, 1 child, 35 hrs on NLW, no housing costs

Scenario 1 - 'legacy' claimant, receives tax credits 18,532 20,198

Scenario 2 - recieves UC, work allowances restored 18,179 19,921

Scenario 3 - receives UC, work allowances cut 15,551 17,077

Loss due to work allowance cut (difference between scenarios 2 and 3) -2,629 -2,845

Single adult, 1 child, 35 hrs on NLW, privately renting a 2 bedroom tenancy

Scenario 1 - 'legacy' claimant, receives tax credits 21,919 21,726

Scenario 2 - recieves UC, work allowances restored 21,375 22,987

Scenario 3 - receives UC, work allowances cut 20,821 22,387

Loss due to work allowance cut (difference between scenarios 2 and 3) -554 -599

Working single personSingle adult, no children, working 16 hrs a week on the NLW, no housing costs

Scenario 1 - 'legacy' claimant, receives tax credits 6,007 7,801

Scenario 2 - recieves UC, work allowances restored 6,779 7,801

Scenario 3 - receives UC, work allowances cut 6,007 7,801

Loss due to work allowance cut (difference between scenarios 2 and 3) -772 0

Net income

Notes All scenarios assume 'existing' benefit claimants and do not take into account changes that affect new claims (e.g. abolition of the 'family' or 'first child' premium within UC, HB and TCs) only from April 2017; Scenario 2 shows a scenario in which cuts to UC work allowances were never implemented; all adults aged over 25; families not in receipt of support for childcare; Personal Allowance to raise to £12,500 by 2020-21, as pledged by Government at Summer Budget 2015; Four year freeze of all relevant UC components from 2016-17 to 2019-20, as announced at Summer Budget 2015, and uprated by CPI thereafter; Universal Credit work allwowances frozen until 2017-18 and uprated by CPI thereafter; Working Lone Parent Housing Benefit calculations assume a 2 bedroom tenancy rented at the average LHA rate for Great Britain; calculations include Child Benefit

Sources CPI forecast from IFS Winter is Coming report, November 2016; House of Commons Library calculations. See Appendix for further details and calculations.

Dual earner family

Single earner family

Working lone parent (without housing costs)

Working lone parent (with housing costs)

21 Universal Credit changes from April 2016

6. Will transitional protection be available for claimants?

For in-work families and individuals already in receipt of Universal Credit when the work allowances were reduced from April 2016, there was no specific provision to maintain their UC awards at the previous level (but see below regarding support to help those affected respond to the change).

However, in relation to the eventual UC caseload, the numbers affected at this point were relatively small. As of 8 September 2016 there were 338,519 people were on UC, of whom 139,870 were in work.16

If a family is moved from legacy benefits to Universal Credit as part of the “managed migration” and their entitlement to UC is lower than their existing benefits, they will be eligible for “transitional protection” – ie their UC award will be topped up so that they do not lose out in cash terms. They will continue to receive this amount of support (although it will not increase from one year to the next) until such time as their UC award “catches up”, or the family experiences a significant change in their circumstances.

A “significant change” could include:

• a partner leaving or joining the household; • a sustained (three-month) earnings drop beneath the level of

work that is expected according to their claimant commitment; • the UC award ending; and/or • one (or both) members of the household stopping work17 Transitional protection will only apply to families moved over onto Universal Credit as part of the “managed migration” – ie families on benefits/tax credits whose situation has not changed, where DWP initiates the transfer to UC. For others, the transfer to UC will be triggered following a change in their circumstances which affects their entitlement to existing benefits. This is referred to as “natural migration.” For families in this situation, transitional protection does not apply.18 Detailed plans for how transitional protection will work have not yet been announced, but a briefing paper at the Revenuebenefits website, Universal Credit: transitional protection19, brings together such information as is available from Government statements and policy documents. The Minister for Welfare Reform, Lord Freud, also gave some information on how the Government envisages transitional

16 DWP, Universal Credit Statistics: Data to 6 October 2016, 19 October 2016 17 HC Deb 30 January 2013 c862w 18 (See section 2 above for a more detailed explanation of how people may move to

UC 19 Last updated 7 March 2016

Number CBP7446, 16 November 2016 22

protection will work during the Lords Committee Stage of the Welfare Reform and Work Bill on 14 December.20

Support for working families affected by the changes in April 2016 For UC claimants already working when the work allowances were reduced in April 2016, the Government said that support would be available to help them “manage the change.” In its December 2015 response to the Social Security Advisory Committee’s Occasional Paper 15, Universal Credit: priorities for action, the Government said:

We… expect many claimants to respond to the changes to work allowances announced in the Summer Budget by actively seeking more work, and we will support them with this. For example, someone could recoup the loss from the Work Allowance changes by working 3-4 additional hours a week at the national living wage to which they are entitled.21

The Government intended to use “adviser support and the flexible support fund to ensure that each of those families is supported through the change.”22

In its State of the Nation 2015 report published on 17 December 2015, the Social Mobility and Child Poverty Commission commented however:

It will be very difficult for many affected families to increase their hours of work and hourly pay to avoid big cuts to their incomes compared to the current system. For example, a lone parent working full-time at the minimum wage who receives no support with their housing costs will see a reduction of £2,600 per year – £50 per week – in their income from this measure [the reduced work allowances] in isolation. The combined effect of income tax, National Insurance and the Universal Credit taper will mean that Universal Credit claimants who pay income tax will only keep 24 per cent of any increase in their earnings: this means that the parent in this example will have to increase their earnings by some £210 per week – or 72 per cent of expected gross full-time earnings at the minimum wage in 2020 – to make up the income losses they will face as a result of the reduction in their work allowance. The £39 per week increase they will see in their earnings as a result of the introduction of the Living Wage will help a little, but is not on the scale required to make up the losses.23

The Commission also warned against over-reliance on “in-work conditionality” to counter negative effects of the changes on work incentives:

The introduction of in-work conditionality in Universal Credit may mitigate some of these issues, but the system is still under development and policymakers are still far from clear about how it will work in practice. Relying solely on this untested system to prevent parents from acting on the increased financial incentives to reduce their working hours that exist in Universal Credit compared with the current tax credit system – especially families

20 HL Deb 14 December 2015 cc1908-1910 21 Government response to SSAC Occasional Paper 15: Universal Credit: priorities for

action, p5 22 HL Deb 14 December 2015 c1910 23 Social Mobility and Child Poverty Commission, State of the nation 2015, p134

23 Universal Credit changes from April 2016

that currently work more hours than the proposed hours requirements, or where parents earn more than the National Minimum Wage – is risky. Further action is required to ensure that work incentives within Universal Credit and the development of the in-work conditionality system support the overall goal of tackling working poverty.24

24 Ibid. c138

Number CBP7446, 16 November 2016 24

7. What have other commentators said?

Reductions to Universal Credit work allowances will ultimately have a similar impact to the changes to tax credits which are not now going ahead, the main difference being that while families would have been affected by the tax credits immediately from April 2016, the full impact of changes to work allowances will not be felt until Universal Credit is fully introduced. Although the impact varies according to household circumstances, overall the changes mean a reduction in the generosity of Universal Credit and, for some groups, a reduced incentive to enter or progress in work.

The Social Security Advisory Committee The Department for Work and Pensions has not produced an Impact Assessment for the work allowance changes. The Social Security Advisory Committee expressed concern about whether there was an adequate evidence base to assess and evaluate the changes.

The Social Mobility & Child Poverty Commission The Social Mobility and Child Poverty Commission warns that the impact of fiscal pressures on work incentives and the extent of in-work support risks undermining the original aspirations for Universal Credit.

There is concern that families transferring to Universal Credit as part of the managed migration whose entitlement to UC is substantially lower than their existing benefits and tax credits might be reluctant to move into work or increase their hours if this would trigger a loss of transitional protection, thereby undermining the UC incentives structure.

The Social Mobility and Child Poverty recommends that, in order to “revitalise employment incentives in Universal Credit”, the Government does not go ahead with the planned reductions in the work allowances, as a first step towards returning UC to its original aspirations as the public finances improve:

We strongly support the aims of Universal Credit, and believe that it could have a transformational impact on work incentives through the simplification and responsiveness to fluctuations in income that it will bring; through smoothing the high marginal deduction rates that some claimants face; and through allowing more support and encouragement to be given to help those in working poverty increase their earnings.

However, the impact of fiscal pressures on the shape of work incentives in the programme and on the extent of in-work support risk the original aspirations set out by the architects of Universal Credit back in 2009 not being delivered. Worse still, there is a risk that incentives to progress in work for many families could end up being worse than they were in the pre-2010 system. This would be a missed opportunity.

The immediate priority must be taking action to ensure that the introduction of Universal Credit does not make families with children who ‘do the right thing’ (in terms of working as much as

25 Universal Credit changes from April 2016

society expects them to) worse off than they would be under the current system. That means reversing the cuts to Universal Credit work allowances enacted through the Universal Credit (Work Allowance) Amendment Regulations 2015 before they are implemented in April 2016.

The medium-term objective should be to make improvements to Universal Credit to improve work incentives by introducing a work allowance for second earners in couple households, adjusting work allowances in step with changes in direct taxation and integrating free school meals and council tax support in the system to avoid creating new cliff edges.

The longer-term objective should be to return Universal Credit to its original aspirations once the national debt starts to fall. Work allowances should be returned to the level originally planned in 2012 and uprated in step with increases in earnings since then in order to improve work incentives. The taper rate in Universal Credit should be reduced from 65 per cent to 55 per cent – as originally envisaged by the designers of Universal Credit – to provide better incentives for low-paid workers to progress in work.25

Institute for Fiscal Studies The IFS included initial analysis of UC changes its post-spending review analysis.

In an analysis published as part of its February 2016 Green Budget report26, the Institute for Fiscal Studies found that a series of pre-emptive cuts meant that the introduction of Universal Credit would in the long run reduce the generosity of the benefits system – including to working families. UC would still however do a lot to help make work pay for many of those who currently face the most severe disincentives.

Looking at the long run impact of Universal Credit – i.e. when transitional protection for claimants moving from existing benefits is exhausted – the IFS found that UC strengthens financial work incentives only slightly on average, but that this masked significant effects in both directions for different groups. It noted:27

• UC will dramatically reduce the number facing very weak financial incentives to move into or stay in work. The number of people who lose more than 70% of their pay in taxes and withdrawn benefits (or would lose that much if they moved into work) will fall by two-thirds from 2.1 million to 0.7 million.

• UC will tend to weaken the incentive for single parents to be in work, and to strengthen the incentive for couples to have one person in work (rather than none or two). On average, working single parents will effectively keep 8% less of their earnings under UC than under the system it is replacing, because of the way UC is withdrawn as their earnings rise (a disincentive to work made significantly greater by the July Budget cuts).

25 Ibid. p144 26 James Browne, Andrew Hood and Robert Joyce, The (changing) effects of universal

credit, IFS Green Budget 2016, February 2016 27 Universal credit cuts support for working families, but helps make work pay where

current system creates worst problems, IFS press release, 3 February 2016

Number CBP7446, 16 November 2016 26

• Looking at the financial incentive for those in work to earn more (e.g. by increasing hours of work or moving to a better paid job), UC again tends to strengthen incentives where they are currently weakest. The 800,000 working individuals who would currently keep less than 20p of an additional pound earned (of whom 600,000 would keep less than 10p) would all keep at least 23p if the long run UC system applied now.

Turning to the long run impact of Universal Credit on incomes, IFS found that:

• Introducing UC will cut annual benefit spending by £2.7 billion in total. (This is on top of other benefit cuts such as the four-year freeze to most benefit rates.) When first proposed UC was intended to be more generous than the current system, but cuts to how much recipients can earn before their benefits start to be withdrawn have reversed this.

• Among working households, 2.1 million will get less in benefits as a result of UC’s introduction (an average loss of £1,600 a year) and 1.8 million will get more (£1,500 average gain). Among the 4.1 million households of working age with no-one in paid work, 1 million will get less (average loss of £2,300 a year) and 0.5 million will get more (average gain of £1,000 a year).

• Working single parents and two-earner couples are relatively likely to lose, and one-earner couples with children are relatively likely to gain. Among those currently receiving one of the benefits being replaced by UC, working single parents would be over £1,000 a year worse off on average if the long run UC system applied now, but one-earner couples with children would gain over £500 a year on average.

• Owner-occupiers and those with assets or unearned income are relatively likely to lose, but working renters are relatively likely to gain. This has the implication that UC will likely focus support more on those with long-term (rather than just temporary) low incomes, but it also weakens the incentive for some to save.

The IFS concluded that while changes to Universal Credit would reduce benefits for working families on average – a reversal of the original policy intention – there were still potential gains to be realised from the simplification of the working-age benefits system it entailed and the removal of the most extreme disincentives to enter and progress in work.

The IFS analysis concluded:

Universal credit will look significantly different when it is finally fully introduced compared with the original plans. In particular, reductions in the planned levels of work allowances – the amount claimants can earn before benefit entitlements start to be reduced – mean that it reduces rather than increases the total level of support for working households. The way in which the planned levels of work allowances have been repeatedly trimmed back does not give the impression that this has been the result of a carefully-thought-through plan for the shape of the future

27 Universal Credit changes from April 2016

benefits system. Rather, it appears as though cutting work allowances has been seen as a convenient way of reducing planned social security spending by making changes to a benefit that has not yet been introduced.

Despite the overall reduction in in-work support, there are groups that will benefit directly from UC’s introduction. Those in rented accommodation and single-earner couples with children will see their benefit entitlements increase under UC on average. This will strengthen the financial incentive for couples with children to have one person in work rather than none. On the other hand, this does weaken the incentive for both members of a couple with children to work rather than just one, as two-earner couples with children see a reduction in their benefit entitlements on average under UC.

While the winners and losers from UC, and its impacts on financial work incentives, have been affected significantly by the changes made to it since it was first mooted, the main potential benefits of the structural changes that UC will bring remain intact. It will be a welcome simplification of the benefits system, and will still strengthen work incentives for those who face the weakest incentives under the legacy system. On the other hand, it also remains the case that these benefits are being undermined to some extent by the decision to leave support for council tax as a separate system designed by local authorities. This complicates the overall system and potentially reintroduces some of the very high benefit withdrawal rates that UC would otherwise have abolished entirely.

If UC is to significantly increase the amounts of paid work that people do, it seems likely that this would be more the result of non-financial changes – such as increasing the conditionality requirements on benefit claimants and the increased level of integration and simplicity that UC will bring to the system – rather than because people face stronger financial incentives to do paid work. Indeed, early evidence has shown that UC has led to increased labour market participation among a group for whom it does not strengthen financial work incentives on average. The success of UC as a whole may also depend on how smoothly other non-financial changes work, such as the fact that payments will be made monthly and only to one member of a couple and that there will be no direct payments to landlords.28

Resolution Foundation The Resolution Foundation published initial analysis of the impact of UC changes on low-income working families following the Autumn Statement 2015.

May 2016 report

A report published by the Resolution Foundation on 3 May 201629 stated that the latest series of cuts to Universal Credit risked leaving UC “as little more than a vehicle for rationalising benefit administration and cutting costs to the Exchequer” and that “any ambition for supporting and rewarding work and progression looks very hard to achieve under the revised proposals.”

28 The (changing) effects of universal credit, pp258-9 29 David Finch, Universal Challenge: Making a success of Universal Credit, Resolution

Foundation, May 2016

Number CBP7446, 16 November 2016 28

The Resolution Foundation found that, even when considered alongside policies designed to boost incomes, including the National Living Wage and income tax cuts, relative to the current system without those measures in place, the latest version of UC implied:

• 3 million working families entitled to support in the tax credit system will no longer be entitled to any in-work support, leaving them £42 a week worse off on average;

• A further 1.2 million are set to receive UC, but be an average of £41 a week worse off;

• 1.7 million still in receipt of UC will be better off by an average of £38 a week, in part due to the more generous treatment of housing costs; and

• Only around 200,000 families – a mix of those without children and couple parents – who are no are longer entitled to UC at all will be overall better off following cuts to in-work support and boosts to income from the National Living Wage and income tax cuts.30

The research also concluded that Universal Credit as it now stood could also undermine incentives to work, particularly for lone parents and second earners. It commented:

Crucially, the much-reduced scale of the work allowances available to different families risks lowering the ‘sweet spot’ for working faced by many – particularly single parents who have shown themselves to be responsive to such incentives. The hours rule in tax credits incentivises work of 16 hours a week and is reflected in significant numbers of single parents working precisely that many. But UC risks encouraging the trading of fewer hours for a relatively small drop in income.

For second earners in couples the situation may be worse still, with increasing numbers potentially deciding not to enter work at all. Without a work allowance this group will see anything that they earn reduce their benefit income through the taper. A parent earning £5,000 a year would see their income increase by only £1,750 – and that is before accounting for any associated childcare costs.

To ensure that the introduction of UC supports working families to boost their incomes, financial incentives should be focused on those most likely to respond. Rebalancing support towards single parents and second earners could help UC surpass the current system in its ability to help people into work. But with in-work support already stripped back this will require reinvestment – via a reversal of the Summer Budget cuts to work allowances.31

The report set out a “three point plan” for the new Secretary of State, designed to ensure that UC would provide the support needed for families moving into and progressing in work in the future, and to make implementation as simple as possible. The report argued that the new Secretary of State for Work and Pensions should “restate and reclaim the role of UC in supporting more people into work and then boosting earnings”’ rather than being a source of savings for the Treasury, by-

30 Ibid, Executive Summary 31 Ibid, Executive Summary, original emphasis

29 Universal Credit changes from April 2016

• Ensuring that the incentives UC creates are focused on those most likely to respond to and be in most need of support. With the employment picture vastly improved over recent years and levels of worklessness in households dropping dramatically, UC must be refocused to meet the living standards challenge of the future rather than the past.

• Embracing the challenge of tackling low pay and progression. Despite the welcome strides taken forward with the implementation of the National Living Wage, in-work poverty and low pay look set to remain key challenges in the coming years – UC must be ready to meet them.

• Taking the chance to reassess the way in which the UC system itself functions and the processes people must go through when making their claim. As currently designed UC piles extra burdens on recipients - these could be eased. Making people’s lives more difficult may make them resistant to the change UC brings. Requiring recipients to provide complex information so the system can calculate entitlements risks creating errors and mistakes that could cause implementation to stumble.32

November 2016 report

On 7 November 2016 the Resolution Foundation published a further report, Under New Management: options for supporting ‘just managing’ families at the Autumn Statement.33 The authors comment:

The new Prime Minister has been very clear in her determination to put the interests of ‘just managing’ families at the heart of her government, but she has inherited tax and benefit plans which are set to lower incomes for many in the group over the remainder of the parliament. With post-EU referendum revisions to projections for jobs, earnings and inflation pointing to slower levels of income growth in the coming years, the outlook for those who are just about managing looks even tougher than we forecast at the time of the March Budget.

The report states that the Chancellor’s statements on the need for a fiscal “reset” give some headroom in order to help families in this group. The authors add:

[The Chancellor] also has the ability to reprioritise within existing fiscal plans - and we have suggested pressing pause on income tax and corporation tax cuts as a way of releasing roughly £4 billion for more targeted support for the economy in general and ‘just managing’ families in particular.34

They argue that while the Chancellor’s response will “rightly include a focus on investment and productivity growth, with this being the key to boosting living standards in the long-run, ...he also has a chance to make a more immediate impact on the living standards of the ‘just

32 Ibid, Executive Summary, original emphasis 33 David Finch and Matthew Whittaker, Under New Management: options for

supporting ‘just managing’ families at the Autumn Statement, Resolution Foundation, 7 November 2016

34 Ibid, Executive Summary

Number CBP7446, 16 November 2016 30

managing’ by revisiting some of the key welfare policies he has inherited.” The policies it suggests might be “revisited” include:

• the cuts to the Universal Credit work allowances; • the four-year freeze to working-age benefit rates; • removal of the “family element” in UC; and • the introduction of the two-child limit in UC.

The authors add:

Action on all of these policy areas would be welcome for some family incomes, but boosting work allowances is potentially the most targeted way to support low to middle income households that make up the government’s ‘just managing’ cohort. That’s particularly true for second earners and single parents who have shown themselves sensitive to incentives in the tax credit system. Alongside raising the value of existing allowances, the Chancellor should therefore explore options for introducing a meaningful work allowance for second earners in couples. Currently second earners in receipt of UC are set to lose 65p of every £1 earned from the moment they enter work, acting as a significant disincentive to enter employment.35

Centre for Social Justice On 27 October 2016 the Centre for Social Justice – which is now chaired by the former Secretary of State for Work and Pensions, Iain Duncan Smith – published a pamphlet36 which makes the case for reversing the April 2016 cuts to the Universal Credit work allowances, to “return Universal Credit back to its original design.” The CSJ argues that strengthening the UC work allowances “is the most effective way of supporting those who are just about managing and how this will help more people to find work and make the most of their potential.” It suggests funding the increases by delaying planned increases in the income tax personal allowance. The pamphlet explains:

At the heart of this is the fact that all the money invested in UC work allowances will go directly to people who are reliant on in-work benefits, those who are just about managing. In comparison, as little as 25 pence of every £1 invested in increasing the income tax personal allowance will go to this group. By choosing to invest in UC work allowances more people will find work and those in relatively low-paid work will be better supported.

As a result, the Centre for Social Justice (CSJ) is recommending that the Government, in the forthcoming Autumn Statement, reinstate UC work allowances to their status before the reductions in the 2015 Budget. This would cost up to £3.4 billion from March 2022, depending on how this change was made. If it is necessary to generate commensurate savings elsewhere, this could be done by adjusting the planned increases in the income tax personal allowance or even by slowing down the planned increases, which should generate sufficient savings.

In her first speech as Prime Minister, Theresa May MP, promised to those who are just about managing that: “When it comes to

35 Ibid, Executive Summary 36 Centre for Social Justice, The case for strengthening Universal Credit work

allowances, 27 October 2016

31 Universal Credit changes from April 2016

taxes, we’ll prioritise not the wealthy, but you.” This change will help to achieve this, ensure that the just about managing get the support they need, and ensure that work always pays.37

Speaking at the pamphlet’s launch, Iain Duncan Smith commented:

The purpose of Universal Credit was to make work pay.

Most people on benefits want to work. They want a regular routine, an interaction with a community outside the home, a stake in society and a sense of purpose. Work gives this to them – and it is crucial that we make sure people are always better off because they are in work.

Every penny invested in Universal Credit will go to low-paid workers, yet this is true of just 25 pence of every £1 invested in the income tax personal allowance. Investing in Universal Credit is a far better way of supporting those who need it most.

This is why we must restore Universal Credit’s original budget, and help those who are just about managing to properly provide for themselves and their families.38

Government response The Government stated that most analyses (as published immediately following the Autumn Statement 2015) of the impact of the Universal Credit changes failed to take into account the full package of policy measures affecting families, including elements such as increases in the personal tax allowance, the National Living Wage, and better childcare provision. Furthermore, it pointed out that analyses fail to account for the dynamic impact of Universal Credit, including changes in behaviour in response to improved opportunities to move into and progress in work.

The Government also envisaged providing help and support to seek more or better paid work, to “recoup the loss” from the work allowance changes. The Social Mobility and Child Poverty Commission believed, however, that it will be “very difficult” for many families to increase their hours and pay to avoid big cuts to their incomes compared to the current system.

37 Ibid. p2 38 Centre for Social Justice, CSJ calls on Government to back the ‘just about managing’

by reversing Universal Credit cuts, CSJ press release, 27 October 2016

Number CBP7446, 16 November 2016 32

8. Appendix The following table show the benefit award and net income of various family types under the current, “legacy” system (that is, tax credits, Housing Benefit, etc) as compared to under Universal Credit.

Awards have been calculated using the Library’s “ready reckoners”; full technical details are available in the footnotes that follow this table.

Benefit awards of example families

£ per annum (unless otherwise stated), nominal terms

2016-17 2017-18 2018-19 2019-20 2020-21

Dual earner family: couple, 2 children, 1 x 35 hrs, 1 x 16 hrs a week on NLW, no housing costsGross earnings (combined earnings) 19,147 20,439 21,819 23,292 24,864

Income tax 428 505 631 765 913 National Insurance 610 710 798 895 999

Net earnings (combined earnings) 18,109 19,224 20,390 21,632 22,952

Benefit awardsScenario 1 - recieves tax credits 5,667 5,137 4,571 3,967 3,593

Scenario 2 - receives UC, allowances restored 4,498 3,779 3,134 2,444 2,000

Scenario 3 - recieves UC, work allowances cut 3,414 2,695 2,021 1,300 826

All scenarios - Child Benefit award 1,794 1,794 1,794 1,794 1,838

Net incomeScenario 1 - recieves tax credits 25,570 26,155 26,755 27,393 28,383

Scenario 2 - receives UC, allowances restored 24,401 24,797 25,318 25,870 26,790

Scenario 3 - recieves UC, work allowances cut 23,317 23,713 24,205 24,726 25,617

Single earner family: couple, 2 children, 1 x 35 hrs a week on NLW, no housing costsGross earnings 13,140 14,027 14,974 15,985 17,064

Income tax 428 505 631 765 913 National Insurance 610 710 798 895 999

Net earnings 12,102 12,812 13,545 14,325 15,152

Benefit awardsScenario 1 - recieves tax credits 8,130 7,766 7,378 6,963 6,791

Scenario 2 - receives UC, allowances restored 8,406 7,944 7,580 7,195 7,070

Scenario 3 - recieves UC, work allowances cut 7,322 6,860 6,467 6,050 5,896

All scenarios - Child Benefit award 1,794 1,794 1,794 1,794 1,838

Net incomeScenario 1 - recieves tax credits 22,026 22,372 22,716 23,082 23,781

Scenario 2 - receives UC, allowances restored 24,096 24,344 24,712 25,107 25,897

Scenario 3 - recieves UC, work allowances cut 19,424 19,672 20,012 20,375 21,048

Working lone parent: single adult, 1 child, 35 hrs on NLW, no housing costsGross earnings 13,140 14,027 14,974 15,985 17,064

Income tax 428 505 631 765 913 National Insurance 610 710 798 895 999

Net earnings 12,102 12,812 13,545 14,325 15,152

Benefit awardsScenario 1 - recieves tax credits 5,350 4,986 4,598 4,183 3,941

Scenario 2 - receives UC, allowances restored 4,997 4,536 4,214 3,872 3,664

Scenario 3 - recieves UC, work allowances cut 2,369 1,907 1,514 1,097 820

All scenarios - Child Benefit award 1,079 1,079 1,079 1,079 1,105

Net incomeScenario 1 - recieves tax credits 18,532 18,877 19,222 19,588 20,198

Scenario 2 - receives UC, allowances restored 18,179 18,427 18,838 19,277 19,921

Scenario 3 - recieves UC, work allowances cut 15,551 15,798 16,138 16,501 17,077

33 Universal Credit changes from April 2016

2016-17 2017-18 2018-19 2019-20 2020-21

Working lone parent: single adult, 1 child, 35 hrs on NLW, privately renting 2 bedroom tenancyGross earnings 13,140 14,027 14,974 15,985 17,064

Income tax 428 505 631 765 913 National Insurance 610 710 798 895 999

Net earnings 12,102 12,812 13,545 14,325 15,152

Benefit awardsScenario 1 - recieves tax credits 6,119 4,986 4,598 4,183 3,941

& Housing Benefit 2,618 2,064 1,840 1,602 1,527

Scenario 2 - receives UC, allowances restored 8,193 7,731 7,310 6,863 6,729

Scenario 3 - recieves UC, work allowances cut 7,639 7,177 6,741 6,278 6,130

All scenarios - Child Benefit award 1,079 1,079 1,079 1,079 1,105

Net incomeScenario 1 - recieves tax credits & HB 21,919 20,941 21,062 21,190 21,726

Scenario 2 - receives UC, allowances restored 21,375 21,622 21,934 22,267 22,987

Scenario 3 - recieves UC, work allowances cut 20,821 21,069 21,365 21,682 22,387

Working single person: no children, 16 hrs on NLWGross earnings 6,007 6,412 6,845 7,307 7,801

Income tax - - - - -

National Insurance - - - - -

Net earnings 6,007 6,412 6,845 7,307 7,801

Benefit awardsScenario 1 - recieves tax credits - - - - -

Scenario 2 - receives UC, allowances restored 772 514 257 - -

Scenario 3 - recieves UC, work allowances cut - - - - -

Net incomeScenario 1 - recieves tax credits 6,007 6,412 6,845 7,307 7,801

Scenario 2 - receives UC, allowances restored 6,779 6,927 7,102 7,307 7,801

Scenario 3 - recieves UC, work allowances cut 6,007 6,412 6,845 7,307 7,801

CPI (of year previous) 0.0% 1.0% 2.7% 2.8% 2.5%

Universal Credit work allowances (cut from April 2016, as announced Summer Budget 2015)Higher work allowance (£ per month)

Single or couple: childless, not disabled - - - - -

Lone parent 397 397 408 419 430

Couple with children (adults not disabled) 397 397 408 419 430 Single or couple: one or both are disabled (i.e. have limited capability for work) 397 397 408 419 430

Lower work allowance (£ per month)

Single or couple: childless, not disabled - - - - -

Lone parent 192 192 197 203 208

Couple with children (adults not disabled) 192 192 197 203 208 Single or couple: one or both are disabled (i.e. have limited capability for work) 192 192 197 203 208

Universal Credit work allowances (restored, Summer Budget 2016 cut ignored)Higher work allowance (£ per month)

Single or couple: childless, not disabled 111 111 114 117 120

Lone parent 734 734 754 775 794

Couple with children (adults not disabled) 536 536 550 566 580Single or couple: one or both are disabled (i.e. have limited capability for work) 647 647 664 683 700

Lower work allowance (£ per month)

Single or couple: childless, not disabled 111 111 114 117 120

Lone parent 263 263 270 278 285

Couple with children (adults not disabled) 222 222 228 234 240Single or couple: one or both are disabled (i.e. have limited capability for work) 192 192 197 203 208

Number CBP7446, 16 November 2016 34

Wages

Adults work on the NLW 2016-17 to 2020-21. Wage projections based on chart 1.12, page 33 of Summer Budget 2015

Personal Allowance

Government pledge to raise the Personal Allowance to £12,500 by 2020-21, Summer Budget 2015

Tax Credit awards

Assumes these families are not in receipt of any award from the Childcare element of Child Tax Credits

Four year freeze of all components from 2016-17 to 2019-20, as announced in Summer Budget 2015. Uprated by CPI thereafter

Families assumed to be ‘existing claimants’, not affected by limits to support for new births and claimants to two children from April 2017 or the abolition of the family element for new claimants from April 2017

Housing Benefit awards

Four year freeze of all components from 2016-16 to 2019-20, as announced in the Summer Budget 2015. Uprated by CPI thereafter

Families assumed to be ‘existing claimants’, not affected by limits to support for new births and claimants to two children from April 2017 or the abolition of the family element for new claimants from April 2017

Housing Benefit calculations assume a family privately renting a two bed tenancy. Housing Benefit award limited by the average Local Housing Allowance rate for a 2 bed tenancy in Great Britain; LHA rates frozen from 2015-16 to 2019-20 and uprated by CPI thereafter

Universal Credit awards

Four year freeze of all components from 2016-17 to 2019-20, as announced in the Summer Budget 2015. Uprated by CPI thereafter

Universal Credit work allowances frozen in 2016-17 and 2017-18; uprated by CPI thereafter

Families assumed to be ‘existing claimants’, not affected by limits to support for new births and claimants to two children from April 2017 or the abolition of the ‘first child premium’ for new claimants from April 2017

Housing support calculations assume a family privately renting a two bed tenancy. Award limited by the average Local Housing Allowance rate for a 2 bed tenancy in Great Britain; LHA rates frozen from 2015-16 to 2019-20 and uprated by CPI thereafter

Under scenario 2, the cut to Universal Credit work allowances announced in Summer Budget 2015 is ignored; calculations assume the change did not take effect in April 2016

Under scenario 3, cuts to Universal Credit work allowances are implemented in full from April 2016

Inflation

CPI forecast taken from table 4.1, page 24 of the IFS’ November 2016 Winter is Coming

report

BRIEFING PAPER Number CBP7446, 16 November 2016

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