Select Committee on Work and Pensions Fourth Report

BENEFITS, TAX CREDITS AND WORK INCENTIVES

The financial implications of moving into work

69. People who have been on benefit for a long time often require intensive support to get them back into work or even to begin to think about entering work. The progress from dependence on incapacity benefits to work can be very gradual. Not everyone will be able to make the leap from not working to working full­time. For some, working just for a few hours a week will be a major achievement which may take many years. Several of the organisations submitting memoranda referred to this as a 'work continuum'.

70. Joanne Hindle of UnumProvident was of the view that the whole benefits and Jobcentre Plus structure works against the work continuum as it based on an assumption of a binary situation that people are either 'incapable' of work or able to seek and enter work. Furthermore that the situation is not sufficiently flexible to enable people to move up and down the work continuum.[51] This view was also voiced by other organisations giving oral and written evidence.[52]

71. Each stage of the work continuum has financial implications for the disabled person concerned. As many pointed out, the complex interactions of the benefits system upon paid work means that changes in circumstances and the effect on income are not easily understood by people claiming incapacity benefits. The result is uncertainty, with many IB claimants worried about the risk to their secure income if they attempt to work.

72. The Committee was interested to hear from job brokers in Merthyr Tydfil, who reported that in some circumstances, to ease the shift from benefits into work, they had used the Advisers Discretionary Fund to provide a benefit run-on for some clients. In their view this had been successful in helping to alleviate the financial uncertainty when benefit ends and before the first pay packet is received.

73. The Committee is concerned that disabled people still face considerable financial barriers in the move from benefits to work and recommends the Government introduce a four week complete benefit run-on for disabled people moving into work.

74. The Government has already introduced a range of work incentive measures that are intended to reduce the financial disincentives to work. These include the 52­Week Linking Rule; the Disabled Persons Tax Credit and the new Working Tax Credit; Permitted Work rules; Job Grant; and earnings disregards.

75. Lorna Reith of Disability Alliance and Joanne Hindle of UnumProvident were of the opinion that financial risk is more of an issue for disabled people moving into work than financial disincentives. As Ms Reith pointed out, "I am not sure there are financial disincentives. I think there is financial risk, which is not quite the same thing. There will be disincentives, if people sat down and worked things out - they might well find they were worse off in work. My experience is that people do not have the faintest idea either what benefits they are on or what is likely to happen to them when they move into work. They do not sit down and say, "Right, my housing benefit taper will do this, and I'll have that much"; they just do not know. So actually the idea that financial incentives are a big issue I think is a big mistake. What people fear is the element of risk. When you move into work if you have been out of work for a long period of time, there is a whole range of risks that you take. There are emotional risks. It is a big step to be taking. It might not work out. You might feel much worse at the end of it. It might exacerbate your condition. It is very risky. On top of that, you have this kind of financial risk. Benefits might be low, but they are secure and you know what you are getting."

76. To alleviate the financial risk of moving into work, Disability Alliance proposes a 'back to work diary' which would be administered by Jobcentre Plus and would aim to illustrate to the individual, and their employer, the financial aspects of moving into work. The diary aims to help them to cope with the transitional period and to ensure that they receive the financial help they are entitled to. The Committee supports the idea of a 'back to work diary' and urges the Department to consider how this might be implemented.

Return to Work Credit

77. The Pathways to Work Green Paper outlined plans to pilot a Return to Work (RTW) Credit aimed at helping those on IB move back into work. It is modelled on the success of the Employment Credit payable to those on the New Deal 50 Plus. The Return to Work credit will be paid, through Jobcentre Plus, at £40 a week for 52 weeks where personal income in work is less than £15,000p.a. Those who commented on the RTW credit were broadly welcoming of the initiative. The main concerns were, first, that it should not count as income for Housing and Council Tax Benefits purposes and, second, what happens to people when they reach the end of the one year period, especially if their earned income has not increased.

78. The Committee welcomes the Return to Work Credit. We do not believe it needs piloting and believe that it should be extended nationally as soon as possible. We also recommend that the credit should be excluded from the Housing and Council Tax Benefits income calculation and would welcome clarification on how the Department plans to deal with claimants once they reach the end of their claiming period.

Earnings disregard and permitted work

79. The current earnings disregard allows disabled people on incapacity benefits to earn up to £20 per week for an unlimited period. Under the new 'Permitted Work' rules Incapacity Benefit claimants can earn up to £67.50 a week for 26 weeks. While welcoming the Permitted Work rules, several organisations have pointed out that the current income disregard of £20 per week has not maintained its value since it was introduced. In addition, the interaction with Housing Benefit or help with mortgage costs can be disrupted if more than £20 is earned.

80. The Committee recommends that the earnings disregard should be raised to £35 per week. This would enable a full day's work at minimum wage levels and would help to reduce the financial leap between living on benefits and moving into work of more than 16 hours a week, supported by tax credits.

16 hours rule

81. Eligibility for tax credits, including the new Working Tax Credit, is dependent upon working a minimum of 16 hours per week. There has been extensive lobbying from the disability organisations to reduce the 16 hour rule to enable more disabled people to move into work, or to retain employment if they acquire a disability. At present the leap between living on benefits and working a few hours a week under the earnings disregard rule or moving into work of more than 16 hours and claiming tax credits is much too difficult for many disabled people.[53] In addition, those who are already in work but need to reduce their hours to cope with an acquired disability are pushed out of work once they fall below 16 hours.

82. The Committee believes that a combination of a low earnings disregard and the 16 hour rule creates a gap in the financial support which produces added difficulties for disabled people to enter work, or to stay in work. We therefore recommend reducing the qualifying hours to 12 hours per week for those with disabilities while (as recommended above) raising the disregard to £35 per week.

52-Week Linking Rule

83. IB claimants who move into work or training can register for the 52-Week Linking Rule. This enables them to reclaim the benefit within 52 weeks at the same level without having to serve a qualifying period. Organisations were broadly welcoming of the 52-Week Linking Rule however some expressed concern over the process by which people have to register their interest in claiming it within one month of moving into work.[54] This can prevent individuals from qualifying.

84. The 52 Week Linking Rule is a welcome development which will help to remove the fear of being unable to reclaim benefits should a job not work out. The Committee is concerned that the requirement to register for the linking rule within one month of entering work is an unnecessary bureaucratic hurdle which should be removed. We recommend that entitlement to the 52 Week Linking Rule should be automatic.

  

DLA reassessment

85. Disability Living Allowance is paid to cover disability­related costs regardless of an individual's work status. Oral and written evidence submitted expressed concern that DLA is frequently reviewed once a disabled person moves into work or onto a work training programme. This occurs apparently because it is assumed that their disability needs have changed or their condition has improved, which is not necessarily the case. Disability Alliance and Mind[55] were particularly concerned that this adds to the financial risks associated with moving into work. No clear research evidence appears to be available on the extent of this problem. However, both organisations state that they come across this issue on a regular basis. Part of the problem is not that DLA is actually reviewed and reduced or withdrawn, but that no guarantee can be given that it will not be. On that basis, as DLA can be a large proportion of their income, it is suggested that many disabled people make the decision not to take up the work or training opportunity offered. The problem is more applicable to people with mental health difficulties, rather than, for example, someone who is blind or who is paraplegic.

86. The Committee recommends the Department explore further the extent to which Disability Living Allowance reviews act as a financial disincentive to work and consider establishing a fixed­term Disability Living Allowance 'moratorium' when a claimant first moves into work to enable them to adjust to their new financial situation.

Housing costs

87. Another significant financial disincentive is that of housing costs. These were not extensively investigated during this inquiry but they were mentioned several times by witnesses and others giving written evidence as a key factor which discourages disabled people from entering the labour market. Responding to a question on financial risk and in­work benefits, Mr Ian Charlesworth of the Shaw Trust said, "The loss of Housing Benefit and the potential threat to the home is a big fear factor for so many people".[56] Three-fifths (60 per cent) of households[57] with one or more sick or disabled adult of working age are owner-occupiers and many will be beneficiaries of mortgage protection payments but the financial risks of moving into work still exist for them too. Those on Housing Benefit are also vulnerable to a loss of income. Housing Benefit and Council Tax Benefit Extended Payments do help some disabled people with housing costs for four weeks after moving into work, but the marginal deduction rates will be more of an issue.

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51   Qq 105, 121 Back

52   Qq 32, 133, 142, Ev 16 Back

53   Q 59, Ev 31, 39-40 Back

54   Q 55, Ev 3, para 17 Back

55   Qq 60 - 62 Back

56   Q 126 Back

57   Department for Work and Pensions (2002), Family Resources Survey 2001 Back

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Prepared 11 April 2003