Select Committee on Work and Pensions Seventh Report

3  Incentives to work

119. So far this report has examined how complexity manifests itself in the administration and structure of the benefits system. We received evidence to suggest that the consequences of complexity extended beyond maintaining a claim for out-of-work benefits. Witnesses suggested that as claimants move off benefits and into the labour market, they can face further difficulties in calculating their financial situation in work, in understanding the myriad rules that exist for in-work benefits and in fully appreciating the interaction between benefits and Tax Credits.

Better-Off Calculations


120. Better-Off Calculations are undertaken by Jobcentre Plus staff on behalf of claimants and give a comparison between the claimant's out-of-work benefits and the in-work benefits they would receive when they take up employment at a certain income. Given that the transition from benefits to work can involve changes to levels of income and to periods of payment, a Better-Off Calculation can ease the consequences of change and the interaction between wages and in-work benefits by clarifying an individual's budget once they begin employment.

121. When we visited Stratford, East London, it was explained to us that Better-Off Calculations took around twenty-five minutes to complete, and in the London region, around 40% of claimants received a Better-Off Calculation, which compared favourably to the national standard of 20%.

122. The specific merits of the Better-Off Calculation in terms of increasing incentives to work was raised in evidence sessions. Abigail Howard from the Wise Group commented that, when Better-Off Calculations are completed, they were valuable to their clients:

"if you have got a skilled person who knows the right questions to ask and who is very thorough about it I think it [the Better-Off Calculation] can be very useful"[160]

However, she added the caveat that "The system is as good as the person administrating it."[161]

123. However, Michael Fothergill of Off the Streets and Into Work expressed concern that constraints on Jobcentre Plus Personal Advisers' time affected the accuracy and frequency with which Better-Off Calculations were administered:

"When [claimants] have got a whole raft of different benefits, they are really interested to find out exactly how that is going to translate into work, but Personal Advisers really do not have the time to do that."[162]

124. According to OSW, the complexity of the Better-Off Calculator itself compounded the potential for inaccurate outcomes; "[it] is too complicated for people to use, it is just too lengthy to use really for Personal Advisers."[163] Michael Fothergill's comments were supported by DWP research in 2004, which suggested that the inherent complexity of the Better-Off Calculator could create difficulties for those administering it:

"Less experienced advisers found the BOC [Better-Off Calculator] difficult to use and interpret; more experienced advisers found aspects of the BOC problematic, such as the selection of the financial year or where incomes had varied during the year."[164]

125. One Parent Families suggested that Better-Off Calculations for lone parents had "become increasingly hard to do, due to the annual nature of tax credits."[165]

126. The Wise Group provided a case study example which illustrated the difficulties a claimant could face in returning to work because of inaccurate and infrequent Better-Off Calculations:

"Margaret is married with one child and has been on Incapacity Benefits for four years. Her husband is also out of work because of severe health problems and requires a certain level of care and support from Margaret on a day-to-day basis. Despite her responsibilities for both her 2-year-old daughter and her husband Margaret has been keen to come off her benefits and find work.

"Margaret actively sought support from her local Jobcentre in finding out what her financial position would be if she found employment. A 'Better-Off' calculation conducted by the Jobcentre showed that for the hours she could manage to work employment was not a feasible option for her.

"Margaret is however particularly motivated to work and continued to make enquiries on her own behalf as to whether or not this was the case. After she had communicated with both the Council Tax and Housing departments she discovered that the amounts of money she had been told she would be charged for council tax and rent had been incorrect. She then revisited the Jobcentre with these revised totals but was again informed that the hours she wanted to work would not be financially viable.

"By this time Margaret had secured a potential post as a carer for a child with disabilities, a flexible job with hours that were suitable for her to meet her other responsibilities at home. She discussed the situation with her potential employers who agreed to increase the hours they had offered her to 26 hours a week. After discovering this Margaret re-contacted her Jobcentre to find out if this increase in hours will make work financially viable. However she was told that she would have to wait at least a month before she could get an appointment in order to run the Better-Off check. "[166]

127. Engagement with those who are out of the labour market is crucial, and Better-Off Calculations are an essential tool in this process. At the same time, their complexity illustrates the opaqueness of our current benefits and tax credits system. We recommend that all staff who carry out Better-Off Calculations are given additional training to ensure that the information they give to claimants is accurate, and that the IT systems are reviewed to make them easier to use and to ensure that Better-Off Calculations accurately reflect likely tax credits payments. The Committee would also welcome assurances from Jobcentre Plus that Better-Off Calculations are a priority and that staff are encouraged not just to undertake claimant assessments but to appreciate fully the value of the calculation in giving people the incentive to return to work.


128. We were told by Jobcentre Plus staff that Better-Off Calculations were not offered to all claimants for a variety of reasons: relating to the individual (eg someone who had recently given birth) or the time available to the Adviser. A supplementary memorandum from the DWP gave further details:

"Jobcentre Plus does not routinely collect data on the percentage of customers currently given a Better-Off Calculation for all customer groups and all interview types. At a national level, Jobcentre Plus has concentrated its interest on mandatory interviews where Better-Off calculations are more likely to be undertaken when most appropriate to the customer's circumstances.

"Data for lone parents who have made a claim since the Jobcentre Plus regulations came into force shows a significant and consistent increase in the percentage of Better-Off calculations conducted throughout 2006/2007. A further study of all lone parents, including those making claims before the introduction of Jobcentre Plus regulations, has been undertaken as part of a drive to improve lone parent performance and shows not only that there has been a marked increase across 2006/07, but also that the percentage of Better-Off calculations undertaken falls in line with expectations of them being conducted at the appropriate time - more BOCs are being undertaken in caseload and New Deal Lone Parent interviews where customers are actively receptive to move into employment."[167]

129. Abigail Howard from the Wise Group reported that low proportions of their clients had received Better-Off Calculations:

"We did a survey with our clients before we came here today because we thought we had a lot of anecdotes but not many facts and only 27 per cent had had a Better-Off calculation at the Jobcentre before they came to us for help, so they are not getting that advice and that information up front, which I think would make the journey easier and a lot less scary for people."[168]

130. We asked the Minister about this and he told us:

"The Better-Off Calculation does not always have to be done for every single claimant; it should be done where it is appropriate, and where it is an effective device and it is going to assist someone of course we want to see it done. The 20 per cent figure, which you have heard, we have suggested would represent an average where it was being applied in all appropriate cases. Indeed, in cases where we do think it is particularly helpful we have found the incidence of people being taken through that calculation going up quite considerably; in the case of lone parents making a new claim, for example, now 34 per cent are taken through the demonstration. Clearly it is a tool and it is very important and it is being applied more and more frequently where it is appropriate to do something."[169]

131. In order for the Better-Off Calculation to be "applied more and more frequently" it is important that staff receive clear guidance about who should receive it, however DWP told us:

"There is currently no formal guidance available. Jobcentre Plus is developing a Policy and Good Practice Guide, which will be available in the autumn. Instruction on the advantages of using Better-Off calculations is delivered as part of the Personal Adviser Learning and Development Routeway, where it is stressed to learners that the primary role of BOC is to show that the customer is Better-Off by taking up employment."[170]

132. We believe that Better-Off Calculations can help claimants make informed choices about work by setting out clearly any in-work entitlements for which they may be eligible. We recommend that the Government ensures that all working-age claimants are given a Better-Off Calculation at the appropriate time, and that it sets higher national targets for how many claimants receive them.

In-work benefit entitlements: moving into work

133. As we have already explained, we received a clear message from the memoranda and from witnesses that any examination of complexity in the benefits system and how it relates to work incentives should span cross-departmental boundaries and consider how DWP benefits interact with:

134. Citizens Advice argued:

"It makes little sense for the question of 'benefit complexity' to be examined without looking at the same time at other systems that affect income, including the tax credit system […] The positive benefits that may be available from benefit simplification for users of the system will inevitably be limited by the current scope of reform."[171]

135. Similarly, Michael Fothergill from OSW emphasised:

"There is also a whole raft of hidden costs to being in work as well. Not only do you lose all of your benefits and your Housing Benefit is reduced drastically but then you also lose free school meals, prescriptions, glasses, teeth, council tax, all these things, then you have to pay fares to get to work, there are extra costs for clothes, for food, into-work calculations do not bring that kind of stuff to bear."[172]

136. A number of witnesses stressed the importance of claimants experiencing a smooth transition from benefits to in-work support, emphasising the first month as the crucial stage for many claimants if they are to sustain employment. For example, Ginny Lunn from the Prince's Trust told us "the first month is critical, because once you start a job you are not paid until the end of your first month".[173]

137. The Wise Group agreed and added that when the benefits system fails to provide entitlements, employment programme providers are frequently required to bridge the financial gap:

"I think […] that the first month is absolutely crucial and that is when they [employers] lose people. A lot of organisations such as our own end up subsidising people during that first month, quite significantly, to get them through unexpected costs; also the fact that sometimes the system just lets them down."[174]

138. Beyond the application and maintenance of different claims, individuals who move into work can face additional barriers caused by the complex rules and interactions between out of work and in-work benefits. The Joseph Rowntree Foundation commented on the "discontinuities" in entitlement, adding that "the present UK tax and benefit system makes a sharp distinction between people who are 'in work' and those who are 'out of work'." Fran Bennett emphasised that immediate financial advantage may be less important in determining decisions to work than a longer-term view:

"What I would probably draw from the experience of the last few years is that claimants value greatly security and stability in income. In particular, claimants with children do not want to put their children at risk of benefit changing or being withdrawn."[175]

139. This leads on to the relationship between DWP benefits and tax credits, which we cover below.

DWP benefits and HMRC Tax Credits

140. On 3 May 2007, the Public Accounts Committee published a report on the Tax Credits system which concluded that, "the service provided to tax credit claimants has been poor."[176] In this Report, we do not intend to comment on the extent of complexity in the Tax Credits system; rather we examine the relationship between DWP benefits and Tax Credits and how their sometimes complex interactions can impact upon claimants' work incentives.

141. In her report, Sue Royston recommended that in the short to medium-term, DWP should concentrate on:

"Addressing, or working with the HMRC to address, the interactions between TCs and other benefits, which cause significant problems for some customers and have an impact on DWP targets of persuading people back into work and tackling child poverty."[177]

142. Abigail Howard from the Wise Group explained how delays in the payment of Tax Credits meant that, without alternative subsidies, some of their clients would have struggled to retain their job:

"We have a lot of clients who have to wait up to ten weeks for their Tax Credits to come through, so if we are not there to support them I do not see how else they would get through that period."[178]

143. We also heard from a Senior Research Fellow at the University of Oxford, Fran Bennett, who emphasised the importance of looking at both DWP benefits and HMRC Tax Credits in terms of simplifying the system of financial assistance:

"It is absolutely essential that the interaction between benefits and Tax Credits […] [is] tackled. You can only do that in a cross-government way. The fact that your [the Committee's] remit is limited to exclude Tax Credits, and the same officially with the Social Security Advisory Committee [SSAC]- I know there is a memorandum of understanding - is a real drawback for the holistic examination of both policy and administrative simplification."[179]

144. The Child Poverty Action Group similarly emphasised the need for more engagement between DWP and HMRC and the important role that the Social Security Advisory Committee (SSAC) could potentially play in brokering this:

"We urge the Committee to explore the ways in which different departments work together to deliver the income maintenance policies as part of its inquiry. We argue that similar principles should apply irrespective of the provider department. In particular, we continue to argue that the Social Security Advisory Committee (SSAC) should have statutory oversight on regulations affecting Tax Credits."[180]

145. Although Tax Credits fall under the remit of HMRC, a Memorandum of Understanding was signed in July 2004 that set up formal arrangements under which SSAC would be invited to comment on matters within HMRC's responsibility and to provide confidential advice to Treasury Ministers. In 2004, our predecessor Committee recommended that the remit of SSAC should be extended to formally include HMRC. The Government responded:

"The Government notes the views of the Committee, and of the independent reviewer conducting the Quinquennial Review of SSAC, but remains of the view that it would not be appropriate to extend SSAC's statutory remit to cover Tax Credits."[181]

146. This was re-iterated in a supplementary memorandum received at the very end of our inquiry:

"The Government has no plans to introduce legislation to extend the role of SSAC. The existing Memorandum of Understanding gives SSAC the opportunity to put full and frank advice to Treasury Ministers on the Tax Credit system."[182]

147. However the Social Security Advisory Committee itself has made clear that relations with Her Majesty's Revenue and Customs are not satisfactory:

"although we have continued to take an interest in matters administered by HMRC, particularly the operation of the Tax Credits scheme, we have had relatively little contact with HMRC over the course of the reporting year and our role has not developed as we had hoped it would. Accordingly, we believe that a joint review of the Memorandum of Understanding is called for. We have approached HMRC and await their response." [183]

148. We conclude that any attempt to simplify the benefits system must take tax credits into account. However, it is difficult to see how this will be achieved at a policy-making level. The Benefit Simplification Unit only has responsibility for DWP benefits and while there is joint HMRC/DWP work underway to improve data sharing and operational processes, there is no Government Minister, department or unit which is attempting to address the combined and overlapping complexities of the benefits and tax credits systems. This omission must be urgently addressed.

149. We believe that the Social Security Advisory Committee is a valuable and experienced resource that provides critical examination of the DWP benefits and HMRC Tax Credits systems and would have a role in joining up HMRC and DWP thinking. We urge the Government to ensure that both Departments engage with the Social Security Advisory Committee as a means of collaboratively addressing complex interactions between the respective systems, reconsider formally extending the Social Security Advisory Committee's remit to include Tax Credits, and arrange for a joint review of the Memorandum of Understanding to be conducted as soon as possible.


150. We heard evidence to suggest that claimants' misconceptions of benefit rules could act as a disincentive to them returning to the labour market. The Wise Group commented:

"Often one of the biggest challenges faced by our programmes is proving to clients that they will not be disadvantaged by moving into work, which goes against commonly held perceptions."[184]

151. Disability Alliance's Paul Treloar suggested that claimants were often unaware that Housing Benefit could be claimed as an in-work benefit:

"I think the information could be better to help people understand that you can keep Housing Benefit when you move into work, because I think people think it stops automatically because it is passported with a means-tested benefit."[185]

152. Similarly Michael Fothergill of OSW reported:

"we have found from quite a lot of our research that people have absolutely no idea what in-work benefits they are entitled to. Certainly in relation to Housing Benefit, I have found it remarkable that people do not know that they are entitled to this."[186]

153. Disability Alliance's and OSW's concerns were supported by a recent Working Paper from DWP on the impacts of rent on Housing Benefit and work incentives. Researchers concluded that Housing Benefit should be regarded as protecting people from the financial effects of high rents and as an integral part of the financial work incentive package for out-of-work claimants. However, the report found that the real value of Housing Benefit as a form of in-work support was often missed because "people's perceptions of how Housing Benefit operates in work [which] limit[s] the effectiveness of Housing Benefit as an in-work benefit and this is something we need to work to change."[187]

154. Earlier DWP research similarly concluded that:

"From the perceptions of customers (both in work and workless), local authority staff and Jobcentre Plus advisors, the evidence for the incentive effect of HB/CTB is extremely weak.

"In order for HB/CTB to act as an incentive to work it needs to be recognised by people who are seeking work that the benefit is both available and will make a significant contribution to their income. For a variety of reasons, this does not happen in practice."[188]

155. The DWP has acknowledged in its own research that it must do more to ensure that claimants are aware of Housing Benefit as an in-work benefit. We urge the Government to work with local authorities to examine how best to raise awareness amongst benefit claimants and low wage earners and to act upon this swiftly.

Marginal Deduction rates and the poverty trap

156. As detailed above, an unforeseen consequence of a complex benefits system can be the proliferation of inaccurate assumptions about entitlement amongst claimants, which can in turn have a negative effect on claimants' incentives to work. During our inquiry, we heard from organisations which argued that in some cases, assumptions reflect the reality and that existing benefit rules, particularly for Housing Benefit, may discourage people from working.

157. In its response to the Government's Welfare Reform Green Paper in 2006, OSW argued that "the single biggest financial disincentive to work is Housing Benefit, in particular the tapers"[189]. Michael Fothergill expanded on this point:

"the people we deal with are probably going to remain on the National Minimum Wage for a good two or three years at least, because for them it is sustaining a job as opposed to progressing in a job. I am not saying that everybody will not progress but certainly there will be a large percentage that will not, and with that Housing Benefit taper it is just going to be almost impossible for them to work. If we had a system which started off lower and then increased gradually over a period of five years, or such, maybe that would support better, but at the moment certainly not for National Minimum Wage and high rent."[190]

158. The Housing Benefit taper is triggered when a claimant's income is higher than what they would theoretically receive on Income Support, income-based Jobseeker's Allowance or Pension Credit Guarantee. A deduction is made from their maximum housing benefit entitlement based on how high their income is above those benefits. Housing benefit is reduced at a rate of 65p for each £1 of excess income. The first £6,000 of savings are ignored. If there is more than £6,000 in savings each £500 of savings (or part thereof) will result in an extra £1 a week in income being assumed in the calculation of income.

159. Citizens Advice commented on the impact of these tapers on the overall Marginal Deduction Rate faced by claimants, and argued for a significant drop :

"HB is ignored for calculating Working Tax Credit but WTC is not ignored for HB income. When income is raised as by WTC, the tapers of HB and CTB combine to 85% which means a person gains only fifteen pence for every extra pound earned."[191]

160. It gave the example of "a client working 12.5 hours [who] was offered an increase to 16 hours a week. If she did this she would lose her CTB and much of her HB and actually be worse off. She was very upset."[192]

161. Professor Veit-Wilson noted that "The IFS has calculated that the aggregate effect of the increasing deductions and losses of benefits leads to some low earners suffering potential or actual marginal tax rates of 70 to 96 per cent on each additional pound that they earn." He continued:

"These very high marginal tax rates on low incomes conflict with the principle that taxation should be fair and equitable as between different earners, and that it should be transparent and calculable.

"What is most unacceptable about this situation is its inconsistency with the very widely asserted claim that income tax rates above the current 40 per cent are incompatible with enterprise. If this is the highest tax rate that it is right to expect a high income earner to pay, how much worse it is that the government effectively charges low income earners more than twice that rate."[193]

162. He concluded that "It is therefore essential that any simplification of the benefit system should reduce and not exacerbate the problem of the intolerably high effective marginal tax rates suffered by low earners."


163. A complex benefits system can contribute to claimants' barriers to work through disincentives caused by misunderstandings and misconceptions of how the system operates and by the intricacies and interactions of financial assistance in and out of work. But we also heard evidence from organisations that argued that, even without these anomalies, there are some claimants who may never be Better off in work. In terms of the overall simplification of the benefits system, this is relevant and merits examination in this Report, as if there are groups that are being lost in the "complex morass"[194] of benefits, this carries the threat of undermining one of the Government's fundamental priorities of supporting all those who are able to work to get back into the labour market.

164. The poverty trap refers to the conundrum that results when in-work, income-tested benefit payments are reduced as income rises, combined with income tax and other deductions, with the unintended consequence of discouraging higher paid work, whether that involves working longer hours or acquiring skills. It demonstrates the way in which the benefit system can create a perverse incentive.

165. Sue Royston described the 'unemployment trap' as follows:

"The unemployment trap occurs when those without work find the difference between in work and out of work benefits too small to provide an incentive to enter the labour market. Very many lone parents who are without maintenance and have jobs on the minimum wage are in the above situation."[195]

166. One of the key purposes of the UK benefits system is to provide a safety net for people who are out of work and to support those who can work to do so. However, the transition from out of work benefits to employment (and possibly in-work benefits) and the corresponding marginal deduction rates (MDRs)[196] may create a situation whereby the individual has an incentive to avoid work because their net income gain after benefits and taxes is not enough to compensate for the effort they must expend at work.

167. Sue Royston's report to DWP illustrated the circumstances in which some lone parents will face the poverty trap:[197]Table 1: Hours worked and total income after outgoings
Hours worked Income/wk from work after tax Childcare costs Tax Credits and CHB (and IS) HB/CTBTotal income before paying rent, C tax and childcare costs Total income after paying rent, C tax and childcare costs
Any yr4 on IS £240 £162£105 £290£185
Yr 120 £115£75 £231£49 £395£215
Yr 125 £137£100 £252£37 £422£217
Yr 130 £157£125 £284£10 £451£221
Yr 135 £178£150 £3040 £481£226
Yr 235 £178£150 £264£32 £472£217

168. John Wheatley from Citizens Advice told us:

"there are still people for whom it is not financially sensible to move into work when you look at the perfect information, because they are moving into a low-income job, they have childcare costs and they lose free school meals or other help they might be relying on, and they have travel to work costs. If the calculation is done correctly, for many people, the only reasons for moving into work are the non-financial ones, about it being good for your self-esteem and being good to go and mix with adults for a change and being good in the longer term for your career and hope that you might progress."[198]

169. Steve Broach from Every Disabled Child Matters highlighted the particularly difficult situation that faces some parents of disabled children:

"They are paying five times as much for childcare as families with non-disabled children. That is an absolutely primary driver in keeping families out of work and the result of that is that only 16 per cent of mothers of disabled children are in any form of paid employment, as opposed to over 60 per cent of mothers of other children."[199]

170. We were keen to learn whether any quantification had been carried out of how many people were affected and to what extent by the objective function of the rules within the benefits system. The DWP informed us:

"There are around 500,000 working age Housing Benefit recipients with Marginal Deduction Rates in excess of 40%. The vast majority of these are on the Housing Benefit taper. There are other important contributors to MDRs such as Taxes and Tax Credits, so the overall contribution Housing Benefit/Council Tax Benefit will make to MDRs depends on what other elements of the tax and benefit system people are on."[200]

171. We received a report by OSW, The costs and benefits of work for single homeless people, which undertook an analysis of the different types of claimants for whom incentives to work are lowest. The report acknowledged that most people, working full time, will be better off in work but highlighted other groups for whom employment may not be the best route out of poverty:

"In most of the cases in this analysis most people are better off in work at National Minimum Wage (NMW) working full-time (35 hours a week). In the average case a person working 35 hours at NMW is £45.94 better off in work each week. However there are some people for whom it is not better off to be in work, especially those working for 15 or 25 hours a week on Income Support, Jobseeker's Allowance, Income Support with the Disability Premium and Incapacity Benefit.

"Working hours and pay rates have a significant impact on the amount by which someone is better off in work. At 15 hours a week, at NMW, in no cases are people better off in work. At NMW the average person working 15 hours a week is worse off in work by £13.48, young people working at the development rate of the NMW are, on average, £15.77 worse off.

"Amongst the cases in this analysis the smallest incentives to work are for young people (under 21) living in privately rented accommodation or social housing in London moving from Income Support with the Disability Premium into work. If they earn the NMW at the development rate (£4.45 an hour) then they will be £42.06 worse off each week.

"Even working full time, in this case, the person would still be over £20 worse off a week. Working 35 hours a week at NMW (£5.35 an hour) the greatest incentives are for those on Incapacity Benefit receiving DLA4 who can be up to £120.39 better off in work."[201]

172. The Wise Group similarly observed:

"Despite many improvements made to the current system there remain clients for whom unemployment seems to be a more financially sensible option than moving into work. This is not necessarily about people 'playing the system' but often about them making logical cost/benefit based decisions."[202]

173. However, in written evidence DWP stated:

"There is no unemployment trap for the vast majority of working age benefit claimants because, assuming work of at least 16 hours a week, their out of work benefits would be exceeded by minimum earnings plus in-work benefit and Tax Credits."[203]

174. OSW findings appear to refute the Department's comments about the unemployment trap. We asked the DWP whether or not it agreed with OSW. It replied:

"This report has been read with interest and it is noted that it contains a lot of detailed analysis. The Department does, however, wish to make the following points.

The benefits system is geared towards moving people into work of 16 hours or more. Individuals working less than 16 hours are entitled to claim Jobseeker's Allowance or Income Support if their earnings are less than their applicable amount. While on the benefit they can make use of the earnings disregards in Jobseeker's Allowance and Income Support which allow customers to work a few hours and keep some amount of their earnings before they are taken into account in their benefit calculations. The in-work cost assumed by the Off the Streets analysis is held constant regardless of the numbers of hours worked. The Department does not believe this to be realistic. Establishing exact gains to work is usually dependent on the level of the in-work-costs which will vary widely between individuals.

Working 16 hours at the National Minimum Wage compares favourably with levels of out of work benefits. For example, individuals aged 25 and over receive £85.60 from 16 hours work at the National Minimum Wage (rising to £88.32 from 1 October 2008) compared with £59.15 from Income Support/Jobseeker's Allowance. Also, individuals on the development rate for 18-21 year olds receive £71.20 from 16 hours work at the National Minimum Wage (rising to £73.60 from 1 October) compared with £46.85 from Income Support/Jobseeker's Allowance."[204]

175. In 2006, the Institute for Fiscal Studies undertook some analysis of the "poverty trade-off" on behalf of the Joseph Rowntree Foundation.[205] The study looked at different family types and their respective incentives to work and found:

"The financial work incentives of these groups are very different. Lone parents face some of the weakest incentives to work at all, and face weak incentives to progress in the labour market. They face weak incentives to progress because many working lone parents will be subject to withdrawal of a tax credit or means-tested benefit as their earnings rise. For the same reason, and because of the low average wage that they receive and high levels of out-of-work income, they face weak incentives to work at all.

"Meanwhile, single adults without children face some of the strongest incentives to work. The relatively low level of state support that is provided to these people when they are not working means that their replacement rates are generally low. The incentive to progress is relatively strong for this group, with most individuals being subject to the basic rate of income tax and [National Insurance contributions]."[206]

176. We recommend that the Government undertakes research to investigate whether there remain some groups of claimants for whom work does not offer the best route out of poverty, and more detailed analysis of the impact of high Marginal Deduction Rates in parts of the benefits system on overall work incentives.

DWP contractors' understanding of the benefits system

177. We took evidence from a number of organisations that provide employment support to DWP benefits claimants. We were particularly interested in examining how much DWP contractors knew about benefit rules and whether benefits advice was offered to their clients. Abigail Howard from the Wise Group outlined the level of expertise amongst the organisation's staff:

"Chairman: Abigail, the Wise Group is a DWP contractor; does the Wise Group see it as a core function of its staff that they are experienced benefit advisers?

"Ms Howard: It is not a core function of their role but certainly they need to have a good understanding of the system to help their clients. I think we see their key role as being supportive of people, in whatever way they need to be supported to get a job.

"Chairman: Does every one of your staff have to be given that level of benefits knowledge or do you designate two or three people, or whatever?

"Ms Howard: Actually I do not know. I think there are a few members of staff in each project who probably have that knowledge but not every single member of staff has that level of knowledge and expertise."[207]

178. The current contractual obligations for the New Deals, Employment Zone and Pathways to Work do not include any requirement for DWP contractors to provide benefits training for their staff.

179. Sue Royston's report expressed some concern about the future role of contractors and the impact on benefits advice, noting that:

"Some within the voluntary sector expressed concern that in the future customers may not see a DWP advisor at all because the service has been contracted out. There may be no incentive for someone from a contracted out organisation to give advice about other benefits. This could have an unwelcome impact on the take-up of other benefits."[208]

180. The Committee awaits the Government's response to David Freud's review of welfare system but even at this early stage considers that, should the Government extend the role of contractors in delivering frontline services for claimants, it should be incumbent on providers to undertake benefits training for staff.

160   Q 181 Back

161   Q 181 Back

162   Q 180 Back

163   Q 191 Back

164   DWP Research Report 220, Jobcentre Plus' delivery of New Tax Credit policy, October 2004 Back

165   Ev 139, para 17 Back

166   Ev 153-154 Back

167   Ev 231 Back

168   Q 158 Back

169   Q 314 Back

170   Ev 231 Back

171   Ev 211, para 5 Back

172   Q 168 Back

173   Q 160 Back

174   Q 161 Back

175   Q 31 Back

176   Committee of Public Accounts, Twenty-second Report of Session 2006-07, Tax Credits, HC 487, May 2007 Back

177   Royston (2007) Benefits Simplification and the Customer. Independent report to DWP, para 5.2.1 Back

178   Q 161 Back

179   Q 21 Back

180   Ev 191, para 5 Back

181   Reply by the Government to the First Report of the Work and Pensions Committee, Session 2002-2003 (HC 296), Report on the Social Security Advisory Committee, May 2004, Cm 6190 Back

182   Ev 233 Back

183   SSAC 2006 Report, para 1.43 Back

184   Ev 152, para 10 Back

185   Q 129 Back

186   Q 159 Back

187   DWP Working Paper No 38, Para 3.4, Impacts of rents on Housing Benefit and work incentives, February 2007 Back

188   DWP Research Report No 383, Housing Benefit and Council Tax Benefit as in-work benefits; claimants' and advisors' knowledge, attitudes and experiences, 2006 Back

189   OSW response to the Green Paper, A new deal for welfare: empowering people to work, April 2006  Back

190   Q 162 Back

191   Ev 214, para 26 Back

192   Ev 214, para 32 Back

193   Ev 223, paras 51 - 52 Back

194   Ev 151, para 2 Back

195   Sue Royston's report to DWP, Benefits Simplification and the Customer, p 51, February 2007 Back

196   Marginal deduction rates measure the extent of the poverty trap by showing how much of each additional pound gross earnings is lost through higher taxes and withdrawn benefits or Tax Credits. [Definition taken from Budget 2007: Building Britain's long-term future: Prosperity and fairness for families, March 2007]  Back

197   Adapted from Sue Royston's report to DWP, Benefits Simplification and the Customer, February 2007 Back

198   Q 124 Back

199   Q 151 Back

200   Ev 134 Back

201   OSW, The costs and benefits of work for single homeless people, 2006, p 64  Back

202   Ev 152, para 13 Back

203   Ev 111, para 3.4 Back

204   Ev 233 Back

205   The Institute for Fiscal Studies, The poverty trade-off, published for the Joseph Rowntree Foundation, October 2006 Back

206   The Institute for Fiscal Studies, The poverty trade-off, published for the Joseph Rowntree Foundation, October 2006 Back

207   Qq 192-193 Back

208   Royston (2007) Benefits Simplification and the Customer, Independent report to DWP, para 1.2.7 Back

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