White Paper on Universal Credit - Work and Pensions Committee Contents


Written evidence submitted by Citizens Advice

Citizens Advice welcomes the opportunity to comment on the proposals set out in the Government's White Paper, Universal Credit: welfare that works. In 2009-10, Citizens Advice Bureaux saw 2.1 million clients and helped with 7.1 million issues. Benefits and tax credits and debt are the two biggest areas of advice, and account for almost two thirds of issues advised on. We handled over two million benefits and tax credit issues, which involved helping people understand and claim what they are entitled to, helping to resolve administrative problems, and helping to challenge decisions.

The volume and nature of our enquiries indicates just how complex the benefits system is, and shows the level of demand for help from our clients. In a recent online survey about policy ideas for the Government's spending review, over 3,000 CAB advisers and clients responded, and the need for a simpler benefits system won the most support. In the response to the consultation, 21st Century Welfare, Citizens Advice welcomed the aim of the Universal Credit to simplify the benefit and tax credit systems and to make work pay. However there are a number of areas in the White Paper that still require considerable development and without significant resolution, threaten to undermine the reforms. This response aims to flag up these issues, though there will not be space to deal with them all in detail.

ALIGNMENT OF RULES IN BENEFITS AND TAX CREDITS

Many of the problems highlighted below arise from the merging of two systems with a range of different rules - some of which are more generous in one system than the other. In order to fulfil the government's aim of supporting people into work that pays, the Universal Credit must be designed to incorporate these numerous differences without simply adopting the cheaper option.. The rules around "responsibility for a child", for example, are different in DWP benefits from in tax credits (and even different between child benefit and tax credits, both of which are administered by HMRC). Careful thought must be given to how these rules are aligned, and decisions made on which would best fit with the policy objectives of the universal credit, rather than which would be most affordable in the immediate term.

CHILDCARE

The Government remains undecided about how to provide help with childcare costs. We cannot stress enough how critical this issue is in helping low income parents into work, or increasing their working hours.

If help with childcare costs are managed separately from the UC, parents will face a second rate of withdrawal of benefit, which is likely to result in very high marginal deduction rates. With the UC taper rate set at 65%, those who pay tax and NI will lose 76 pence in every £1 of extra earnings. Any separate withdrawal of support for childcare costs would inevitably result in lone parents (or couples where both are in low-paid work) losing much more than this and - crucially - being unable to predict their final net income.

We do not support proposals to deal with childcare costs by disregarding them from income, as this will put many families at risk of facing effective marginal deduction rates of over 100%[202]—ie to lose out financially when working more. The impact will depend on the ratio of earnings in relation to their childcare costs.

The Paper appears not to recognise the help with childcare costs currently provided through the housing and council tax benefit system, which can cover up to 17% of childcare costs, in addition to the 80% covered through the tax credits system. We hope that this does not mean a reduction in the overall financial help available for childcare costs.

Possible options for providing help with childcare costs are limited by the desire to maintain the current level of spending. If the purpose of welfare reform is to encourage more people into work, and the intention is to extend support to parents working fewer than 16 hours, it is difficult to see how it will be possible to maintain current spending levels, and ensure that work will pay for everyone with children. If lone parents are expected to work when their youngest child is five, support for childcare costs must ensure that work pays for a lone parent on minimum wage with average child care costs. If the system cannot guarantee that it can make work pay in these circumstances, this must be made explicit, and the associated conditionality regime must be consistent with this. Whilst the JSA conditionality regime does not require a lone parent to take a job that does not fit with school hours or for which affordable childcare is available, the proposal to cut housing benefit for individuals who have been claiming JSA for over a year may not allow them to operate within these flexibilities, without being penalised.

The proposal to pay 70% of childcare costs in UC is, in our opinion, the best of the options offered by DWP. However, if it were adopted, it would fail the two tests of Universal Credit for many claimants. It will not make work pay and will not be simple enough for a parent to predict whether they will gain significantly if they accept an extra shift at work.[203]

It will be difficult to find affordable and non complex solutions, but we suggest the following could be considered:

  1. Paying childcare costs in full or at 95% (at present 97% of childcare costs are paid for those on HB/CTB) up to a given limit of say £100 beyond which only say 70% of childcare costs were paid. The fixed amounts will need to be higher in areas of high childcare costs and for children with disabilities.
  2. Increased universal free/subsidised provision during school holidays.

We would not expect the Bill to be passed without these details being resolved. A PQ response from Chris Grayling advised that the detail will be announced over the coming months, after discussion with the sector. The UC will succeed or fail depending on whether work really does pay for parents reliant on childcare costs. We recommend that the Bill should include broad provision, to prescribe that whatever the solution, there should be no requirement for a parent with childcare costs to work, unless they can be sure of retaining at least 85 pence in the £1 after paying all their childcare costs.

FINANCIAL SUPPORT WITH COUNCIL TAX

The current proposals for UC already mean that workers above the tax and NI thresholds will lose 24 pence for every extra pound earned. We are worried that the exclusion of council tax benefit from the UC. We believe it risks adding complexity, reducing support to many low income families and further reducing gains from work. We recognise DWP's intention to negotiate with the Department for Communities and Local Government, to ensure that whatever financial support for council tax is agreed, will be included in the single taper. The importance of this must not be underestimated and we stress that if this cannot be achieved, the Government should rethink the decision to localise support for paying council tax.

EXTRA HELP FOR PEOPLE IN WORK, WITH DISABILITIES/HEALTH CONDITIONS

The white paper proposes to give extra support to people who have been assessed as able to do some work, but who are at a disadvantage in the labour market as a result of a disability. There appear to be two mechanisms by which this support can be given

  1. a higher personal allowance (equivalent to ESA WRAG rate); and
  2. a higher earnings disregard.

It is not clear, however, who will be entitled to receive this help.

Through the disability element of working tax credit, the current system provides extra income for those who can work, but are disadvantaged and likely to have a lower earning power because of their disability. It also enables them to become eligible for WTC when working fewer hours than those without a disability - currently 16. The disability element is vitally important in enabling people with disabilities and health problems to move into, and stay in, work. At April 2010 125,000 adults were in receipt of the disability element of WTC. We believe that take-up is low as some of the current criteria are poorly understood and are not well explained by HMRC. We have significant evidence of the disability element being removed incorrectly, and cases demonstrate negative impact on claimants' health and ability to work. We would expect the new system to provide support for a similar group of people but that access to the support should be simplified where possible.

Current entitlement is based on the ability to fulfil two criteria:

  1. they must continue to have a disability which puts them at a disadvantage in the labour market, and
  2. fulfil a benefit condition - either through receipt of DLA or complex criteria involving receipt of a sickness or incapacity benefit for some time at any time in the last six months before moving into work.

Entitlement to the disability income disregard must not be limited to claimants in receipt of DLA or moving from the ESA-equivalent into work, since many people currently entitled to the disability element of WTC (on the basis of DLA lower rate care) are likely to lose eligibility following the DLA review. Secondly, many people coming off ESA because they are judged fit for work, are still at a very significant disadvantage in the labour market - and would currently be entitled to support through the disability element of tax credits, if they find work within six months. It is very unfair that the timing of a work capability assessment could have such a long term effect on someone's financial position.[204]

One possible option would be to extend the remit of the WCA to separately assess disadvantage in the labour market, as well as work readiness. Conditionality could then be tailored to the client, but people assessed to have a disadvantage in the labour market would still receive extra financial support related to their disability.

The allowances proposed in the UC when tapered away at 65%,will—at almost all points on the scale of hours worked—equal the level of support currently provided by the disability element of WTC.[205] However, if the higher earnings disregard and the extra amount in their personal allowance is not available to those who have been found fit for work (but who have a very significant disadvantage in the labour market as a result of a condition or impairment), there will be many people who—even though they will be unable to work more than 16 hours—will be denied the extra help they need.

PENSIONERS

The introduction of Universal Credit will have implications for the system of financial support for people who are over state pension age (SPA). Currently, people who are over women's state pension age may be eligible for pension credit, housing benefit, council tax benefit, help with mortgage interest, child tax credit and working tax credit. With child tax credit and housing benefit no longer existing outside the UC, a system of support for pensioners with children and housing costs must be established. The white paper proposes adding allowances in pension credit for pensioners with children and housing costs, but there will also be the need to provide support to families not eligible for pension credit. Current pension credit claims can include a partner who has not yet reached SPA. The white paper raises the possibility that people over SPA who are still working could choose to apply for UC rather than pension age benefits, but gives no details.

It appears to us that the pension age benefit arrangements will need to be modified so that older people will continue to receive the same level of support as they do at present. We hope that the government will bring forward specific proposals in the near future and will consult upon these proposals before legislation is finalised.

IN WORK CREDIT/RETURN TO WORK CREDIT

The current in-work credit amounts to £40 a week for the first year of moving into work. It is not yet decided whether equivalent extra financial support for those moving into work will be reflected in the UC. With the removal of hours rules for many people, the move into work will be a gradual one and the logic of providing extra support at a specific point becomes less clear. Evaluations of the value and impact of the in-work credit on lone parents return to work has found that other factors were generally more important than financial gains.[206] It was found to provide extra support for those who would have moved into work anyway, while for some lone parents who had been out of work longer, it provided an important safety net, and removed some of the risks associated with a return to work - particularly if work was temporary, part-time or low paid. It proved particularly useful in helping lone parents adjust to a new way of budgeting on a monthly wage, and by providing an additional income and helping them deal with debts.

A much higher earnings disregard will help remove some of the risks from moving into work, while the reforms should mean people are less likely to be out of work for such long periods. We would therefore recommend that the money might be better spent supporting parents to provide up-front childcare deposits, or to enable people to continue paying for childcare when temporarily out of work.

PASSPORTED BENEFITS

Current proposals are that passported benefits are lost at set thresholds, not all at once, so there is no cliff edge when households lose all the extra benefits. However, different benefits are of different value to different households - the fact that free prescriptions are not lost at the same time as free school meals means nothing for someone who only needs prescriptions, whereas the value of free school meals is by far the greatest benefit to a family on low income.

We would welcome further consideration of the proposals for dealing with passported benefits as set out in Dynamic Benefits

SAVINGS RULES

There are no savings limits in the tax credit system. Only the interest earned on savings is taken into account when calculating claimants' entitlements. If the UC has savings limits of £16,000, it will extend means-testing to thousands more families in low-paid work. This will have a significant impact on these families - not least because it will prevent them from being able to save for a deposit for their own property. As soon as their deposit savings hit £16,000 they will lose their entitlement to UC.

We welcome the extra disregards for those with a mortgage who are working and not eligible for housing costs. While we welcome this help for those with a mortgage, we feel it is unfair that many of those who are struggling to save a deposit to buy a house will be excluded because of the savings limit, whilst others are supported whilst building up a much greater equity in their property.

We feel that it is similarly unfair on couples in their fifties who have been on a low income and have been unable to buy a property (and therefore benefit from increased equity), but have made modest savings for their old age. It will particularly affect couples where a man has worked in a manual occupation all his life, becomes seriously ill in his fifties and suffers a significant drop in income. This group will also be affected by 12 month time-limit on contribution-based ESA for those in the WRAG group. People in this situation can currently claim working tax credit, but will get no help under UC.

We also believe it will increase error because it will create a new client group who are in work, but are not used to having to monitor their level of savings, and maintain it below £16,000.

HOUSING COSTS

It is important that the housing element in the UC must reflect rent paid. The White Paper acknowledges the need for local variations to be taken into account, but does not provide detail about how the housing element will reflect local housing costs. How these areas are defined will be crucial if local variations in rent are to be reflected in the housing element. We already see problems with the setting of the BRMA areas. We are also concerned that the move to up-rate LHA rates in line with the Consumer Price Index (CPI), rather than by using local Rent Officer data will also break the link between local rent levels and housing benefit over time, causing problems for claimants in areas which, for local reasons, may experience an increase in rent levels above the average.

More significantly, use of the CPI seems likely to depress LHA rates over time, as rent inflation is traditionally higher that the CPI. During the period 1991-2009 ONS data shows that CPI averaged 2.86% pa whilst "rent only"inflation was 5.43%.[207] This will therefore lead to a steady shrinking in the sector of the market which is affordable within LHA rates, and moreover appears to be in contradiction to the proposal to set LHA rates at the 30th percentile. In practice it would seem that uprating by CPI will mean that LHA rates will steadily reduce below the 30th percentile. In our submission to the Committee's inquiry into the HB changes in the budget we argued that at the very least it will be crucial that the regulations provide for regular corrections to be made so that LHA rates continue to reflect the reality of local rents.

SMALL EMPLOYERS WHO CURRENTLY FAIL TO COMPLY WITH EMPLOYMENT LAW

Bureaux currently report the difficulties faced by clients in accessing their employment rights: paid holiday entitlement, minimum wages or even getting payslips. This causes difficulty in reporting their income for housing benefit purposes. How will claimants be able to get their UC paid accurately if their employer doesn't comply?

SELF-EMPLOYED PEOPLE

It is not clear how the new system will work for self-employed people who will presumably have to report their own income. Compliance with the system may be difficult for this group. We are already concerned because bureaux evidence shows us that many employers already force people to register as self-employed when they are actually employees, because the employers do not want the responsibilities of employment conditions. We are concerned that the added administrative responsibilities required by the UC system will exacerbate this problem.

We are very concerned at the proposal to assume an income equivalent to the minimum wage. Current rules limit how long the system will support a self-employed person before they are established and paying themselves an income. It is very helpful, however, to have a basic income to rely on in those early stages. Citizens Advice Bureaux see many people enabled to set up in self-employment as a result of this help. If they are assumed to have an income of about £200 /week, it will significantly restrict the ability of many to set up in self-employment.

Self-employment can be a particularly useful route back into employment for disabled people - particularly those with a fluctuating condition - as they can control when and how long they work. An employer is much less likely to be as accommodating to good and bad days. It therefore seems very short sighted to remove this help when there is such an emphasis on helping disabled people back into work.

PAYING ELEMENTS SEPARATELY

The universal credit represents a high risk of people losing all their benefit income if the calculation of one element is delayed. It is important that a mechanism is found to ensure a minimum level of income if there are delays in delivering the benefit.

Furthermore, we recommend the ability to split payments between adults in a household, in order to retain a balance between "wallet" and "purse".

December 2010



202   Though technically the MDR will be less than this, because a parent will always pay some of the childcare costs not met by the UC (the suggestion is for 70% to be covered up to a cap), their experience will be to lose money for every extra hour worked/pound earned. Back

203   Someone offered an extra shift at work say worth £48 will have to work out 24% of this which is what they will keep (£11.52). They will then have to find out how much extra childcare they will have to pay for - if it will cost an extra £35 in childcare they will then have to work out what 30% of this is (£10.50 and then if any extra expenses such as fares will eat further into the remaining £1. Back

204   If twoople become partially sighted at the same time, both are awarded ESA in the WRAG and both gradually adjust to their impairment. The person with the better qualifications is offered a job whilst still on ESA, the other person spends a year on JSA before finding a job. Both obviously have an ongoing significant disadvantage in the labour market.  Back

205   There is a cliff edge in the present system where someone can earn more under the permitted work rules. Back

206   http://www.dwp.gov.uk/newsroom/press-releases/2010/nov-2010/dwp165-10-261110.shtml
http://www.dwp.gov.uk/newsroom/press-releases/2010/nov-2010/dwp164-10-261110.shtml 
Back

207   Moreover this may be an underestimate of private sector rent inflation as it includes all rents (i.e. RSL and LA). Back


 
previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2011
Prepared 7 March 2011