White Paper on Universal Credit

Written Evidence Submitted by Family Action

1. About Family Action

1.1. Family Action has been a leading provider of services to disadvantaged and socially isolated families since 1869. We work with over 45,000 vulnerable families and children a year by providing practical, emotional and financial support through over 100 community-based services across England. Additionally in 2009-2010 we distributed 4,218 grants totalling over £1,104,883 to families and individuals in financial hardship throughout the UK. Family Action won the 2009 Charity Awards Foundation award for effectiveness and jointly with CAB, Gingerbread and our sponsors Barclaycard the 2010 Third Sector Award for best corporate partnership for Horizons, an integrated welfare advice, training and educational grants package for lone parents. Find Family Action on the Web at www.family-action.org.uk .

1.2. Family Action works with vulnerable families in the home, providing early intervention services that strengthen families, assisting them to take more responsibility for their lives, parent their children, and where appropriate, helping them to move towards employment.

1.3. We believe the best way to reduce the cost of the welfare system, and to reduce welfare dependency and poverty is to ensure that work makes more financial sense for those low income families who are able to work. As such we are very supportive of the Government’s efforts to introduce a system which will improve the financial incentives to move into and progress in, employment.

One Family Action client works 16 hours per week because she is a woman who wants to work and knows it is good for her kids to see her work. However, she knows that because of deductions from her Housing Benefit, and because she has to pay £26 per week in travel costs, work does not really pay. For clients like her, it is vital to increase work incentives, so that they can really see the financial benefits of working, and of progressing in work. It is also important to simplify the system so that they can be clear exactly how much they benefit by entering work.

1.4. It is for this reason, and for service users like this one, that we think it particularly important for the Government to act now to address any issues with the Universal Credit, which may undermine its progressive intentions.

1.5. Family Action work closely with the campaign to End Child Poverty by 2020. Given problems of both out-of-work and in-work poverty in the UK, the introduction of the Universal Credit will play a key role in helping the Government to reach its target, and to keep to its duties under the Child Poverty Act.

2. Summary of key issues addressed

2.1. This submission addresses a number of key areas regarding the Universal Credit, on which Family Action has particular expertise. These include:

1. The impact of the Universal Credit on Marginal Deduction Rates, with particular emphasis on effective Marginal Deduction Rates taking into account childcare costs, for households who need financial support through the Universal Credit in order to pay for childcare.

2. Potential problems with the Universal Credit and savings incentives.

3. Issues with the delivery of the Universal Credit, including the need to "firewall" different components of the Credit in order to protect claimants from the risk of loss of multiple benefits where problems occur with their Universal Credit claim.

4. Finally the submission makes reference to more immediate problems of changes to the welfare system announced in the Budget and the Comprehensive Spending Review which may undermine work incentives in the shorter term, prior to the completion of the transition to the Universal Credit system.

3. Summary of recommendations

3.1. The withdrawal rate for the Universal Credit should be reduced to 55% in line with the proposals from the Centre for Social Justice [1] . This would ensure that households in receipt of tax credits, and paying Income Tax and National Insurance, and no other means tested benefits would not face a higher withdrawal rate under the Universal Credit. It would also help other working families in receipt of Universal Credit.

3.2. As well as reducing the withdrawal rate to 55%, introduce a childcare element equivalent to at least 70% of childcare costs. If there is no reduction in the overall withdrawal rate, the Government should introduce a childcare element covering at least 80% of childcare costs. We are very concerned that current plans for help with childcare costs could be considerably less generous than this, undermining work incentives for families in need to financial support with childcare.

3.3. Introduce capital rules for the Universal Credit in line with the capital rules for Tax Credits, not those for Income Support. Without this change, substantial savings disincentives will exist within the system for many households.

3.4. Give claimants the option of having all benefit payment dates linked, (including benefits outside of the Universal Credit). This would enable claimants to have all of their benefits paid on the same day, better enabling them to control their finances.

3.5. "Firewall" the different elements of the Universal Credit, so that, in the event of payment problems, even if one part of the benefit stops, not all benefit payments stop.

3.6. Improve work incentives in the short term. A number of the changes in the budget and the Comprehensive Spending Review work against the underlying principles of the Universal Credit. Some of these changes should be rolled back to ensure that moving into work pays for families in the period before the transition to the Universal Credit.

4. Universal Credit and Marginal Deduction Rates

4.1. The rate of deductions (through increased Income Tax and National Insurance, and reduced means tested benefit payments) incurred on earning an additional £1 is known as a person’s Marginal Deduction Rate (MDR). For some low-income working households, MDRs can be extremely high, currently reaching as much as 95.5% - meaning that families receive very little benefit from taking on additional work.

4.2. Family Action agree with the Government that action needs to be taken to increase financial incentives for people in low income working families to progress in work by increasing their working hours or to work for a promotion. We are therefore pleased that for some in-work, benefit claimants, the Universal Credit could substantially reduce Marginal Deduction Rates.

4.3. In particular, the Universal Credit addresses the extremely high rates of withdrawal faced by households in receipt of Housing Benefit and Council Tax Benefit, and by families working less than 16 hours per week. We welcome a lower withdrawal rate for these groups, which is also more consistent in the withdrawal of benefits as hours and/or earnings increase.

4.4. However, we are concerned that for many people the Universal Credit could reduce work progression incentives. As we note in our attached policy briefing "Marginal Returns?" [2] , for a worker currently paying Income Tax and National Insurance, in a family receiving tax credits at more than the family element, but not receiving housing benefit or council tax benefit, marginal deduction rates are currently 70%. The same household in receipt of Universal Credit instead of Tax Credits, the equivalent MDR would be 76%.

4.5. Our estimate suggests that as many as 1.35 million households are in this position. It is also estimated that as a result, under the Universal Credit, more tax-paying, working households in receipt of means-tested benefits would face increased, rather than reduced, MDRs.

4.6. The "Marginal Returns" policy briefing paper proposes that the taper rate for the Universal Credit is reduced to the 55% originally proposed by the Centre for Social Justice in the paper dynamic benefits, this would mean that the households mentioned above would face similar Marginal Deduction Rates under the Universal Credit as they do at present.

4.7. In addition to problems with the main taper mentioned above, we are concerned that insufficient emphasis has been placed on the place of help with childcare costs and of Council Tax Benefit within the new system. Under some of the Government’s proposals for dealing with childcare costs, some households could effectively face Marginal Deduction Rates (including childcare costs) of more than 90%, or even 100% - the latter meaning that they have to pay to work additional hours.

4.8. The Marginal Returns paper recommends that Council Tax Benefit is included within the Universal Credit in order to avoid the introduction of an additional benefit taper. We have been reassured in discussions with the Department for Work and Pensions, that the Government intends to avoid a second taper on Council Tax Benefit, and we very much look forward to hearing their plans for dealing with Council Tax Benefit in a way which does not reduce work incentives.

4.9. Proposals for dealing with childcare costs are outlined in the following section.

5. The Universal Credit, Marginal Deduction Rates and childcare costs

5.1. In a separate policy briefing entitled "Marginal Returns? (part 2): dealing with childcare costs" [3] Family Action outlined 3 potential policy proposals for dealing with the problems with childcare costs resulting from the Government’s proposals outlined in the White Paper, which were addressed in the first policy brief.

· Disregarding childcare costs for both the Universal Credit, but also for the purposes of income tax and national insurance – effectively a "double disregard".

· Introducing a childcare element of Universal Credit equivalent to at least the current element in the Working Tax Credit (80%), rather than at the 70% rate which the childcare element of Working Tax Credit will be at following the reductions in help with childcare costs announced in the budget.

· Reducing the overall withdrawal rate for the Universal Credit to 55%, plus a childcare element covering at least 70% of childcare costs.

5.2. It is concluded that of the models proposed, the preferred solution is a reduction in the overall withdrawal rate of Universal Credit, combined with a substantial childcare element within the credit. This is because this option addresses other problems with Marginal Deduction Rates under the Universal Credit highlighted in our previous paper, as well as providing further assistance to families with childcare costs.

5.3. Aside from this, it is suggested that an increased childcare element within the Universal Credit would be preferred to the "double disregard" approach, since the disregard is neither very generous, nor does it give the flexibility to easily improve entitlements to help with childcare costs, which is offered by a childcare element. The childcare element should cover at least 80% of childcare costs - though higher rates would improve this and ensure that work paid more than under the current system for more families.

5.4. Family Action is very concerned that proposals we have seen for dealing with childcare costs, since the publication of the White Paper, have been decidedly less generous than those outlined above. Were these options implemented some working parents could face considerably reduced work progression incentives compared to their current position, and, as previously noted, some may have to pay to work additional hours.

5.5. In addition, it is important to remember that many households currently receive assistance with childcare costs through Housing Benefit and Council Tax Benefit in addition to the childcare element of Working Tax Credit. As a result, help with childcare costs under the Universal Credit needs to be substantially higher than that currently provided through Working Tax Credit, in order to provide equivalent outcomes for households with childcare costs in receipt of Housing Benefit and Council Tax Benefit.

6. The Universal Credit and Savings incentives

6.1. The Universal Credit White Paper proposes introducing similar capital limits as currently apply within Income Support.

" Universal Credit will have the same capital rules as currently apply to Income Support. There will be an upper capital limit above which there is no entitlement and a lower limit below which capital is fully disregarded. An income will be assumed for capital between the lower and upper limits. " [4]

This would mean that savings are limited to £16000. Households with savings over this threshold would not be entitled to receive any Universal Credit.

6.2. We are concerned that this could undermine savings incentives, particularly for households currently in receipt of Tax Credits, but not other means tested benefits. The capital rules for Tax Credits are considerably more generous than for other means tested benefits, since there are no capital limits for Tax Credits, and instead, taxable income (above £300) from savings is taken into account [5] .

6.3. Households which are currently entitled to Tax Credits could have no entitlement to Universal Credit under the proposals for dealing with capital. This will, in particular, make it very hard for families in this position to save enough money for a deposit to buy a house.

6.4. For this reason we recommend that the Government introduces the same capital rules as apply for Tax Credits, to the Universal Credit.

7. Delivery of the Universal Credit

7.1. We welcome some of the proposals for delivery of the Universal Credit. In particular, we welcome the idea of a single entry point to a number of benefits within the welfare system. Multiple entry points to the benefits system cause complexity, and huge problems of passing information between different parts of the benefits system. For instance:

One service user, who is a lone parent coping with a child with a disability, noted that her Child Tax Credit stopped because she hadn’t realised she had to tell Tax Credits about taxable benefits she received. She had to call around a number of different departments to get them to tell her what she received in taxable benefits, so that she could pass this information on, and get her Tax Credits paid again.

7.2. We also welcome the potential this creates for a number of benefits to be paid at the same time in one sum.

One service user noted that she receives her Income Support fortnightly, her Tax Credits weekly, her DLA monthly, and her Child Benefit Monthly. She noted that it is complicated to know what you are getting when, and that this makes it difficult for her to plan in advance. She said it would be much better if everything was paid together, and that this would help her to stay out of debt.

7.3. Although we appreciate that Child Benefit and DLA will remain outside of the Universal Credit system, paying Income Support and Tax Credits together will help claimants like this to feel in control of their spending, and potentially help to avoid claimants getting in debt.

7.4. We hope that claimants could have the option of having their DLA and Child Benefit could be linked into the Universal Credit system (even if remaining separate) so that all benefits are paid at the same time.

7.5. Although welcoming the idea of a single benefit on the previous two counts. We are concerned that the current system protects claimants, so that even if one benefit is lost, others may continue in payment.

One service user noted that her Housing Benefit stopped for three months as a result of a fraudulent claim made in her name. Although this caused problems with her other benefits they continued in payment throughout this period. If all of her benefits had stopped this would have created awful problems.

7.6. We believe that the Universal Credit should be "firewalled" into different components so that even if one component stopped, payment would continue on the rest of the claimant’s benefits.

8. The Universal Credit, the Comprehensive Spending Review and the Budget

8.1. The key principle behind the introduction of the Universal Credit is to increase the financial incentives to move into and progress in work for low income working households.

8.2. For this reason we are very concerned that in the shorter term, many of the announcements in the CSR and the June Budget appear to do the reverse of this, reducing work incentives for many households.

8.3. Our analysis indicates that at least eight welfare cuts announced in the comprehensive spending review directly hurt low income working families. When combined with cuts announced in the budget, the analysis identifies at least 21 key welfare cuts will hurt the finances of low income working families [6] .

8.4. Changes to eligibility rules for working tax credits could lead to some couples with one person working 16 hours per week losing up to £3810 per year in Tax Credit entitlement. This is significantly more than the equivalent of the average household spend on grocery shopping [7] . Indications suggest that the changes could leave them worse off in than out of work – and push these families into poverty.

One Family Action worker is a working mother with 2 children (aged 7 and 3 and a half).  She currently works 16 hours per week as an administrator.  Her husband is currently doing training, and is looking for a job, but at the moment is finding it very hard to find anything in current conditions.

If the eligibility criteria for Working Tax Credit was changed so that couples with children had to work 24 hours to be entitled to WTC, then this family would lose their entitlement to WTC (which is currently about £237 every 4 weeks).  As a result of this loss, their entitlement to Housing Benefit and Council Tax Benefit increases – however an approximate calculation indicates they would still be likely to lose more than £20 per week from this change.  Some families could lose considerably more.

8.5. Changes to the eligibility rules for Working Tax Credit also penalise couples, and could discourage stable families.

8.6. Reductions in help with childcare costs through the childcare element of working tax credit could cost working families up to £30 per week - £1560 per year.

8.7. Freezing entitlements to Working Tax Credits, could lose low income working households £153 from their Working Tax Credit entitlement next year relative to uprating WTC elements with RPI to September 2010. By 2013/14 this could increase to £483.

8.8. Making Education Maintenance Allowance and (potentially) Council Tax Benefit discretionary locally managed funds, could lead to low income working households losing eligibility to these important benefits.

8.9. Changes to the contributory Employment and Support Allowance could lead to income losses of up to £91.40 per week for couple households where one member is working, and where the other is too ill to work. The changes could lead to households such as this being pushed into poverty.

8.10. We believe that the Government could work towards fulfilling the objectives of the Universal Credit in the shorter term, by rolling back some of the welfare cuts that they have made which affect low income working households.

9. Attached documents

Family Action has attached three documents referred to in this submission:

Family Action (2010) "The Universal Credit: Marginal Returns? – assessing the impact of the Universal Credit on Marginal Deduction Rates"

http://www.family-action.org.uk/uploads/documents/MDRs%20under%20UC.pdf

Family Action (2010) "Marginal Returns? (Part 2): Proposals for dealing with childcare costs"

(not currently available online – please email sam.royston@family-action.org.uk if you would like a copy.)

Family Action (2010) "Pushed towards poverty: 21 Welfare Cuts for Low Income Working Households"

http://www.family-action.org.uk/uploads/documents/21%20welfare%20cuts%20CSR%20report_2_.pdf