1.Universal Credit (UC) is being introduced by the Department for Work and Pensions (DWP) to replace six working-age benefits and tax credits. It is scheduled to be fully operational by 2021. UC is intended to improve financial incentives to work. The “legacy” benefits system it will replace is characterised by working hour thresholds, which encourage rigid patterns of low-hours employment. The most notable threshold, often described as a “cliff edge”, is at 16 hours per week: no in-work benefits are paid to someone who works less than 16 hours and no out-of-work benefits are paid to someone who works more than 16 hours. Unsurprisingly, as shown in Figure 1, a disproportionately large number of people work exactly 16 hours per week.
Figure 1: Example “cliff edge”: Weekly hours worked by lone parents, 2013–14
2.In UC, benefit payments are reduced at a consistent rate of 65 pence per pound as earnings increase removing such distortions. UC is less generous than the legacy system for a claimant working more than 16 hours, but more generous for one working less than 16 hours (Figure 2). The Institute for Fiscal Studies (IFS) and the Resolution Foundation note that these provisions risk a new problem of the proliferation of short-hours, low-paid “mini jobs”, in which incomes are topped up by UC. Mini jobs can have poor pay progression and career prospects. The Joseph Rowntree Foundation (JRF) also found strong correlation between low pay and job insecurity. Four in ten people on low pay had at least one period of joblessness within the subsequent four years.
3.To support low-paid claimants to become ultimately independent of the welfare state, the DWP intends to establish a service to promote in-work progression. This will offer support to low-paid claimants to increase their earnings to at least the equivalent of 35 hours per week at the National Living Wage (the earnings threshold). A full in-work service would apply to around one million working people. Such claimants might be encouraged to earn more through increased hours or a pay rise in their current job, taking on additional jobs or finding a completely new job. The DWP is currently trialling an in-work service led by Jobcentre Plus (JCP) and will report findings in 2018.
4.Encouraging people to earn more is intended to promote greater financial independence and thereby save public money. It is also a key element of the Government’s plans to improve the UK’s productivity through a higher pay, lower welfare economy. An in-work service is, however, a radical departure. It is largely untried in the UK and internationally. The DWP intends to build evidence of what works as it develops the policy over the coming years.
5.We undertook this inquiry to evaluate the DWP’s approach to building the evidence base and make some early practical recommendations about how it could deliver fair and effective support for in-work progression. We will continue to monitor the DWP’s progress. We are grateful to everyone who contributed to the inquiry.
1 Lone parent claimants are more likely to be sensitive to these thresholds and work a particular number of part-time hours due to their circumstances. Individuals must work at least 16 hours to receive Working Tax Credits (WTC), for example. At December 2015, 50% of single parent claimants of WTC and Child Tax Credits worked between 16 and 23 hours; 13% worked between 24 to 29 hours; 14% worked between 30 and 34 hours; and 23% worked 35 or more hours. In contrast, 10% of single claimants of WTC without children worked between 16 and 23 hours; 2% worked between 24 to 29 hours; 45% worked between 30 to 34 hours; and 43% worked 35 or more hours. Source: HMRC, , December 2015
2 This is referred to as a “taper rate” of 65%. In addition to the taper rate, UC also includes support towards childcare costs. UC claimants can claim back up to 85% of their paid out childcare costs up to a monthly limit of £646 for one child or £1108 for two or more children. See: DWP, , April 2016
3 See, for example, Resolution Foundation, Universal Credit: a policy under review, August 2014; and IFS, ‘The (changing) effects of Universal Credit’ [part of IFS Green Budget], February 2016
4 Thompson, S., , Joseph Rowntree Foundation, February 2015, p. 4
5 Note: Assumes two children aged under five, no childcare costs, no unearned income, renting at the Local Housing Allowance rate in a median rent area and paid the National Living Wage
6 DWP (). People aged under 25 are subject to a different rate known as the National Minimum Wage
7 (Ross James)
8 DWP ()
Prepared 06 May 2016