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Universal Credit isn’t working: proposals for reform Contents

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Chapter 3: Managing on Universal Credit

109.This chapter examines the adequacy of Universal Credit awards and how well the benefit incentivises claimants into work or to increase their hours. It examines wider spending reductions in the social security system which have affected the security of benefit claimants, including those on Universal Credit.

Social security: spending cuts

110.Universal Credit was intended to be more generous to claimants than legacy benefits. We were told that the budget for Universal Credit in 2012/13, when the benefit was introduced, was set to be £2 billion per year more generous.110 This was reduced subsequently alongside wider cuts in public spending. In 2015 alone, £3 billion was cut from Universal Credit.111 Nicholas Timmins told us that Universal Credit was introduced “right into the teeth of austerity”.112 Sir Iain Duncan Smith MP, Secretary of State for Work and Pensions from 2010 to 2016, told us that it was right to press ahead with Universal Credit regardless of the fiscal context:

“[The idea] that somehow, we could not roll this out because we were in austerity but we could have stayed with the other benefits because somehow they were satisfactory. They were not. I know of no one who has genuinely studied this who says that what went on before was better than what we have now; that is simply not the case. I argue that whether or not you end up with austerity, your policy position must be to improve.”113

111.Baroness Stroud told us, “We never envisaged that we would have to do these reforms in an age of austerity. It was very challenging.”114 Baroness Stroud said that more substantial support to vulnerable claimants was not developed as a result of the reductions in social security spending.115

112.Spending reductions in the social security system in these years included:

• freezing the value of most working-age benefits between 2016 and 2020;
• introducing a welfare cap that limits the amount that the Government can spend on certain social security benefits and tax credits. The Treasury has said that the welfare cap will apply in 2024/25 and be set at £137.2 billion, with a margin of 3%;116
• introducing a cap (‘the benefit cap’) which limits the total amount that individual households can receive. The benefit cap is set at £23,000 per year for a family living inside Greater London, and £20,000 for a family living outside of London;
• limiting the child element to two children and removing the family element/premium in tax credits, Universal Credit and Housing Benefit;
• cutting Universal Credit work allowances (since partly reversed);
• Reducing Housing Benefit, including reducing the Local Housing Allowance for private sector tenants.117

113.More money has been put into Universal Credit since.118 Most recently, the Government made several temporary changes to the benefits system and to Universal Credit in response to the COVID-19 pandemic:

• the standard allowance in Universal Credit has increased by £1,040 per year for one year, on top of planned annual uprating of benefits. This is a temporary measure which lasts for 12 months;
• Local Housing Allowance rates have been uprated to the 30th percentile of local market rents after a four-year freeze beginning in 2016; and
• for self-employed claimants, the Minimum Income Floor has been suspended.119

114.Some groups of claimants remain affected by earlier cuts to social security. While those cuts were not specific to Universal Credit and applied to the social security system generally, Universal Credit has increasingly been affected by the cuts as it has been rolled out to more people. We examine the effect on claimants from two of the most significant spending cuts that remain—the benefit cap and the two-child limit—later in this chapter.

115.In April 2019 the DWP said that Universal Credit will provide households with an additional £2.4 billion per year compared with legacy benefits because of higher take-up.120 However, the level of take-up that is needed to reach this figure is not guaranteed. The Resolution Foundation has set out several reasons why people are less likely to claim Universal Credit, including low entitlement amounts or not wanting to engage with benefit conditionality.121 Policy in Practice said that Universal Credit has a reputational problem which may cause take-up to fall short of expectations.122 The DWP has not published take-up figures for Universal Credit.

116.The Government undertook the most significant social security reform for a generation at the same time as making substantial cuts to public spending, including wide ranging cuts to the social security system, in order to reduce the deficit. Cuts to Universal Credit have been partially restored but they, along with problems of design and implementation, have had lasting consequences by increasing poverty and hardship among many claimants. Universal Credit’s promise of increased generosity now rests on higher take-up by claimants. The reputation of Universal Credit is poor and higher take-up is not guaranteed. The DWP should start publishing take-up estimates in order to assess how successful Universal Credit has been in achieving the increased take-up that is assumed to flow from simplification.

117.The significant cuts to the social security system over the last decade mean that a catch-up increase in funding is needed urgently to ensure that Universal Credit is fit for purpose. Even when the recent increases in Universal Credit are taken into account, it is a less generous benefit than intended by its original proponents. Without the Government putting more money into the system, Universal Credit will continue to be beset by the problems that we have set out in this report. The recommendations below set out a pathway for making Universal Credit an adequate and fairer system which would provide greater security for claimants.

Adequacy of awards

118.Universal Credit awards comprise a monthly standard allowance and may contain additional elements depending on the claimant’s circumstances. Table 1 sets out the monthly standard allowance for different claimants.

Table 1: Monthly standard allowance rates for Universal Credit

Claimant group	2019/20 standard allowance	2020/21 standard allowance
Single (under 25)	£251.77	£342.72
Single (25 or over)	£317.82	£409.89
Joint claimants (both under 25)	£395.20	£488.59
Joint claimants (one or both 25 and over)	£498.89	£594.04

Source: Department for Work and Pensions, ‘Policy paper: Benefits and Pension Rates 2020 to 2021’ (9 April 2020): https://www.gov.uk/government/publications/benefit-and-pension-rates-2020-to-2021/benefit-and-pension-rates-2020-to-2021 [accessed 20 July 2020]

119.Additional elements based on claimants’ personal circumstances are set out in Table 2.

Table 2: Planned uprating in additional monthly payments

Additional payment	2019/20 rate	2020/21 rate
First child (born prior to 6 April 2017)	£277.08	£281.25
First child (born on or after 6 April 2017) or second child and subsequent child (where an exception or transitional provision applies)	£231.67	£235.83
Disabled child addition—lower rate	£126.11	£128.25
Disabled child addition—higher rate	£392.08	£400.29
Limited capability for work amount	£126.11	£128.25
Limited capability for work and work-related activity amount	£336.20	£341.92
Carer amount	£160.20	£162.92
Childcare—maximum for one child	£646.35	£646.35
Childcare—maximum for two or more children	£1,108.04	£1,108.04
Non-dependents’ housing cost contributions	£73.89	£75.15

Source: Department for Work and Pensions, ‘Policy paper: Benefits and Pension Rates 2020 to 2021’ (9 April 2020): https://www.gov.uk/government/publications/benefit-and-pension-rates-2020-to-2021/benefit-and-pension-rates-2020-to-2021 [accessed 20 July 2020]

Who gains and who loses?

120.In April 2019 the Institute for Fiscal Studies published research which found that some groups gain from the introduction of Universal Credit, but many groups lose out. It said:

• 76% (8.7 million adults) of those entitled to means-tested benefits—and 84% (7.2 million) of those in working households—see a change in their entitlement of at least £100 per annum;
• 17% (1.9 million) see a loss of at least £1,000 per annum; and
• 14% (1.6 million) see a gain of at least that much.123

121.Figure 2 shows what proportion of each family type gains and losses under Universal Credit.

Figure 2: Impact of Universal Credit on adults in households entitled to means-tested benefits, by family type per year (share of all entitled adults in brackets)

Source: Institute for Fiscal Studies, Universal credit and its impact on household incomes: the long and the short of it (April 2019) p 13, available at: https://www.ifs.org.uk/publications/14083 [accessed 20 July 2020]

122.Almost a quarter of couples with children see a large increase in their entitlement from Universal Credit. A large proportion of those who gain from Universal Credit do so because of its more generous treatment of working households who pay rent; 29% of those in Universal Credit working households and living in rented accommodation see an increase in entitlement of at least £1,000 per annum.124

123.The Institute for Fiscal Studies found that claimants in the lowest 10% income bracket lose the most from Universal Credit on average—a fall of up to 1.9% in their income, equivalent to £150 per year per adult.125 It found that those most negatively affected by Universal Credit tend to be those with financial assets;126 the low-earning self-employed; mixed-aged couples—i.e. where one partner is above state pension age and the other below; and some claimants on disability benefits.127 We examine the adequacy of Universal Credit awards for disabled claimants and mixed-age couples below. The effect on the self-employed was examined in chapter two.

Food poverty

124.Research has shown that increases in foodbank usage within local areas is linked to the rollout of Universal Credit. In 2018, the Trussell Trust reported that foodbanks experience a 52% increase in demand on average, 12 months after Universal Credit has been rolled out. This compared with a 13% increase in demand on average in areas that have had Universal Credit introduced for three months or less.128 The Trussell Trust’s ‘The State of Hunger’ report said:

“Statistical modelling of the changes in food parcel demand showed clear and robust evidence that the extent and timing of five key benefit changes (sanctions, Universal Credit, ’bedroom tax’, benefit levels, Personal Independent Payment assessments) had sizeable and significant effects, confirming the findings from the surveys of people referred to food banks and referral agencies.”129

Box 6: Case studies provided by Karbon Homes

“Miss X was living on virtually no disposable income after she had paid her rent, council tax, utilities and other bills. She had to turn to the foodbanks which she felt degrading as she couldn’t believe that in this day and age, she would be using them. Worst still, she could only get 3 days food out of 7, so in her words, she had to starve for four.” “Miss Y said “stress, emotional stress, and the wonder of how you are going to pay each bill and keep a roof over your head … .to be honest I struggled to get food shopping, I can’t afford it for my children, my ex-partner has to get it for them. I am trying to keep on top of the bills, and I can’t. I am trying my best.”

Source: Written evidence from Karbon Homes (EUC0061)

Standard allowance increase

125.The changes to benefits announced since the 2020 Spring Budget are estimated to have cost the Government about £8 billion over the next year.130 The most substantial of these changes was the temporary increase in the standard allowance that the Chancellor said would last for 12 months. The Secretary of State for Work and Pensions told us the increase in the standard allowance would bring the basic rate of Universal Credit in line with Statutory Sick Pay. She said, “The rate to which [Universal Credit] was raised—about £1,000 a year—means that the standard allowance is now approximately the same as statutory sick pay, as opposed to the differential that would be there with the legacy benefits.”131 The Chancellor of the Exchequer said that the increase would “strengthen the safety net”. He said, “we will also act to protect you if the worst happens. To strengthen the safety net, I’m increasing today the Universal Credit Standard Allowance, for the next 12 months, by £1,000 a year.”132

126.The standard allowance has been increased by £20 a week for all Universal Credit claimants. The same increase applies to single people, couples and households with children. Universal Credit claimants told us that the increase in the standard allowance was welcome. Angela Charlton said:

“The extra money has meant that I can buy fresh food for myself and my daughter [instead of relying on food banks]. That has been a nice, welcome change, but I am sure it is going to be taken back off us afterwards.”

127.Kirsty Harkins, a Universal Credit claimant and volunteer at Sale Moor Community Partnership, said:

“This is very welcome indeed, and, if ever I lose my limited capability for work payment and have to live on the basic allowance for Universal Credit, it will be essential, quite frankly. People who are just on basic allowance struggle hugely. I fear that may be my future, so, yes, a 30% increase is massively helpful. But is it temporary, and why? That is my question. If it is not good enough for the general public during COVID-19, why is it enough for those who struggle more generally? The payment increase should be permanent, in my opinion.”133

128.Other witnesses agreed that the increase in the standard allowance was necessary and said that the Government should make it permanent.134

129.The recent increase in the standard allowance is welcome considering the evidence we have received about the adequacy of Universal Credit, which said that it was often not enough income to live on. Universal Credit must provide claimants with an adequate income and act as a safety net for avoiding extreme poverty and hardship. We believe that the increase shows the original rate was not adequate. The Department has, to date, said that this is only a temporary measure. The Government should commit to making the increase in the standard allowance permanent. To avoid undue hardship and poverty it should also examine the relative levels of benefits for couples and those with children and investigate whether there are other claimant groups who do not receive adequate income.

Disabled claimants

130.In 2018 the Government said that “Britain is spending more on disability and incapacity benefits as a share of GDP than all other G7 countries except Germany”.135

131.The Joseph Rowntree Foundation said 31% of disabled people live in poverty, compared with 20% of the non-disabled population, and nearly half of people in poverty are disabled or live with a disabled person.136

132.Research by the Disability Benefits Consortium has identified two positive measures in Universal Credit for some disabled people:

• the limited capability for work-related activity element of Universal Credit is higher than the equivalent amount awarded to those in the support group of income-related Employment and Support Allowance and continues to be included in the maximum amount of the household regardless of earnings (a single person in the support group of Employment and Support Allowance with no other income and not entitled to the severe disability premium will be £95 a month better off on Universal Credit);137 and
• there is no earnings limit to the carer element of Universal Credit provided the other criteria for entitlement to carer’s allowance are met.138

133.However, we also heard that disabled claimants can lose out from Universal Credit. James Taylor, Executive Director of Strategy and Social Change at Scope, told us that Universal Credit is less generous than the legacy system for disabled people because they are no longer entitled to additional payments related to their disability:

“We know that it can be harder for disabled people to find a job and stay in work. The removal of those disability premiums139 effectively makes it much harder for them now than it was perhaps five or six years ago, which is why we want to see that disability top-up or premium be reintroduced into Universal Credit”.140

134.The Severe Disability Premium in the legacy system is paid to those disabled people who are on a disability benefit which would entitle them to have a carer paid to assist them, but who do not have a carer and who live on their own (or only with dependent children or another adult in receipt of a qualifying benefit).141 The DWP has not said why Universal Credit does not have an equivalent to Severe Disability Premium. It has maintained that Universal Credit simplifies means-tested support for disabled people and is easier to understand in general. It has made transitional protection available to ensure that people moving onto Universal Credit do not lose out in cash terms if their entitlement to Universal Credit is lower than their existing benefits.142

135.Advice Nottingham, a consortium of six advice agencies, said that once transitional protection ends the lack of an equivalent of Severe Disability Premium in Universal Credit means that disabled claimants stand to lose up to £180 per month.143

136.The Disability Benefits Consortium has recommended that the DWP introduces a ‘self-care’ element to Universal Credit to compensate for the financial loss that disabled claimants face due to the lack of an equivalent to Severe Disability Premium in Universal Credit. It said that a self-care element would provide additional support for disabled people who live on their own and do not have a carer (in the same way as the Severe Disability Premium).144 The Disability Benefits Consortium has estimated that a self-care element would cost around £1 billion.145

137.Policy in Practice said that, as a result of the exclusion of additional support elements, people in receipt of disability benefits but deemed fit to work will lose around £50 per week because their expenses for day-to-day living and mobility issues are higher.146 Parents of most disabled children have also lost out financially with Universal Credit. Households with disabled children have £154 a month less under Universal Credit compared with the legacy system.147 Families who care for disabled children face many additional costs, such as household aids and adaptations, additional travel costs to hospital and other appointments, and higher childcare costs for disabled children.

138.The financial loss that disabled claimants face is compounded by the loss of permitted work rules that were included under Employment and Support Allowance. Employment and Support Allowance claimants can earn up to £131.50 a week from permitted work without losing any of their benefit, though earnings beyond that do create a reduction in income. However, under Universal Credit someone who is found to have limited capability for work can earn £73 if they receive housing support, and £128 if they do not—the set work allowance—before their Universal Credit starts reducing. North Tyneside Citizens Advice Bureau told us that the relative financial loss in permitted work rules is a disincentive to work for disabled claimants as they cannot work as many hours part-time without it affecting their benefits.148 Research from the Disability Benefits Consortium says that increasing the work allowance would significantly assist disabled claimants who are only able to work part-time.149

139.James Taylor told us, “It is important that disabled people move into employment. In this country at the moment, around 1 million disabled people are out of work but want to work.”150 Evan Odell, a researcher at Disability Rights UK, agreed and told us that the obstacles that many disabled people face are external to them and result from a lack of available support.

140.The DWP should introduce an equivalent to the Severe Disability Premium. This should be a self-care element for any disabled person who does not have someone assisting them and claiming the carer element of Universal Credit. We were told that this would cost the DWP around £1 billion per year.

Mixed-age couples

141.Under Universal Credit a mixed-age couple is considered to be a ‘working age’ couple for the purposes of means-tested benefits.151 This change applied from 15 May 2019, when mixed-age couples were no longer able to choose whether to claim Universal Credit, Pension Credit or pension-age Housing Benefit.152 In July 2019, the Institute for Fiscal Studies said that the change would save “just over £1 billion per year.”153 Both partners in a couple now have to reach the current qualifying age—65 years and 5 months—for Pension Credit before they are entitled to Pension Credit or pension-age Housing Benefit.154

142.The new regulations mean that individuals below state pension age whose partner is eligible can no longer live on Pension Credit, meaning that their work incentives are comparable with a single person of similar age. That has come at the expense of individuals who are eligible for Pension Credit and whose younger partner is unable, or unwilling, to work. They will now face a less generous safety net, potentially for years after they reached the state pension age.155

143.As a result, if a couple are entitled to Universal Credit because they have low income (taking account of the full new state pension worth £175.20. per week to which the older member is entitled), then unless the younger member of the couple has a health condition which would prevent them from working, is responsible for looking after young children or is a carer, he or she will be subject to the same work-search and work-related conditions in Universal Credit as other claimants.

144.Age UK said that the policy that younger partners should have the same work incentives as other people under state pension age is unrealistic. It said, “in reality, for many affected, work is simply not an option due to ill health or the need to care for their older partner.”156

145.Evidence from Age UK sets out how mixed-age couples lose out substantially from Universal Credit. It said that mixed-age couples can be up to £7,000 a year worse off than under the previous system.157 The standard single-person rate of Pension Credit is around £8,700 per year compared with the basic Universal Credit rate for a couple of around £5,990 per year (pre-COVID-19 figures). Even when accounting for the temporary increase in the standard allowance, the basic Universal Credit rate still falls short of Pension Credit at only £7,128 per year.

146.Universal Credit was designed as a working-age benefit; it was not designed with pensioners in mind. While we understand the trade-off which the DWP has had to consider in relation to mixed-age couples, we feel that on balance it has opted for the wrong approach.

147.Including mixed-age couples in Universal Credit has meant that they may lose out financially. The partner who is eligible for a state-age pension is treated unfairly compared with single pensioners and couples of state-pension age. The DWP should revert to the previous system in which mixed-age couples were treated as state-pension age couples for means-tested benefits.

Deductions

148.Large amounts of historic debt have built up in the social security system. When Universal Credit started to roll out at scale, there was around £5.9 billion of tax credit debt; local authorities are owed around £2 billion in housing benefit debt; and there are over £1 billion of overpayments in Job Seeker’s Allowance and other benefits that are still technically repayable. Historic debt totals around £10 billion.158

149.Sir Iain Duncan Smith MP told us that a condition imposed on the Universal Credit programme was that it could be used to recover historic social security debts:

“The reality is that it [HMRC] decided—I am afraid that I had to cave in on this eventually, because I was under pressure across the board—that the debt it was not able to get back, which I think is something around £6 billion [in tax credit overpayments], has been moved across on to universal credit as people come across.”159

150.The debt-recovery mechanisms in the Universal Credit programme were applied stringently. Until late 2019 a maximum deduction of 40% could be made to a Universal Credit award to repay historic debts. This has since been reduced to 30%. At the spring 2020 Budget it was announced that it will be reduced further to 25% from October 2021.

151.There are exceptions which mean that deductions can be taken over that limit. Last Resort Deductions are for arrears of owner–occupier service charges or rent, or arrears for gas or electricity. Last Resort Deductions can be made to prevent claimants being evicted from their home or having their fuel disconnected. Overpayments of Universal Credit are repaid at a rate of up to 15% of the standard allowance. If one or both (if they are a couple) of the claimants’ earnings are above the level of the work allowance (if the work allowance is applicable) an additional amount of up to 10% can be deducted.160

152.The repayment of historic benefit debt is a problem for many claimants. Dr Ruth Cain, a Senior Lecturer at the University of Kent, told us that because Universal Credit is a household benefit a claimant can inherit, and become liable to repay, a debt that their partner has accrued, even if the debt precedes the relationship.161

153.The number of people affected will rise significantly when the managed migration process starts. In March 2020, 60% of Universal Credit claimants received less than its standard rate because they were paying back various benefit debts.162 The largest category of social security debt is tax credit debt (£6 billion), which many claimants do not realise they owe and for which they may not have budgeted.163

154.Garry Lemon, Director of Policy, External Affairs and Research at the Trussell Trust, told us that in February 2019 there were 30,000 claimants who had more than 40% deducted from their payments. In May 2019, 440,000 claimants, or 52% of Universal Credit claimants who were paid an advance, were paying off another debt to the Government. He said, “That was often a tax credit debt or repayment being clawed back from an already very low amount of money.” He told us that the Government should be held to the same standards as private sector lenders and should conduct proper affordability assessments before imposing deductions for historic debts.164

155.Witnesses said that historic tax credit debt should be written off. Baroness Stroud said she would “highly recommend [a debt] amnesty” for claimants.165 Sir Iain Duncan Smith MP agreed and said, “the No. 1 thing I would do is get rid of the debt that is coming across unnecessarily from tax credits”.166

156.Nicholas Timmins told us that because of the level of debt in the system, “about 30% of claimants are living on 25% or 30% less than the standard rate of [Universal Credit]. That seems extremely harsh.”167

Box 7: Case study on deductions provided by Mind

“[I] find it impossible to make my money stretch for one month as I have hardship payments, budget loan and a service charge coming out [of] my payment that leaves me with £190 and a lot of that is paid out to people I’ve had to lend from (friends, family)”

Source: Written evidence from Mind (EUC0084)

157.Nicholas Timmins said that many people do not realise that they have historic tax credit debts, so the debt crystallises for them only once they move to Universal Credit.168 The recovery of this debt is factored into the award without an affordability assessment, meaning that the claimant may live on substantially less than the minimum award for a long time. Mr Timmins said that this “will hurt claimants and cause further damage to [Universal Credit’s] reputation.”169

158.As more people migrate to Universal Credit, its role in recovering historical debt will become more prominent. The DWP should ensure that deductions taken from Universal Credit awards are first subjected to an affordability assessment. They should only made in accordance with what a claimant can afford to repay.

159.Many people are unaware that they have tax credit debts and often the overpayments they have received were not their fault. Using Universal Credit to recover historic debts has left many households with an income well below that to which they are entitled.

160.The Government should write off historical tax credit debt owed by Universal Credit claimants. We believe that the £6 billion of tax credit debt should be treated as a sunk cost—it is highly unlikely to be repaid in full, and the Government should not jeopardise the financial security of claimants in pursuit of it.

Benefit cap

161.The benefit cap was introduced in 2013. It limits the total amount a household can receive in certain benefits to £20,000 per year for families outside London and £23,000 per year for families in London (or £13,400 and £15,410 per year respectively for single people).170

162.It is designed to encourage people to find work and does not apply to those with disabilities or carers. People can overcome the cap on income by entering employment or increasing the hours in their current job. However, the evidence shows that only around 5% of capped households move into work because of the cap.171 Evidence from the Hyde Group, a housing association, said that the benefit cap penalises people for not finding work and as a result the cap is a further burden on top of the benefit sanctions system.172

163.The Zacchaeus 2000 Trust said that Universal Credit claimants subject to the cap lose out more than those who claim legacy benefits while subject to the cap. It said, “Previously, a household could only have their [Housing Benefit] capped. On [Universal Credit], the cap can be applied not just to a household’s housing costs but to its whole [Universal Credit] award.”173

164.We heard that the benefit cap has a disproportionate impact on women and children. Surviving Economic Abuse said that “the benefit cap disproportionately affects women who have fled domestic abuse, and pushes them into choosing between living in danger or risking poverty.”174 Child Poverty Action Group, a charity, said that by 2023/24, an estimated 400,000 children will be deeper in poverty due to the benefit cap.175

165.We received evidence calling for the benefit cap to be scrapped. Surviving Economic Abuse said that in combination with the five-week wait and repayments for advances, the benefit cap is “putting women in situations where they may have no choice but to return to the abuser or take out payday loans.”176 Tower Hamlets Council said that removing the benefit cap would benefit up to half a million children nationally by 2023.177

166.The Institute for Fiscal Studies estimated in 2019 that abolishing the benefit cap would cost the Government around £200 million per year.178

167.We recognise that the benefit cap was intended to increase the financial incentive to move into paid work. This is more likely to be effective if there is a buoyant labour market than if there is high unemployment and few job vacancies. In light of the unfolding economic crisis we recommend that the Government review the level of the benefit cap and its effect on hardship and poverty.

Two-child limit

168.The two-child limit applies to children born after 6 April 2017. The new limit means that in families where there are already two or more children, the child element in Universal Credit and child tax credits is restricted to the first two children. This means that families cannot receive any additional support for their third child onwards.179

169.The Zacchaeus 2000 Trust said that the two-child limit meant that those with more than two children had “no choice but to work more hours to make up for the fact that their [Universal Credit] payment does not cover their family’s essential costs.”180

170.Marilyn Howard told us that the limit had a particularly negative financial effect on “certain groups of people with large families, maybe from black and ethnic minority groups or particular religious groups.”181 The Women’s Budget Group described it as “discriminatory.”182

171.Refuge said that the two-child limit had made people who have experienced domestic abuse more financially dependent on perpetrators. It said that individuals with more than two children who separate from perpetrators can be forced into poverty as they do not have enough to support themselves and their children.183

172.We heard that the two-child limit increases child poverty.184 The Poverty Alliance, an anti-poverty network, said that the two-child limit “meant that the level of support provided by Universal Credit has been rendered entirely inadequate for substantial numbers of families across the UK.”185 The Child Poverty Action Group said, “The two-child limit will mean that an additional 300,000 children are in poverty by 2023/24 as well as pushing a million children deeper into poverty.”186 It said that the two-child limit should be scrapped.187 In 2019 Child Poverty Action Group estimated that this would cost £1.7 billion.188

173.The two-child limit is unfair. It penalises large families and can put the health and wellbeing of children in jeopardy. We heard that ending the limit could protect up to 300,000 children from poverty. We urge the Government to remove the two-child limit and consider introducing tapered awards for families with more than two children.

Work incentives

174.One of the guiding principles of Universal Credit was to ‘make work pay’. It does this in two main ways. First, it aims to incentivise claimants in the relevant groups who are not working to find work even if for just a few hours. Second, it aims to incentivise claimants who are already working to take up more hours, so that any increase in earnings leads to an increase in total income (‘in-work progression’). For couples there are incentives for both partners to work, or to work more hours.

Financial incentives to enter work

175.The work allowance acts as an earnings disregard and is the amount that claimants can earn before their Universal Credit payment is reduced. Baroness Stroud told us, “the whole crux of Universal Credit is the [earnings] disregard to reward the move into work and the taper progression in work.”189 When Universal Credit was initially rolled out, single people and couples without children were eligible for a work allowance. These were cut as part of spending reductions in 2015 and the cuts came into force in April 2016. Now, only those with responsibility for a child or with limited capability for work are eligible for a work allowance.190 There is one work allowance per household; couples do not have a second allowance.

176.We heard that the current structure and level of work allowances have diminished the financial incentive to enter work for certain groups. Policy in Practice was concerned about the employment prospects of unemployed single people, with no children, who do not have a work allowance when they enter employment. It said that the 63% taper rate risks the cost of work becoming greater than retained income for claimants once tax, national insurance, and work expenses are taken into account.191

177.Money Advice Plus, a charity, said that the removal of work allowances for single people and couples without children has disincentivised claimants from taking low paid or short hours work that may have led to them taking more hours or better paid work.192

178.Marilyn Howard told us that second earners, who tend to be women, have “fewer work incentives” under Universal Credit.193 Dr Rita Griffiths linked this to the fact there is no work allowance for the second partner. She said, “There is only one work allowance between the members of a couple, so once that has been expended by the first earner, who tends to be the man in a couple, the taper is applied to the first pound that the second earner earns, at 63%.”194

Incentives to progress in work

179.Universal Credit has a single taper rate of 63% which reduces the amount of benefit paid as claimants’ earnings rise. This, combined with higher work allowances, was designed to ensure that claimants would retain a higher proportion of earned income without facing different marginal incentives at certain working hours.

180.The 63% taper rate does not account for income tax and National Insurance contributions. The DWP said that when the 63% taper rate is combined with these the marginal effective rate of deductions is 75% for a single parent working 30 hours a week at the National Living Wage and living in rented accommodation. For legacy benefits the rate for these circumstances would be 90%,195 but it varies according to earnings level and hours worked. The Secretary of State for Work and Pensions told us that under the previous system these marginal rates of deduction at specific hours thresholds—16 hours and 30 hours—were so high that they disincentivised working more hours.196

181.Sir Iain Duncan Smith MP told us that he had wanted a more generous taper rate but had had to compromise with HM Treasury:

“[A taper rate of] 55% was where we said there would be massive movement up the scale; if you get it down low, you then end up paying less. It is a balance. We did not win that argument with the Treasury; it did not quite see it. It wanted 70-something. We compromised at, I think, 65 in the end. The present, or previous, Government put in extra money and lowered the taper again.”197

182.The taper rate was reduced from 65% to 63% in November 2016. This means that for every £1 of net earnings in excess of the work allowance claimants lose 63p of their benefit as opposed to 65p.198

183.The Joseph Rowntree Foundation told us that work incentives have been “theoretically strengthened on average” in Universal Credit. It said that Universal Credit reduces the number of families facing marginal effective rates of deductions of over 80%. However, it said that Universal Credit increases the number of families facing marginal effective rates of deductions between 60% and 80%.199

Improving work incentives

184.Reductions to the taper rate or increases to the work allowance are the main policy levers to improve incentives to enter work or take on more hours. Reducing the taper rate would slow the speed at which Universal Credit is removed as people increase their earnings. Increasing the work allowances—for those groups who have a work allowance—would move up the point at which Universal Credit payments begin to be reduced in relation to earnings.

185.Sir Iain Duncan Smith MP told us that changes to either the taper rate or work allowances should be made in response to changes in the business cycle. He said that in the context of record levels of employment,200 lowering the taper rate would be a stronger incentive for people to take on more hours and progress towards full-time work.201 When there is an economic downturn which leads to a rise in unemployment, the priority should be to reduce the barriers for people to enter employment, even if it is not full-time work. Sir Iain Duncan Smith said that increasing the work allowances in times of higher unemployment would reduce a barrier to work.202

186.The Resolution Foundation said that reductions to the generosity of the work allowances have reduced work incentives.203 The Joseph Rowntree Foundation said, “Increasing work allowances and reducing the taper rate would strengthen work incentives and help protect families on low earnings from poverty. New work allowances for second earners or single parents could be particularly effective.”204 The Institute for Fiscal Studies told us that a reduction in the taper rate of 1% would cost the Government around £350 million a year; an increase in the work allowance of £50 per month for those that already have one would cost around £1 billion per year; extending that increase to include all groups who do not currently have an allowance would cost approximately £300 million more per year.205

187.Witnesses suggested that it may be effective to target certain groups of claimants with further investment. Policy in Practice said that restoring the work allowance for single people would have the biggest impact on incentivising work as unemployed single people are the most likely group to face long-term unemployment.206 The Resolution Foundation advocated introducing a second-earner work allowance.207 Gingerbread, a charity, said that work allowances for single parents should be increased to take account of the greater additional costs of working that single parents face, such as childcare costs.208

188.The principle of always making work pay has been undermined by cuts to work allowances even after taking into account the partial reinstatement in 2019.

189.Given the depth of the recession that is anticipated following the COVID-19 pandemic, getting people into work should be the DWP’s priority. We therefore recommend revisiting both the structure and the level of the work allowances. All claimants should have a work allowance, at a higher rate than currently, to allow them to keep more of their award as they move into work, including short-term or low-hours employment. Figures from the Institute for Fiscal Studies suggest that reintroducing a work allowance for all groups, and increasing it by £50 per month, would cost the DWP £1.3 billion per year.

190.The DWP should also consider a reduction in the taper rate to reduce the unfairness that is inherent in the very high marginal effective tax rates that some of the poorest in our society face.

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