Universal Credit Briefing Note

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Universal Credit

Universal Credit is intended to simplify the benefit system and make work pay at all levels of income.

The rationale for Universal Credit

The current benefit system is incredibly complicated.  It has grown and been tinkered with over many decades, and is now seen as being costly to administer, while making work a risky proposition for many claimants.

Three separate public sector organisations administer a range of out of work and in-work means tested benefits:

  • Jobcentre Plus administers Jobseeker’s Allowance (JSA), Employment and Support Allowance (ESA, the replacement for Incapacity Benefit (IB)) and Income Support.
  • Local authorities administer Housing Benefit and Council Tax Benefit.
  • HMRC administers a range of tax credits.

Each of these benefits and credits are means tested based on a different set of rules, for example, some are withdrawn against gross income, others against net income, some take into account savings above £6,000 while others have a much higher threshold, they may treat sources of income differently as well.  This makes it very difficult for advisors to tell claimants how moving into work will impact on their take home pay.

Perhaps the worst element of the current system is that, for many claimants, moving into work does not make them financially better off.  For claimants moving into minimum wage or part-time employment, the impact on take home pay can be minimal.  Benefits can be withdrawn penny for penny as earnings rise; benefit claimants can face effective tax rates of 96%, or more than 100% when the costs of going to work are taken into account.

Introducing Universal Credit: key objectives and design features

Universal Credit is designed to reward work, more work and independence while reducing administration costs.

Simple and effective

It is a single payment administered by a single department, the Department for Work and Pensions. This single payment follows a single set of rules, making it relatively simple to understand, and giving the claimant certainty that they will be better off in work.

Universal Credit will be managed a single department and will be ‘digital by default’ to reduce administration costs and help to tackle fraud and error.  Up to 80 per cent of claimants are expected to ‘self-serve’, with more advisor time available for claimants that need additional support either with their claim, with looking for work or with life skills needed to progress towards work.

Rewarding

Claimants keep a greater proportion of their earnings before their earnings are withdrawn (the earnings disregarded) and face a lower withdrawal of benefit as their earnings rise (the taper rate).

A higher earnings disregard is designed to encourage households to take their first steps into work – in effect paying a household Universal Credit for working, rather than not working.  A lower withdrawal rate is designed to ensure that earning more is always rewarded.  The Universal Credit taper is expected to be 65% of net earnings when the Universal Credit is launched in October 2013.

Universal Credit example

A household’s Universal Credit award is a single payment made up of four separate awards:

  • Base award: equivalent to a payment for Jobseeker’s Allowance or Income Support.
  • Child award: equivalent to Child Tax Credit payments.
  • Housing award: equivalent to Housing Benefit and dependent on actual housing costs.
  • Disability award: with two payment levels, one for slight disability, another for severe disability, with the assessment mechanism probably similar to that used for ESA today.
  • Other factors may affect the Universal Credit award, including household savings.
  • This is paid as a single monthly payment to a nominated bank account for the household.

When the household moves into work, they keep an element of their earnings alongside their benefit, after a certain point their Universal Credit is withdrawn at 65% of net earnings, 65p for every pound earned below the personal tax threshold, or 76p in the pound for basic rate taxpayers.

Perhaps the best way for people to understand how Universal Credit works is to use the Universal Credit Calculator.

The impact on frontline advice services

While Universal Credit is simpler than the current range of means tested benefits, it still has to follow a set of rules that can be confusing for claimants and advisors learning about Universal Credit for the first time.  Advisors will need to learn how Universal Credit works, and how to explain that in a clear and simple way for claimants.  The Universal Credit Calculator may help.

Many believe that there will be fewer jobs available for local authority advisors, as Housing Benefit is rolled into Universal Credit.  However, the role of local authorities in administering Universal Credit has not yet been determined.  We can be certain, however, that there will be a shift away from the ‘back office’ to face to face support.  The emphasis will shift away from benefit administration toward supporting more vulnerable claimants with work and life skills.

The majority of Universal Credit claimants will already be in work, and many out of work claimants will self serve.  Advice and support will be focused on those that have been out of work longer and need help getting back into work.  This change will suit some advisors more than others.  For those needing to brush up on their skills, an IAG training course in work and life skills may help.

Implementing Universal Credit

Universal Credit is trying to overhaul a complex and complicated benefit system while changing the culture of delivery agencies and claimants to focus on work and independence.  This is the biggest change to the benefit system since Beveridge, and one that both sides of the political divide agree is long overdue.  It is part of a package of reforms that includes more effective support, for example through the Work Programme, and stricter sanctions to ensure that claimants actively seek work in exchange for Universal Credit payments.

Any change carries risks as well as opportunity, below are some of the challenges of implementing Universal Credit.

IT risk

There is scepticism over the government’s ability to deliver IT change on this scale, in particular on Universal Credit’s partial dependence on the delivery of ‘real time PAYE’ project from HMRC.  DWP report that they are on time and on budget and HMRC have launched a pilot for real time PAYE.

Behaviour change

Probably a bigger challenge, and one at risk of being overlooked, is the need to change the behaviour of claimants to focus them on work, towards more work and independence.

For example, Universal Credit will be ‘digital by default’, with the expectation that 80% of claims will be self managed online.  Questions have been raised over the access to a computer and IT literacy of many claimants.  Universal Credit will also be paid as a single monthly payment, direct to the household.  This has caused concern as it is feared that many claimants will struggle to manage their finances and risk falling behind on their rent, while a small minority may try to avoid paying their bills.

The DWP recognise these concerns and have commissioned projects to understand how large a problem this will be.  They accept that for some claimants direct payments may be necessary to prevent homelessness, and seek to what the trigger points / characteristics are.  However, DWP expect the vast majority of claimants to manage their own finances just as they would have if they were working.

Staying simple and rewarding

The main objectives of Universal Credit risk being undermined before it is launched.  Fiscal constraints mean that the rewards from work, though better than the current system, may not be enough of an incentive to activate claimants.  The simplicity of a single payment is compromised by the localisation of Council Tax Support.

Universal Credit will require face to face support to support claimants with both work and life challenges to move them toward independence.  The main delivery agency for this has been Jobcentre Plus, but it too has placed more emphasis on administering benefits over support into work.  The face to face delivery model has yet to be determined, though local authorities that want to input into these ideas are advised to follow the progress of the Universal Credit pilots.

 

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