What is the Universal Credit?

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The Universal Credit

The Universal Credit is a radical change to the benefit system, it will ease the transition into work for the claimants, make the system easier to both understand and administer while significantly raising incomes for claimants moving into work.

Universal Credit will replace all of the main benefits supplements and premiums with a single payment administered by a single department, the DWP. Under Universal Credit, claimants will be able to earn more before before benefits are withdrawn, encouraging people to take their first steps into work.  Claimants moving into work will be able to keep more of their income as their earnings rise, encouraging people to work additional hours and ultimately move off welfare dependency entirely.

The current system is too complicated and it fails to reward work.

We have a complicated range of benefits administered by three separate government departments, a system that is costly to administer and that can make the transition to work harder for claimants.  The current system can make it difficult for claimants to appreciate how much working would benefit them.

The financial risks of moving into work all too often outweigh the rewards for long term claimants.  For many claimants, the employment opportunities they can realistically apply for will be short term, part-time or highly variable, incurring too much risk for too little reward as they lose the security of a steady income on benefits to be in financial terms only marginally better off in work.

Universal Credit Case Study

A case study can help to illustrate how the Universal Credit improves the benefit system for claimants, employers and taxpayers. Let’s take the example of a single person with no dependents, living at home and claiming job seekers allowance.

Universal Credit Case Study
Universal Credit Case Study for a Single Person moving into part-time work

A: Claimant’s income out of work: £65

The claimant would be entitled to £65 per week under both the current benefit system and under the Universal Credit while out of work.

A part-time job of 10 hours per week at £6.00 per hour would create weekly earnings £60, but their take home income would barely rise under the current system, weakening the incentive to work.

B: Claimant’s income in work:  £70
[£65 + £5 + (£55 * -100%) = £70]

After the costs of travelling to work (£5) are disregarded, the claimants income is withdrawn penny for penny (a 100% tax rate).  The claimant would be only marginally better off in in work than on benefits.
C: Claimant income under Universal Credit: £89.25
[£65 + £5 + (£55 * 35%) = £70 + £19.25 = £89.25]

Under Universal Credit, the claimant keeps 35% of their earnings and has a stronger incentive to take work.   Claimants are much more likely to move into work under the Universal Credit.

D: Taxpayer Savings under the Universal Credit:£35.75
[(£60-£5) * 65% = £35.75]

The earnings of £60 per week are split between higher take home pay for the claimant and reduced Universal Credit payments for the taxpayer.  Claimants are better off in work under Universal Credit, the tax payer saves in benefit payments as claimants move into work and benefit payments are reduced.

Employers

Under Universal Credit, Employers find it easier to recruit  motivated workers.  The Universal Credit works with the flexible employment opportunities created in today’s labour market, employers can adjust hours (and earnings) from week to week and Universal Credit is adjusted automatically through the claimant’s payslip, ensuring that the claimant is always better off in work.

4 Responses

  1. […] agreement over the direction of welfare policy, and the proposed changes to incentives (Universal Credit), support (Work Programme) […]

  2. Type your comment here…

    Your calculations in the examples above are misleading.
    Does 55×100% = 10?

    Please explain

    • Type your comment here…

      Correction

      Your calculation above is misleading : [£65 + £5 + (£55 * 100%) = £70]

      Does 55+5+55 = 70?

      Please explain.

  3. Dear Moses, 
    Thanks for the comment.
    The 100% refers to the ‘withdrawal rate’ of income, i.e. how much of the claimant’s income is withdrawn.  100% withdrawal means that the claimant loses (or has withdrawn) all of their income.
    I have changed the equation to more accurately reflect this.  

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