Building a path out of in-work poverty

Policy in Practice recently submitted evidence to the All Party Parliamentary Group on Poverty. The APPG wants to explore actions that both employers and government can take.

In our submission, we shared recommendations based on our research and data analysis on in-work poverty, as well as our work with frontline organisations. Read our evidence submission here. 

Four key points from our submission:

1. Three in ten low-income working families in London are in relative poverty.
2. In-work poverty is likely to rise by 2022 due to the removal of the £20/week uplift to Universal Credit, the introduction of the Health and Social Care Levy and rising living costs.
3. Aspects of Universal Credit increase in-work poverty by reducing the benefit income of working households. For example, the monthly assessment periods within Universal Credit mean that self-employed households, or households on zero-hours contracts, do not receive Universal Credit support when they need it.
4. Self-employed households are more likely to be in poverty than low-income households who are in regular employment. Our analysis of a Welsh local authority found that 86% of low-income self-employed households were in relative poverty, compared to 55% of low-income households in regular employment.

Tackling in-work poverty is vital to growing the financial strength of families and helping them to avoid crises. As the operational arm of government and the first port of call for families who become financially vulnerable, it is in local authority’s interest that this area of need is robustly addressed.

1. Three in ten low-income Londoners are in in-work poverty

Our analysis of data from 14 London boroughs, covering 400,000 low-income households, found that 29% of low-income working households were living in relative poverty in 2021. Find out more about our analysis of low-income Londoners on our interactive dashboard.

Data from our low-income Londoners projects shows that 29% of households
who are in-work are in relative poverty

Welfare reforms affect low-income working households, reducing their income from benefits and increasing their risk of poverty. For example, although households on Universal Credit who earn £617 or more per month are exempt from the benefit cap, working families who earn less than this amount are affected. 

Our analysis of one London borough found that out of the 5,407 households receiving Universal Credit who were in work, 475 (9%) were affected by the benefit cap and 627 (12%) saw their benefit income reduced as a result of having to repay their Universal Credit advance loan taken out to cover costs during the five-week wait.

2. In-work poverty is likely to rise by 2022

The percentage of low-income households who are in relative poverty has remained relatively stable throughout the Covid-19 pandemic so far, despite rising unemployment. This is due in part to the £20/week increase to Universal Credit, and because the medium income has fallen.

However, in-work poverty is likely to increase by 2022 due to the combination of falling net incomes (due to the end of the £20/week Universal Credit uplift and the introduction of the Health and Social Care Levy) and rising living costs (energy, food and rent costs are expected to increase). The rate at which relative poverty increases will depend on the extent to which the median income increases. 

Our analysis found that a single parent working full-time on the National Living Wage will be worse off by £1,035/year by April 2022. This is because the removal of the Universal Credit uplift, introduction of the Health and Social Care Levy and rising living costs offset her higher earnings.

We recommend that the government retains the £20/week uplift to Universal Credit to support working households whilst living costs are expected to increase. 

A carer on the National Living Wage is set to be £1,035 per year worse off by 2022.

3. The interaction between Universal Credit and earnings means that some low-income working households receive little income from benefits

Work Allowances are one aspect of Universal Credit that limits support for working households with fluctuating earnings. Households with regular earnings will see an application of the Work Allowance in each monthly Assessment Period. For those with fluctuating earnings, the full Work Allowance is only applied in the months where earnings are greater than this allowance. This means that if two households, one with regular and one with irregular earnings, earn the same amount over a two month period, the household with irregular earnings can receive less Universal Credit support. 

In addition, those who are not paid monthly, including those on zero-hour contracts, often do not see support when they need it. Since Universal Credit is paid monthly in arrears, the Universal Credit award based on a month’s income is received the following month. This can result in a claimant receiving both low earnings and low Universal Credit in the same month. This can make budgeting on a low income difficult.

For example, if a single parent earns £1,500 in January, £1,100 in February and £1,500 in March, they will receive their lowest amount of Universal Credit in February. This means that the month when they receive less income from work is also the month when they receive less income from Universal Credit. Their combined monthly income in February is £1,401, compared to £2,053 in March. This is a difference of £652.

4. Self-employed households are especially likely to be in poverty

Although the number of low-income self-employed households is less than the number of low-income households in regular employment, self-employed households are especially likely to be in poverty. This can be explained by low-income self-employed households receiving both low levels of earnings (often below the National Living Wage) and low levels of benefit income. 

Our analysis of a local authority in Wales found that 86% of low-income self-employed households were in relative poverty, compared to 55% of low-income households in regular employment.Self-employed households are also affected by the application of a notional income (the Minimum Income Floor or MIF). The MIF was suspended at the beginning of the Covid-19 pandemic but was reintroduced in April 2021. 

Our analysis found that the reintroduction of the MIF in April 2021, combined with the loss of the £20/week Universal Credit uplift in October 2021, will mean that almost half (47%) of self-employed households will be unable to meet their essential costs. We also found that self-employed households on Universal Credit are worse off by £50.86/week on average compared to people on legacy benefits.

Find out more

• Read Policy in Practice’s submission.
• Policy in Practice helps local authorities, housing associations and other frontline organisations to help people understand how the welfare system can help them move into employment. Read more about our Better Off Calculator here.