In-work poverty: Government can make work pay for three million working families on Universal Credit

Ahead of the Autumn statement tomorrow, analysis by Policy in Practice shows that more needs to be done for benefit claimants to be able to meet their living costs while in work. 2.8 million working families are on Universal Credit, which comprises 41% of all Universal Credit claimants.

Our latest analysis shows that uprating benefits by inflation is the bare minimum the government should do:

• Two in five low income working families in London are in relative poverty in 2022
• Lone parents on UC working full time (on the National Living Wage) are worse off by £1,334 a year compared to 2021
• Working families facing a cash shortfall rose by 3% from April 2022 to November 2022

In-work poverty levels in 2022 are worse than predicted

New analysis shows that in-work single parent households on the National Living Wage were worse off by £1,334 a year in April 2022 due to rising energy costs and the overall cost of living. 

This is higher than the £1,035 figure we predicted in our analysis for the All Party Parliamentary Group on Poverty in September 2021. Today’s figure is higher as a result of energy and living costs rising more rapidly than expected.

The government can make work pay for all working households on low incomes. Restoring Work Allowances to their 2015 levels would enable families to keep more of what they earn, an extra £422 a year for each working household.

Our latest analysis of 76,000 low income Londoners looked at the effect of measures introduced since September 2021, such as the increase in the taper rate and Work Allowances and the uprating of benefits by 3.1% in April.

We found that these measures weren’t enough to prevent significant decreases in disposable income due to rises in energy bills and household costs.

More households are living in relative poverty in November 2022

Our analysis shows that two in five (37.3%) low-income working households in London are living in relative poverty in November 2022. 

This is slightly lower than in April 2022 (38.4%) but much higher than in September 2021 (29%).

Two in five low income working families are in relative poverty in 2022

Working couples without children and working couples with children are most likely to be in relative poverty in November 2022: respectively 57.7% and 45.4% of them are living under the poverty line.

Measures to tackle in-work poverty are insufficient to tackle rising living costs

The government introduced a range of measures to support households in the cost of living crisis:

• the reduction of the taper rate from 63% to 55% in October 2021 meant working Universal Credit claimants were able to keep 8p more of each £1 earned 
• the Work Allowances also increased by £500 per year 

Whilst they were welcome, we found that these two measures did not offset the loss of the £20 Universal Credit uplift for households in London. 

Similarly, in April 2022: 

• The National Living Wage was uprated to £9.50 per hour, more than the expected £9.24. This amounted to an annual increase of £1,227

However, the higher National Living Wage would have slightly amplified the impact of the increase in National Insurance due to the planned Health and Social Care Levy, now reversed.

• Benefits were uprated by 3.1% in April 2022

This is the eighth year in a row that benefits have lost out to inflation. Food and other household costs rose by 6.8% between September 2021 and April 2022, more than double the percentage increase in benefits.

Energy prices have increased in 2022:

• Energy prices were predicted to increase by £149.
• The price cap has since risen twice more, by £694 in April 2022 (an £843 increase overall) and by £529 in October 2022. 

These income and cost changes are felt keenly by single parents on the National Living Wage, who are expected to be £299 worse off compared to earlier predictions. In April 2022 they were £1,334 a year down compared to a predicted £1,035 in 2021.

Although changes in November mean a close return to 2021 National Insurance levels, a single parent household would also have seen their essential costs increase by a further estimated £585.

The number of low-income working families with a cash shortfall grew by 3% between April and November 2022

We estimate that the proportion of low-income working families facing a cash shortfall has risen to 12.8% in November 2022 from 9.7% in April 2022. This means that around 3% more families have no income left to meet their outgoings after essential costs. 

• Single people are considerably more likely to be in cash shortfall (32.5%) in November, facing the largest increase (5.8%) compared to April (26.7%).
• Single people (32.5%) and couples without children (29.8%) are much more likely to be in cash shortfall than households with children.

Uprating benefits by inflation may still leave working families worse off in April 2023

Our analysis of 114,000 low-income households across six local authorities in England and Wales revealed that working families will still be worse off by £54.05 a year after costs by April 2023, even if the government uprates benefits by inflation of 10%. The proportion of working households facing a cash shortfall would increase to 5.5% by April 2023, from 3.66% now.

This is based on inflation remaining at around 10%, as the Bank of England predicts it will for the first months of 2023. This takes into account an overall increase of over £300 in annual food costs for a single parent household working full-time on the National Living Wage.

It is widely expected that the government will uprate benefits in line with CPI inflation in 2023, rather than by wage growth, a decision we welcome. Our analysis for The Observer showed that families would be £400 a year worse off if benefits are uprated by just 5.5%. We found that working families would be more severely affected by this decision, losing out by an average of £458 a year.

What the government can do to make work pay

Despite the measures introduced over the past year, people on low incomes who are working and receiving benefits still face significant hardship. While costs are increasing for everyone, if the policy focus is to make work pay, benefit claimants must be able to meet their living costs while in work.  

The cost of living payments helped many working households this year, but some working claimants may have been ineligible because of the way Universal Credit interacts with fluctuating or non-monthly earnings. For the 41% of Universal Credit claimants who are in work, longer-term solutions are needed.

Three recommendations from Policy in Practice:

1. Uprate benefits by inflation: Uprating benefits by CPI in 2023 would be a welcome measure, though benefits have not kept pace with inflation since 2013 
2. Restore the Universal Credit Work Allowances to 2015 levels: this could incentivise work whilst reducing the burden on working benefit claimants
3. Extend Free School meals to all households on Universal Credit: currently households face a “poverty trap”, losing entitlement to Free School Meals when their earnings surpass £7,400 per year. Extending Free School Meals to all Universal Credit claimants would incentivise work, reaching 1.87 million children

Councils can support struggling households

Join our free webinar: Building a path out of in-work poverty

Wednesday 23 November from 10:30 to 11:45. 

With guest speaker Richard Kaufman, Performance and Data Analyst, Haringey Council

Register

Tackling in-work poverty is vital to growing the financial strength of families and helping them to avoid crises. Despite increases to the National Living Wage, levels of poverty within working households continue to rise.

The government promotes work as the best route out of poverty yet this is not always guaranteed. We know that 75% of children growing up in relative poverty live in a household where at least one person works (DWP, 2021).

Analysis by Policy in Practice from 2021 found that a single parent working full-time on the National Living Wage would be worse off by £1,035 a year by April 2022. We have updated our analysis to show where that household would be now, and where they’re likely to be in 2023.

Join this webinar ‘Building a path out of in-work poverty’ to learn:

• Brand new analysis on how many low-income working families are in relative poverty
• How in-work poverty has risen since the end of the pandemic supports and how it is forecasted to change in 2023
• What practical actions frontline organisations and local authorities can take to support low-income working families

Can’t make the date? Register anyway to automatically receive the recording and slides.