Policy in Practice has submitted evidence to the Work and Pensions Committee as part of its inquiry into the Department for Work and Pension’s preparations for changes in the world of work. This post focuses on the new individualised era of work, and the role of the benefit system in supporting people.

The benefits system can respond better to changes in the world of work

The world of work has become much more flexible and personal. This means that many people do not have a stable employer, choose to work for themselves or have flexible working hours. At the same time, the benefit system has traditionally been built around assumptions about the world of work: that people are paid a regular monthly wage, are in formal employment and work for 35 hours per week. This mismatch can cause problems for many low-income households who are both working and receiving benefits. We highlight five areas where the benefits system can work better for people who are not in ‘traditional’ employment and better reflect changes in the world of work. This is particularly true as the economy recovers from COVID-19. Many of the sectors most heavily affected can only come back by offering their employees flexible hours, and more people are having to work multiple jobs.

1. It’s unclear how much Universal Credit you will get if you are not paid monthly

Universal Credit is assessed on a monthly basis. For households who are paid weekly, fortnightly or four-weekly, the amount of earned income they receive in a monthly assessment period will vary. This in turn means that the amount of Universal Credit they will be paid each month will fluctuate.

Our work with claimants tells us that this fluctuation can be hard to understand, and makes ongoing budgeting difficult.

The DWP could give people an estimate of their Universal Credit award based on their previous earnings. They could also give people the ability to calculate what their Universal Credit award would be if their earnings or other circumstances changed.

Our work with frontline organisations has led us to develop our earnings slider, compare scenarios and Universal Credit calendar features in our Better Off Calculator.These  features allow advisors to give people a better indication of their income in future months.

2. People who have flexible hours or zero-hours contracts do not receive support when they need it

Universal Credit is paid monthly in arrears and the award is based on the previous month’s income.

This means that somebody with high earnings in one month may receive both low earnings and low Universal Credit in the subsequent month. These fluctuating earnings can make budgeting on a low income difficult, especially for people on zero-hours contracts.

We have called for the assessment of Universal Credit to be separate from how it is paid. This means that Universal Credit can be calculated as it is now, using a monthly assessment period, but paid in two separate installments. This would reduce fluctuations in take home income. Read about options to reduce the five-week wait in Universal Credit.

3. Benefit regulations should be updated to reflect multiple jobs, flexible earnings and self-employment

Benefit regulations should be updated to extend support to people who are not in ‘traditional’ employment.

For example, self-employed people pay Class 2 national insurance contributions. However, to qualify for New Style JSA, the claimant must have paid Class 1 national insurance. This means that self-employed people who pay Class 2 national insurance are excluded from this contributory support.

We have heard from many self-employed users of our online benefits calculator who have been affected by COVID-19. Many of these people were surprised and disappointed when they heard that they didn’t qualify for support when they needed it, despite paying tax and national insurance.

Harmonise rules for Class 1 and Class 2 national insurance contributions to allow self-employed people to qualify for contributory benefits.

A further example is the unequal treatment of income between employer-administered support such as Statutory Sick Pay (SSP) or Statutory Maternity Pay (SMP), and the equivalent for those who do not qualify for employer-based support but who would receive the non-employer equivalents of ESA and Maternity Allowance. Employer-based support is treated as earnings under Universal Credit and so benefits from the work allowance and Universal Credit is reduced by 63% of the remainder, meaning the person keeps 37p in the pound. In contrast, the equivalent benefits for those not receiving employer-administered support do not attract a work allowance and are deducted from Universal Credit on a pound for pound basis.

4. People with fluctuating earnings do not fully benefit from work allowances

Work allowances are the amounts that households with children or those with limited capability for work can earn before their Universal Credit begins to be withdrawn.

Households with regular earnings will have the work allowance applied in each Assessment Period. However, for those with fluctuating earnings, the 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. An example illustrating this point is shown below.

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. DWP could introduce a form of ongoing reconciliation to address this.

We have called on DWP to consider introducing a form of ongoing reconciliation. Annual earnings could be assessed with the accumulated work allowances over twelve months, with additional support being paid to households who did not have a work allowance applied in each month.

5. Monthly assessment periods do not adequately support self-employed households

Self-employed households generally do not have regular earned income and are more likely to be affected by the mismatch between support and earnings and the application of work allowances mentioned in the previous paragraphs.

In addition, self-employed households in receipt of Universal Credit are also affected by the application of the Minimum Income Floor (MIF), which assumes they earn in profit the equivalent of the national minimum wage for each hour they work.

The result is that their Universal Credit award may not account for their lower real household income. This can leave households relying on low self-employed earnings together with low Universal Credit support.

Households who are not expected to work or look for work are not affected by the MIF, however we found that it can negatively impact households with hidden barriers to work. Our analysis for the Trust for London found that more than 90% of self-employed households are affected by the MIF.

For households with hidden barriers, their work choice is often not between self-employment and regular employment, but between self-employment and being out of work.

Self-employed people are also more likely to be affected by complex surplus earnings regulations. If a household receives a high amount of earned income in one month, some of it is taken into account in the following month’s assessment period. Surplus earnings rules were introduced to prevent ‘gaming’ of the system. However, the rules are complex for both advisors and claimants, and it’s not clear how big a problem gaming is. The rules only come into effect if earnings fluctuate by a threshold amount. This is currently £2,500, but is set to reduce to £300 at some point in the future.

Listen back to our recent webinar with Sue McCarron from Citizens Advice Wirral to hear how they use the Better Off Calculator to simplify the complexity of surplus earnings.

The DWP should continue to suspend the Minimum Income Floor while we recover from COVID-19, to encourage self-employment. They should also consider further exemptions from the Minimum Income Floor for people with fluctuating health conditions. Surplus earnings rules should be reconsidered, or the higher threshold amount of £2,500 should be retained.

Universal Credit could be adapted to reflect some of the advantages of Universal Basic Income

The Committee asked whether Universal Basic Income (UBI) is needed to address the changes in the world of work.

The main advantages of UBI are its simplicity and its universality. Its key drawback is that it would need to be generous enough to cover the additions for those with greater need.

Universal Credit to reflect some of the advantages of UBI. For example, ending the £16,000 cut-off for savings within Universal Credit would mean that it was accessible to all households regardless of their savings. People with higher incomes and savings would see their benefits tapered away under Universal Credit, as they would with UBI. Universal Credit could also be made easier to claim to encourage higher levels of take-up. Some of the recommendations above would help, as would improving the previous regime of conditionality and sanctions, to allow for more personal freedom around flexibility in work.

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Reducing barriers to work using data led campaigns In September 2023 the UK experienced an economic inactivity rate of 21.3% and an estimated unemployment rate of 4.3%, both of which have increased compared to previous data. Economic inactivity has surpassed pre-pandemic levels, prompting government efforts to integrate this group into the workforce.

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