A new report by Policy in Practice looks at the interaction between taxes and benefits to highlight how Universal Credit supports families.
We find that:
- Out of work levels of Universal Credit are one-third below the level required to cover basic living costs.
- The high costs of private rents and childcare are driving more households to be able to access Universal Credit, including higher-rate taxpayers.
- The savings limit of £16,000, High Income Child Benefit Charge at £50,000 and withdrawal of the personal tax allowance at £100,000 lead to high marginal rates of tax.
Putting the ‘Universal’ into Universal Credit sets out recommendations to improve the effectiveness and fairness of Universal Credit, including raising the level of out-of-work support, removing the savings limit, and ensuring effective marginal tax rates are below 80%.
We also make an important practical recommendation: people who are in work should check if they are eligible for Universal Credit, and companies should check eligibility on behalf of their customers. The report was partly inspired by work for clients in the financial services and utilities sectors who have been surprised at how many of their customers we have been able to help, and by how much.
Contact us to learn more about how we can help.
Three key findings
1. Out-of-work support under Universal Credit is inadequate
Families with two children renting in an expensive part of the country are left with £18,000 (40%) less than their needs due to the Benefit Cap.
2. In-work support under Universal Credit can be accessed by more people than you might think
Up to 300,000 higher rate taxpayers are potentially eligible for Universal Credit. This is caused largely by the high costs of housing and childcare.
This isn’t limited to the most expensive parts of the country. The table below shows indicative gross earnings levels at which different households could potentially access Universal Credit support in different parts of the country. Each example is based on single earner households without childcare costs.
Households with childcare costs for one child could add around £20,000 to the amounts, and £35,000 for two children. For example, a couple with two children renting in Leeds could access support at earnings of up to £96,000.
3. Higher earners lose out through the interaction of taxes and benefits
- The savings limit prevents households with savings above £16,000 from accessing Universal Credit, creating a strong disincentive to save
- The High Income Child Benefit Charge effective between £50,000 to £60,000 combined with Universal Credit can create an effective tax rate of over 100%
- The withdrawal of the tax-free personal allowance at £100,000 means that dual-earner couples are over £14,000 better off after tax than a single-earner household earning £125,140
Three policy recommendations
1. Invest in out-of-work support in Universal Credit
For families with children living in high-cost areas, support is clearly inadequate because of the Benefit Cap and the two-child limit, which hits families both in and out of work, and because the cost of housing is not fully covered by social security.
2. Remove the savings limit in Universal Credit
Remove the savings limit to bring the needs allowance firmly into the tax system, helping younger families who otherwise feel ‘stuck’ renting in particular. There is no savings limit under Tax Credits or Pension Credit, and savings under Universal Credit are already means-tested, applying a notional income of £4.35 per week for every £250 in savings.
3. Ensure effective marginal tax rates are below 80%
Remove the High Income Child Benefit Charge and the withdrawal of the tax-free personal allowance to remove couple penalties within the system and ensure effective marginal tax rates are progressive rather than punitive
We estimate that around £19 billion of Universal Credit and other national, local and private sector support goes unclaimed each year. Even if the amount you are eligible for is small, access to Universal Credit can help you to tap into additional support, including this year’s £900 cost of living payment, free prescriptions, cheaper broadband and social tariffs.
Other key focus points from our analysis
- The majority of Universal Credit support for a family that rents in a high cost area goes to the landlord
- Everyone with savings less than £16,000 should check their eligibility using a benefits calculator, especially if they rent and have children
- Many higher income households in work may be eligible for Universal Credit, but may not know this. More people need support due to increased rent and childcare costs
The pandemic illustrated how we all may need financial support at some point. If we can better align the tax and benefit systems, we can begin to eliminate the false distinction between ‘taxpayers’ and ‘claimants’, build support for social security and make Universal Credit as much a ladder as a lifeline.
People should be able to access the support they need and many don’t know that they can claim Universal Credit. We talk about rising energy and food costs, but we are all paying for our inability to build new housing and provide affordable childcare one way or the other. We encourage everyone with savings of less than £16,000 to check their eligibility using a benefits calculator, especially if they rent and have children.
Deven Ghelani, Policy in Practice
How to check your own and your customers’ eligibility for Universal Credit
Policy in Practice runs the Better Off Calculator, one of the benefit calculators on GOV.UK, and helps local authorities and corporate sector clients to identify customers who are struggling. We believe it should be easy for people to access the support they need. Contact us to learn more about our ‘passport’ service, enabling organisations to help their customers tackle the cost of living crisis. People on lower incomes are automatically assessed and can apply for unclaimed support. To learn more, please contact firstname.lastname@example.org.