Ian Duncan Smith has promised to’. ..put work at the centre of our Welfare System.’ Universal Credit started in the pathfinder area of Ashton-Under-Lyne in April and in July will be extended to Wigan, Warrington and Oldham. National roll out is due to start for new claims from October 2013.
The current system of means tested benefits are seen as complex. They are viewed as acting as a disincentive to getting into work. After a small earnings disregards (for example £5 for single people), benefits such as Job Seekers Allowance (income based) are withdrawn £1 for £1 as a client enters work. Similarly taper rates for Housing Benefit and Local Council Tax Support work together to generally produce a withdrawal taper of perhaps 85% as a client comes off Job Seekers Allowance. Will Universal Credit improve the current system and act as a carrot to encourage clients into work?
The example below illustrates the situation for a single person without children. Under Universal Credit, there is a system of 12 earnings disregards (or ’work allowances’) depending on circumstances. For this client, this is £111. If the client earns above this level then Universal Credit is lost at the rate of 65% of earnings above that level. Universal Credit is assessed monthly unlike current means tested benefits. National Insurance Contributions and income tax are paid weekly so we have tried to indicate at what monthly level a client would have to start paying these.
So if your client gets offered a job earning £25 per week (or £111 per month) then they will get to keep all their Universal Credit. This is much better than the current system. If their hours are then increased and they earn an extra £500 per month, they will lose 65%(£325) off their Universal Credit. If they earn over £646 per month then they would have to start to pay National Insurance Con-tributions (typically 12% for a non contracted out rate). If they earn over £787 per month then they would also have to start to pay income tax.
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If we now add in the possible effect of the withdrawal of Local Council Tax Support, then the disincentive is made greater. The difficulty is that Local Council Tax Support will differ in each local authority area, so our example uses a general situation where the support is withdrawn at a similar rate to the old Council Tax Benefit.
Overall Universal Credit is an improvement for those starting to enter work on a limited part time basis. The system of disregards (or ‘work allowances’) are more generous under Universal Credit varying from £111- £734. However, as a client takes on more work, the withdrawal rate of 65%(and perhaps more accurately greater), remain a poor incentive to work. This is further increased if the client needs to pay National Insurance and income tax. The withdrawal of free school meals may further exacerbate this disincentive.
The design of Universal Credit is also important in making sure that work is incentivised. If clients are not to be deterred from going into work then the computer systems must work well, change of circumstances need to be responded to quickly to avoid under and overpayments and clients on low incomes will have to learn to budget monthly. A harsher sanctions regime was introduced for Job Seekers Allowance and Employment and Support Allowance in December 2012 which is similar to that under Universal Credit. Perhaps the biggest incentive to work, would be increased job availability.