How does the Scottish social security system deal with wealth?

One of the least talked-about elements of the UK’s means-tested benefits system is that claimants are expected to reduce their savings to below a certain level before they are entitled to any means-tested support. This has become so established in the UK system that it is rarely discussed. This means wealth – as well as income – is assessed when determining eligibility and amounts for means-tested support. These rules can act as a virtual wealth tax on those with low incomes. In this article I look at the impacts these rules have on Social Security in Scotland.

Saving penalties

In April, the Resolution Foundation published a report I co-authored with Molly Broome and Alex Clegg called “Saving Penalties: Reforming the Capital Rules in Universal Credit” that looked in detail at the rules for assessing capital in Universal Credit and highlighted the issues these rules create.

The report notes that:

“We estimate that 2 million families who would have been eligible for Universal Credit on the basis of income in 2020-22 have reduced entitlement because of the capital rules (20 per cent of the 10 million working-age families who had sufficiently low income to qualify for Universal Credit support). Among them are around 830,000 families who would face a partial reduction and around 1.2 million families who would lose their entitlement entirely. There are undoubtedly some very wealthy families in this group: 12 per cent (240,000 families) had capital between £50,000.01 and £100,000 (excluding property they live in and pension pots), and 16 per cent (315,000 families) held over £100,000. But nearly half (47 per cent) had relatively modest capital of £16,000 or less.”

So, these rules affect a large number of families across the UK, but are rarely discussed when considering the impacts of social security policy.

The capital limit rules are explored in detail in the report, but broadly mean that someone isn’t entitled to means-tested working-age benefits if they have more than £16k of capital, and their benefits are reduced if they have more than £6k. Capital limit rules apply not only to Universal Credit but also to Pension Credit and some other means-tested benefits. The rules for those over pension age are slightly different – but the same principle applies, if the claimant has more than £10k in savings, the amount of Pension Credit someone receives reduces. The rules exclude some assets, notably your home and pensions.

The research shows that most low-income families don’t have sufficient income to save, so aren’t affected by the capital limit rules – their savings are either non-existent or below the capital limit threshold, and they have no prospect of saving more due to the low levels of means-tested benefits.

But during the research, we heard how some low-income families will have more than £16,000 in savings. Some families may have modest savings before seeing a drop in income, for example, because they have lost their job. Some families could have received a modest inheritance, been transferred to Universal Credit from Tax Credits – which had no capital limits[1] – or  have put money aside for a house deposit or adaptations to an existing property. Backdated arrears of benefits or compensation payments can also sometimes mean a claimant is above the capital thresholds.[2]

What the report doesn’t cover, and what people have been asking, is what impact the ‘saving penalty’ has on Scottish social security. In this blog, I’ll look at some of the impacts the capital limits have on Scottish social security systems and suggest some further questions for social security policy in Scotland.

The impact in Scotland

The Scotland Act devolved several areas of social security to the Scottish Government. Social Security Scotland now delivers 16 benefits, including the non-means-tested disability and carers’ benefits, low-income family benefits, and support for fuel and funeral costs. Local authorities deliver two forms of support that were previously part of the UK social security system: the Scottish Welfare Fund (which replaced parts of the DWP’s Social Fund) and Council Tax Reduction (which replaced Council Tax Benefit).

The main impact of the capital limit rules on claimants in Scotland is the way they affect entitlement to UK-wide means-tested benefits. The analysis didn’t provide a breakdown by country, but as a very rough estimate, approximately 200,000 families in Scotland may be impacted by the Universal Credit capital rules. To get some Scottish benefits, such as the Scottish Child Payment, Best Start Grants, and Funeral Support Payment, you need to be getting a UK-wide means-tested benefit such as Universal Credit or Pension Credit. Some other supports, like Council Tax Reduction, have their own capital limits.

Scottish Child Payment

Scottish Child Payment is paid to families with children who get Universal Credit or Pension Credit.[3] It’s paid using the Scottish Government’s ‘top-up’ powers, so they are only legally able to pay it to families who get Universal Credit or Pension Credit. So the capital limit rules for Universal Credit and Pension Credit prevent some families from getting Scottish Child Payment. – even if they have low incomes. So, for example, if a working-age family has savings of more than £16,000, they won’t be able to get Scottish Child Payment, regardless of their income.

However, an amendment to the Social Security Scotland Act allows for the creation of a new type of assistance – ‘childhood assistance’ – which would allow payments to be made to families who aren’t entitled to Universal Credit or Pension Credit and therefore potentially to families with low incomes but with capital above the capital limits.[4]

Best Start Grants, Funeral Payments, and heating payments

Social Security Scotland pays Best Start Grants and Funeral Support Payments to people who meet the criteria –  having a child of a certain age or being responsible for funeral costs – and are in receipt of a qualifying means-tested benefit – again, either Universal Credit, Pension Credit, or, unlike Scottish Child Payment, Housing Benefit. Most people who get Housing Benefit have been transferred to Universal Credit, but there are some people in Scotland that still getting Housing Benefit. Housing Benefit has similar capital rules to Universal Credit and Pension Credit.

There are also a number of heating payments,[5] and some of these may require the claimant to be getting a UK means-tested benefit to qualify. All these benefits face the same issues as the Scottish Child Payment – some people on low incomes may not be eligible for support due to savings or other capital.

Unlike the Scottish Child Payment, the legal powers used to make these payments aren’t linked to getting a UK payment, so the capital rules for these benefits could be changed. However, Social Security Scotland uses entitlement to a UK benefit to either automate payments or easily check if someone is eligible, so any changes would add complexity to the system.

Council Tax Reduction

From 2013, Council Tax Reduction replaced Council Tax Benefit in Scotland. This is administered by local authorities and reduces Council Tax and water and sewerage charges for people who are eligible. Only Pension Credit ‘passports’ you automatically to full Council Tax Reduction. If you get Universal Credit, or have a low income but get no means-tested benefits, the local authority will calculate your entitlement.

Unless you are ‘passported’ to a full Council Tax Reduction, there is a capital limit of £16,000. So, if you have a low income but savings or capital of more than £16,000, you are unable to get support with your Council Tax. The Scottish Government fully controls Council Tax Reduction and could change the capital rules. However, the rules for Council Tax Reduction are already very complex, and any changes would require updates to each local authority’s systems, so could not be implemented quickly. Rather than reform Council Tax Reduction, there are a number of calls to reform the whole local tax system in Scotland.[6]

Policy in Scotland

So, there is scope for changes to the impact capital limit rules have in Scotland, but also challenges in making any changes. It is not clear how much of an impact any changes would have; more Scotland-specific research is needed to understand the effect the capital limits have.

One of the reasons for publishing the “Saving Penalties” report was to start a wider discussion on capital limits – a relatively under-discussed part of the social security system. Part of this discussion needs to happen at a UK level. For Universal Credit, our report recommended that the UK Government should prioritise targeted reforms that support long-term savings while preserving fairness such as excluding money saved through Help to Save and Lifetime ISAs from the capital rules and removing the ‘cliff edge’ from the upper capital limit.

There are also questions for Scotland to consider:

• Are the current capital limits, set by the UK Government and unchanged for many years, right for Scotland’s policy priorities?
• Who is missing out on support in Scotland because of the capital limits, and what impact is that having?
• Specifically are children in poverty missing out on support because of the capital limits in Universal Credit and Pension Credit?
• Moving from ‘passporting’ support to some other kind of test of entitlement could create additional administrative difficulties – would the benefits outweigh these potential risks and additional costs?
• And perhaps most importantly: is it right that people with low incomes face a virtual wealth tax on relatively modest savings?

[1]People who transfer from Tax Credits to Universal Credit do have some transitional protection, but this only lasts for a short period of time. More information on migration from Tax Credits to Universal Credit is available from the Child Poverty Action Group https://cpag.org.uk/welfare-rights/key-topics/migration-universal-credit

[2]Some backdated payments of benefits are ignored, but usually only for a set period of time.

[3]The legislation allows payments to those receiving Income Support, Income-Based Jobseekers Allowance, Income related Employment and Support Allowance, Child tax Credit or Working Tax Credit but almost everyone getting these benefits has now either been transferred to Universal Credit or their claims have been ended.

[4]Social Security (Amendment) (Scotland) Act 2025 provides for the amendment of The Social Security (Scotland) Act 2018 to create a new type of assistance ‘childhood assistance’

[5] See https://www.mygov.scot/browse/benefits/heating-and-housing for more details.

[6] See for example https://ifs.org.uk/publications/scottish-council-tax-ripe-reform and https://scotland.oxfam.org.uk/latest-news/fair-tax-letter.