Budget reforms will mean a further 200,000 families will be better off on Universal Credit

The welcome reforms to Universal Credit (UC) announced in the 2018 Budget mean that an additional 200,000 families will be better off under the new benefit system, compared to the old one. However, further changes are needed to prevent people getting stuck in low-paid, short-hours work, according to a new report published today (Monday) by the Resolution Foundation.

Back in Credit? considers what the changes to Universal Credit announced in Budget 2018 mean for the generosity of the government’s flagship welfare scheme, and the work incentives for the seven million families who will eventually claim it.

The report notes that the £1.7bn investment in UC at the Budget, coupled with the £3.2bn higher benefit take-up projected by the OBR, means that for the first time since early 2015 Universal Credit is set to be more expensive than the legacy benefit system it replaces.

Crucially, the £1,000 increase in Work Allowances – which will deliver an income boost of up to £630 – mean that an additional 200,000 working families will be better off under UC compared to the legacy system.

Overall, this has reduced the number of losing working families from 3.2 to 3 million, and increased the number of gaining families from 2.2 to 2.4 million. Working families with children are now just as likely to be better off under UC as worse off, with the net losses concentrated among non-parents.

Back in Credit? says that as well as boosting the generosity of UC, the increased Work Allowances have improved work incentives by allowing people to earn more before their benefits are reduced.

However, further changes are needed to make the new benefit fully fit for tackling the big challenge of in-work poverty in Britain, where two-thirds of children living in poverty are in families in which someone works.

The report shows that UC creates strong incentives for workers to match their earnings to their Work Allowance, but relatively weak incentives to work beyond them. That’s because they’re able to keep 100 per cent of each additional £1 earned up to their Work Allowance, while every extra £1 earned after that leads to a 63p reduction in benefit income.

The Foundation highlights two areas of major risk to groups that are particularly sensitive to work incentives:

  • Single parents reducing their hours worked. The point at which a renting single parent’s Work Allowance is exhausted is equivalent to 8 hours per week on the National Living Wage (NLW). In contrast, ‘hours rules’ in the tax credits system create strong incentives for single parents to work at least 16 hours per week. This means that on UC there is a risk they reduce hours. For example, a single parent renting and earning the NLW could halve their weekly working hours from 16 to 8, and lose just £24 per week. This risk carries serious implications for progression and lifetime earnings.
  • Second earners not entering work. Second earners have no separate Work Allowance so, in most cases, will lose benefits from the very first pound of their earnings. This discourages work. This matters because of the higher poverty risk of single earner couple households – just 5 per cent of children living in couple families in which both adults are in full-time work are in poverty, compared to 34 per cent of children living in couple families with only one full-time worker.

To counter these risks, the Foundation welcomes the recent increase in Work Allowances, but calls for further increases for single parents and the introduction of a new second earner Work Allowance to encourage more people (particularly women) to work and maintain their hours.

Laura Gardiner, Research Director at the Resolution Foundation, said:

“The welcome extra investment in Universal Credit at the Budget means that a further 200,000 working families will now be better off under the new benefit system than the old one. This also means that, for the first time since early 2015, UC is set to be more expensive than the legacy benefits it is replacing.

“But if the government wants to make Universal Credit fit for the challenge of tackling 21st century poverty in Britain, these recent changes should mark the start of reforms, rather than the end.

“The government should now prioritise reforming Work Allowances so that they do more to incentivise higher earnings for single parents, and encourage more second earners into work. This would make Universal Credit more female-friendly, and a better vehicle for driving down poverty.”