Welfare

Tackling the adequacy trap: earnings, incomes and work incentives under the Universal Credit

Donald Hirsch
Donald Hirsch
Jacqueline Beckhelling
Jacqueline Beckhelling

This briefing explores the relationship between gross earnings and net incomes at various points in the bottom half of the income distribution, under both the current tax and benefit system and the future Universal Credit model. It considers how these alternative systems relate to poverty and adequate income levels and concludes with some general observations about what difference the new Universal Credit system might make.

Key findings

  • Under existing tax and benefit rules, households on low-to-middle incomes frequently face high rates of withdrawal of state support as they increase their earnings.
  • The introduction of the Universal Credit does not fundamentally change this situation, though there will be a complex mix of winners and losers.
  • For households with the lowest earnings, the very highest withdrawal rates (where each additional £1 of income is reduced by 90p or more) will be abolished. However for others, withdrawal rates will get steeper (rising from 70 per cent to 76 per cent for existing tax credit recipients).
  • Under reasonable assumptions about the structure of the future system, full-time workers on low wages will tend to be better-off under Universal Credit if they are supporting partners and children , but slightly worse-off if they are single. Lone parents working less than 16 hours a week will benefit, but those working longer than this will be worse-off.
  • People who are not working will have increased incentives to do small amounts of work if they do not have a working partner, but in many cases less incentive if their partner does work. The precise pattern of winners and losers is highly sensitive to as yet unresolved details of the Universal Credit, such as how the childcare tax credit will be replaced.
  • The nature and level of childcare support introduced will affect the ability of many families with children to earn a reasonable income, and determine whether work continues to pay.

Further reading

In credit?
Assessing where Universal Credit’s long roll-out has left the benefit system and the country
·
Alex Clegg
Happy new tax year
Six big changes to pay, tax and benefit policy – and how they affect households across Britain
·
Torsten Bell, Adam Corlett, Alex Clegg
Pensioner progress
The impact of personal tax and benefit changes since 2010 on pensioner families
·
Mike Brewer, Alex Clegg, Lalitha Try
Donald Hirsch
Donald Hirsch
Jacqueline Beckhelling
Jacqueline Beckhelling