Working families could become ‘second class savers’ under Universal Credit

Working families moving onto Universal Credit could become ‘second class savers’, with any money put aside potentially counting against their benefit entitlement, according to a new report to be published on Monday (8 June) by the independent think-tank the Resolution Foundation.

Making it work – the final report of a nine-month review of Universal Credit (UC) led by a panel of experts – is supportive of many of the principles behind the government’s flagship welfare reform programme, particularly its improved incentives to work and the merging of six benefits into one.

But it warns that UC also contains many flaws – including the unfair treatment of savers – which need to be addressed before millions of people start moving onto the new benefit system.

In the current tax credit system, the treatment of income other than earnings depends on whether families are working or not. Savings and other income sources – such as occupational pensions, maternity allowance and maintenance payments from ex-spouses – are treated more harshly for out-of-work families than for those who are in employment.

But under UC, the harsh treatment of income will be extended to working families. Every £250 of savings over £6,000 will reduce their entitlement by £4.35 a month, while people with £16,000 of savings or more will be unable to claim in-work support at all.  Income from other sources such as pension, spousal maintenance and maternity allowance payments – will all result in a pound-for-pound reduction in a households’ benefit entitlement.

The Foundation warns that this could deter many low-income working families from putting money aside and planning ahead. It adds that penalising UC recipients who want to save is particularly unfair given the government’s recent £1bn commitment to provide greater flexibility for ISA savers and encourage saving through a tax-free allowance, a policy that will mainly benefit wealthier households.

The report proposes addressing the unfair treatment of low-income savers by excluding ISAs from the UC calculations, which it estimates will benefit around 200,000 working families. It will also call for other sources of income – such as pensions and maintenance payments – to be treated in the same way as earnings.

The report also calls for maternity allowance to be treated equally to statutory maternity pay. This small change in the benefit system would make a huge difference to around 50,000 low-income families with young babies by offering them vital extra financial support.

David Finch, Senior Economic Analyst at the Resolution Foundation, said:

“Universal Credit is in many ways a big improvement on the current benefits system. But there are also serious flaws in the new system that must be ironed out before millions of people move onto the new system.

“The harsh treatment of savings in Universal Credit will turn many working families into ‘second class savers’ – penalising them financially for doing the right thing and putting some money aside for the future.

“The undermining of saving for working families on low-incomes is particularly unfair given that the government has committed around £1bn in tax-relief to encourage other people to save, many of whom will be far wealthier than families receiving Universal Credit.

“The government should encourage all households to save when they can, irrespective of their income, and should end the unfair treatment of savers on UC.”