£600 million raid on Universal Credit will leave millions of working families worse off

A £600m reduction in support will leave millions of working families worse off by 2017 by reducing the amount they can earn before their Universal Credit payment is withdrawn, according to new analysis from independent think tank the Resolution Foundation.

The Office for Budget Responsibility estimates that changes to Universal Credit, announced in the Autumn Statement 2013 documentation, will save the Treasury £600m, with most of the savings coming from the reduction in work allowances.

As with the Personal Tax Allowance, Universal Credit claimants can keep a certain amount of earnings, a ‘work allowance’, before their entitlement begins to be withdrawn. This is a key feature of Universal Credit and a central part of what ensures that families remain better off when they move into work. Approximately 4 million working families will receive Universal Credit, four out of five of whom will be hit by these changes.

Universal Credit work allowances will now be maintained at their current cash level for a period of three years from April 2014. The Office for Budget Responsibility forecasts that inflation (CPI) will be 8.7 per cent over this period meaning that the value of Universal Credit work allowances are set to fall significantly in real terms.

Previously announced measures have already reduced the generosity of Universal Credit. At Autumn Statement 2012 it was announced that most working-age benefits and tax credits were to be uprated by 1 per cent a year (rather than CPI) for three years from 2013. Taken together, the 1 per cent uprating and the reduction in work allowances announced at Autumn Statement 2013 mean that by 2017:

· A single parent household will be up to £420 per year worse off (with £230 coming from measures announced at Autumn Statement 2013)

· A couple with children will be up to £230 per year worse off ( with £130 coming from measures announced at Autumn Statement 2013)

· A couple with no children will be up to £60 per year worse off ( with £30 coming from measures announced at Autumn Statement 2013)

The exact value of the cash loss will vary significantly according to household circumstances but homeowners in receipt of Universal Credit will be hit harder than those who rent. The freezing of the work allowances in Universal Credit disproportionally impacts households in employment and who are in the bottom half of the income distribution. This group is less likely to benefit from further increases in the personal tax allowance than those further up the income distribution.

Gavin Kelly, Chief Executive at the Resolution Foundation, said:

“The decision to reduce the work allowance in Universal Credit by not uprating it with inflation will be a real blow to the working poor. It’s the sort of stealthy measure that often attracts little attention but still has a real impact. Reducing work incentives and family incomes in this way is bad policy – it’s also directly at odds with the government’s stated and laudable objective of making work pay.”

“Universal Credit was originally conceived as an attempt to simplify a number of benefits with the principle of supporting work at its heart. Over time this is being chiselled away by a series of cuts that are altering the policy’s character well in advance of it coming to fruition.”

Ends

Notes

1. The Department for Work and Pensions Universal Credit Impact Assessment states that 4.2 million working households will receive Universal Credit, out of a total of 8.3 million households receiving Universal Credit in total https://www.gov.uk/government/publications/universal-credit-impact-assessment [Table 4]

2. Resolution Foundation analysis of the 1 per cent uprating of most working-age benefits and tax credits announced at Autumn Statement 2012 is available at http://res-fdn.org/1bU6MiU