Workers on low-to-middle incomes face worsening poverty trap under Universal Credit

The Universal Credit will continue to trap many low-to-middle earners on incomes below what they need to make ends meet, according to new research commissioned by the independent think tank the Resolution Foundation. Typically, work incentives for families in lower-paid jobs will worsen. Under the new Universal Credit those currently on tax credits will keep only 24p of each pound of additional earnings, down from 30p in most cases today.

The Government plans to replace most means-tested benefits and tax credits for working-age adults with a single benefit, the Universal Credit, detailed in the Welfare Reform Bill published today.

The reforms are aimed at improving work incentives, but there is set to be a complex mix of winners and losers. The changes will provide a welcome boost for some on the very lowest incomes, but new research by Donald Hirsch for the Resolution Foundation shows that the reforms will not fundamentally improve the current position for many workers.

Full-time workers currently in receipt of tax credits will tend to be better off under the Universal Credit if they are supporting a partner and children. But that support will be withdrawn more quickly than under the current system, once certain income levels are reached. A couple with one full-time worker and two children will keep only 24 pence in the pound for earnings between around £8,000 and £32,000 a year. Under the current system, the same family would keep 10 pence in the pound for earnings between £11,000 and £17,000, rising to 30 pence in the pound for earnings up to £30,000.

Support will also be withdrawn more quickly from couples where a second earner moves into work, making it harder to use second earnings as a route out of poverty.

Author of the report, Donald Hirsch, said ‘This research shows that the move to a Universal Credit does not fundamentally improve the overall picture on work incentives and there is a mixed picture of winners and losers. The gains and losses are highly sensitive to the exact levels of support that are still to be announced. High rates of withdrawal of benefits and tax credits will still make it hard for households to reach adequate living standards.’

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

‘We support in principle the move to a simpler, Universal Credit. But the government needs to show in practice how this improves the position for all low-to-middle income working households. It does not help work incentives if second earners – usually women – have their benefits and tax credits withdrawn more quickly. The level of support for childcare costs is also critical for keeping families in work.’

Notes to editors:

Analysis based on illustrative figures from the Universal Credit White Paper, Universal Credit: Welfare that Works, DWP 2010, assumptions about unannounced aspects, and based on 2010/11 values.

Donald Hirsch is an independent consultant and writer on social policy and is Head of Income Studies for the Centre for Research in Social Policy at Loughborough University.

The Resolution Foundation is an independent research and policy organisation working to improve the lives of low-to-middle earners – a group that is below median income, but not heavily reliant on state support.  There are six million low-to-middle income households in Britain.

Today’s report and all the work of the Foundation can be found at www.resolutionfoundation.org