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

Hard lessons
Childcare support for parents in education
·
Lalitha Try
Cutbacks ahead
Considering the impact of proposed changes to disability benefits on living standards and the public finances
·
Mike Brewer, Louise Murphy
Cold comfort
Mitigating the Winter Fuel Payment cut
·
Alex Clegg, Jonathan Marshall
Donald Hirsch
Donald Hirsch
Jacqueline Beckhelling
Jacqueline Beckhelling