Financial Impacts of Welfare Reform - Illustrative Working Age Case Studies

2 Case studies for selected benefit changes

Working Tax Credit

2.1 Working Tax Credit (WTC) is a benefit paid to individuals who are in low income employment. The key change to WTC affects couples with children, who from 2012/13 are required to work at least 24 hours a week between them, with one parent working at least 16 hours to be eligible. Previously just one person was required to work at least 16 hours. The eligibility criteria for lone parents, childless couples and single people without children have not changed.

2.2 Another change to WTC in general is that the taper rate at which tax credits are withdrawn as claimants' income goes up was increased from 39 to 41 per cent in 2011/12. This means that for every additional pound earned, 41 pence of benefit is withdrawn.

Case Study 2.1 - Entitlement to WTC

Mr M is unemployed and Mrs M works 18 hours per week at a wage of £6.80/hour earning £122 before tax, an annual salary of £6,344. Mr M does not qualify for income-based JSA or Income Support as Mrs M's earnings are just above benefit levels. They live in a three bedroom housing association flat in Dundee with a weekly rent of £130 with their two children, for whom they receive Child Benefit of £34 and Child Tax Credit of £108.

Due to the reforms they lose their entitlement to Working Tax Credit because their hours worked per week are now too low. Mrs M is unable to get more hours at her current job but is looking for alternative work. The couple lose their full entitlement to Working Tax Credit of £74 per week.

However, because of the reduction in income due to the loss of Working Tax Credit, they are entitled to £19 more Housing Benefit and £6 more Council Tax Benefit. While their Child Tax Credit entitlement is unchanged, increases in the rate mean they receive an additional £5. Child Benefit remains unchanged.

Overall, Mr and Mrs M lose £43 a week or £2236 a year.

Data is not available to estimate the number of couples with children in Scotland who are affected by this change in WTC eligibility criteria.

2.3 There is also a childcare element of WTC, which provides support with childcare costs for working parents on low incomes. Lone parents working 16 hours or more a week and couples both working at least 16 hours or more a week are eligible.

2.4 From 2011/12, the proportion of childcare costs that can be claimed was reduced from 80% to 70% of actual childcare costs, and the maximum amount claimable was reduced from £140 to £122.50 per week for one child and £240 to £210 per week for two or more children

Case Study 2.2 - Childcare element of WTC

Ms K works 25 hours per week at a wage of 6.50/per hour and earns £163 before tax a week, an annual salary of £8,476 per year. She is a single parent and lives in a two bedroom private rented property in Midlothian with a weekly rent of £130 with her two children aged one and two. The cost of childcare for her two children is £250 per week.

She receives the childcare element of Working Tax Credit towards child care costs. Prior to the reforms 80% of the costs were covered and Ms K would have received £200 per week to help with childcare costs. Following the reduction in the proportion of the costs covered to 70%, she is eligible for £175 per week, a loss of £25.

However, some of this loss is made up by small increases in of £10 Housing Benefit, and £3 in Council Tax Reduction, to take into account the reduction in Ms K's income. The change to the childcare element rules also coincided with an increase in the Child Tax Credit rate from £99 to £108. Ms K's entitlements to Working Tax Credits (non-childcare) and Child Benefit remain unchanged.

Overall, Ms K loses £3 a week or £156 a year in benefits income. However, due to changes in personal allowance coinciding with the reforms, her post-tax income increases by £7 a week, giving her an overall increase of £4 per week or £208 per year.

In 2011/12, there were around 430,000 people, including 200,000 children, living in households in Scotland that claimed WTC and had formal childcare costs.^[1]

Child Tax Credit

2.5 Child Tax Credit (CTC) is a benefit payable to all parents on low incomes, both in and out of work. There are two parts, a family element (a basic payment) and then an additional payment for each child. At low earnings levels, the household will receive the maximum amount of Child Tax Credit for which they are eligible. Once their annual earnings cross the 'first income threshold', their CTC is reduced, a process known as 'tapering'^[2].

2.6 Prior to the reforms to Child Tax Credit in 2011 and 2012, there were separate earnings thresholds for the child element and the family element of CTC. The child element was tapered as soon as the initial earnings threshold was crossed, while the family element was only tapered after a second, much higher, income threshold was reached.

2.7 In addition, the child element was tapered at a rate of 39 pence in the pound, while the family element was tapered at a much lower rate of 6.67 pence in the pound. Therefore, in 2010/11, families that were eligible for CTC would not lose all of their payment until their household income was around £58,200 annually^[3].

2.8 Since the reforms to Child Tax Credit were fully implemented in April 2012, there has been no separate income threshold for the taper of the family element - all elements of CTC reduce simultaneously after the first income threshold. In addition, all elements are now tapered at the higher rate of 41 pence in the pound. Finally, the 'baby addition' which doubled the family element of CTC for families with a child under one, was abolished in 2011, reducing the total amount of CTC that eligible families could claim.

2.9 One consequence of these reforms is that a family with one child would generally not receive any CTC once their income is above around £26,000, and a family with two children once their income is above around £32,000.

Case study 2.3 - Child Tax Credit

Mrs R and Mr R have one child under one. Mr R works 37 hours a week at a wage of £11/hour while Mrs R works 10 hours a week at a rate of £7.50/hour, and they earn £481 weekly before tax, a combined annual income of £25,200. They receive Child Benefit and Child Tax Credit for their children. Because of their relatively high earnings they are not entitled to any other benefits.

With these circumstances prior to the reforms, the child element was tapered away but they were still in receipt of the full family element, as well as the baby addition to the child element because their household income was under £50,000. Given the same circumstances after the reforms, the baby addition has been removed, and the family element is also partially tapered away as all elements are tapered together. Child Benefit payments remain unchanged.

Overall, their Child Tax Credit Entitlement falls from £21 a week to £4 a week. This is a loss of £17 a week, or £884 a year. This welfare change is partially offset by an increase of £8 per week due to changes to the personal allowance, giving Mr and Mrs R an overall loss of £9 per week or £468 per year.

In 2010/11, before the reforms came into power, there were around 590,000 people in Scotland, including 270,000 children living in families receiving Child Tax Credit with a before tax household income over £26,000^[4].

Changes to Housing Benefit in the social rented sector relating to under-occupancy (the so-called 'Bedroom Tax')

2.10 Housing Benefit paid to tenants who are under pension credit age and who are living in the social rented sector from 2013/14 has been subject to deductions for households that are deemed to be living in properties that are deemed larger than required (widely known as 'bedroom tax'). The new rules replicate size criteria applying to Housing Benefit (Local Housing Allowance - see below) claimants in the private rented sector. Adult couples, 2 children under 16 of the same sex and 2 children under 10 of either sex are expected to share a bedroom.

2.11 Claimants deemed to be under-occupying are expected to move to a smaller property or have their Housing Benefit reduced by 14% of their eligible rent for those under-occupying by one bedroom or 25% for those under-occupying by two or more bedrooms. This has raised concern as in a very large number of cases smaller properties are not available. In particular, there is a shortage of one bedroom properties. Bedroom tax also does not take into account individual circumstances, such as the need to store medical equipment, adaptations to homes, or regularly visiting children (e.g. for separated parents), with very few exceptions.

Case Study 2.4 - Removal of the Spare Room Subsidy

Ms P, a lone parent, has a daughter aged 5 and a son aged 9 and lives in a three bedroom housing association flat in Glasgow with a rent of £110 per week. As two children under the age of 10 of either sex are expected to share a room, she is deemed to be under-occupying the property by one bedroom.

There are no two bedroom flats available for Ms P's family to move into. In addition, once her son turns 10 she will no longer be considered to be under-occupying, as children of opposite sex are only required to share a room up to the age of 10. If she were to move to a smaller property, she would need to move again after 12 months, as a two bedroom property would then be too small.

While she is considered to have a spare bedroom, Ms P's housing benefit will be cut by 14% of her contractual rent. She will lose £15 per week or £780 per year.

In November 2013, around 71,700 households in Scotland were affected by the reduction in Housing Benefit due to over-occupancy^[5].

Local Housing Allowance

2.12 Low income tenants in the private rented sector are eligible for Housing Benefit for their rent up to a certain rate as determined by Local Housing Allowance (LHA) rates, which take into account number of bedrooms and rental costs in the local area defined as Broad Rental Market Areas (BRMAs). Since 2011/12 LHA rates are set at the 30th percentile of rental rates in the BRMA, rather than the 50th percentile. In addition the top rate for properties with 5 or more bedrooms has also been removed, and so tenants in such properties can only get support up to the 4 bedroom rate.

Case study 2.5 - Local Housing Allowance - rate changes

Ms F and Mr S are a couple and live in a one bedroom flat in Renfrewshire which they rent from a private landlord at a cost of £85 per week. Prior to the reforms, they were eligible to claim the entire cost of their rent via Housing Benefit, as the maximum rate claimable, set on the basis of the 50th percentile of local rents was £87. After the reforms, the maximum claimable is £81, set at the 30^th percentile.

Ms F and Mr S lose £4 a week or £208 a year as long as they remain in the same property.

In 2011/12, there were around 160,000 people, including 60,000 children, living in households in Scotland receiving Housing Benefit for a private rented property^[7].

2.13 Younger single people without dependants are only eligible for Housing Benefit in the private rented sector based on the cost of living in shared accommodation, rather than in a self-contained property. This 'Shared Accommodation Rate' (SAR) is set at the 30th percentile of local rates for single rooms. From 2012/13 it has been extended from applying to those ages under 25 to those aged under 35, with some exceptions.

Case study 2.6 - Local Housing Allowance - Shared Accommodation rate

Mr D is 33 years old and lives in a one bedroom private rented flat in Aberdeen costing £115 a week. After the Shared Accommodation Rate (SAR) was extended to individuals up to age 35, he is no longer able to claim Housing Benefit at the full rate of his rent, but only up to the SAR of £69.

While he remains in this property, and until he turns 35, Mr D loses £46 a week or £2380 a year.

Data is not available to estimate the number of single people aged 25 to 34 in Scotland who are affected by the extension of SAR.

Benefit Cap

2.14 From 2013/14, total household benefit payments for working-age claimants are capped to the level of the average weekly wage, after tax and National Insurance, set at £350 for single households without dependent children and £500 for all other household types.

2.15 Benefits entitlements counted towards the cap include most working-age benefits, but not pension credit or retirement pensions. Exclusion from the cap applies for households including claimants of

• Working Tax Credit;
• Disability related payments (Disability Living Allowance, Personal Independence Payment, Attendance Allowance, Industrial Injuries benefit, Employment and Support Allowance support component);
• Some benefits relating to the armed forces.

2.16 Households where a person has worked for 50 out of the previous 52 weeks and not been entitled during that time to income support, JSA or ESA, are exempt from the benefit cap for a period of 39 weeks.

2.17 Some households in temporary accommodation may be affected by the benefit cap. This will primarily be caused by the high rents reflecting the costs of providing temporary accommodation. Rents are higher reflecting possibly high turnover of accommodation, management costs and additional support costs for some residents. Unless this is 'exempt accommodation', they will be subject to the benefit cap, with the possibility of claiming a discretionary housing payment to make up any shortfall in the short run.

2.18 Until the introduction of Universal Credit, the cap is administered via a reduction in Housing Benefit.

Case Study 2.7 - Benefit Cap

Mr A and Ms B are unemployed and live together with their four children aged 3, 5, 12 and 13 in a four bedroom private property in Edinburgh and pay rent of £250 per week. As their two older children are of different sex, they are eligible for the four bedroom Local Housing Allowance rate which covers their £250 a week rent.

They are in receipt of income-based JSA at a rate of £113 per week. They also receive Child Tax Credit for their four children at a rate of £219 per week and Child Benefit at £61 a week. They also receive Council Tax Reduction of £20 per week, but this does not count towards the income against which the cap is assessed.

Their combined income from the benefits counting towards the cap is £642, while the maximum non-single households are entitled to is £500. The cap therefore results in their weekly income being reduced by £142 via a reduction in their Housing Benefit - an annual loss of £7384.

Between April 2103 and January 2014, just under 1500 households in Scotland were affected by the benefit cap^[8].