Financial Impacts of Welfare Reform - Illustrative Working Age Case Studies

3 Universal Credit

3.1 Universal Credit is scheduled to replace all existing means-tested benefits paid to working age people in and out of work, with the exception of Council Tax Reduction. Specifically, the benefits being abolished and replaced by Universal Credit are:

• Income Support
• Income-based Jobseeker's Allowance
• Income related Employment and Support Allowance
• Housing Benefit
• Child Tax Credit
• Working Tax Credit (including childcare element)

3.2 The maximum Universal Credit claimable is made up of a total of:

• A standard allowance
• A child element for each child
• A childcare costs element
• A housing costs element
• An amount for each disabled child
• An amount for an ill or disabled adult

3.3 For each claimant, the maximum amount claimable is worked out on the basis of which elements the claimant qualifies for. This maximum amount is then reduced depending on the claimant's income. The taper rate for Universal credit is 65%, meaning that for every additional pound earned over the 'work allowance' (the amount of earnings disregarded), 65 pence of benefit is removed. This is the same as the current taper rate for Housing Benefit, and higher than the taper rates for Tax Credits and Council Tax Reduction. This increase is partially offset by there only being a single taper rather than several tapers operating simultaneously.

3.4 As noted above, Universal Credit is best understood as a repackaging of existing benefits and is not expected to result in an aggregate reduction in benefit entitlement or expenditure. However, there are likely to be 'winners and losers'. The Department for Work and Pensions estimates that once the system is fully introduced, 2.8 million households will have a higher benefit entitlement than under the current system, 2 million will have a lower entitlement and 2.7 will experience no change in entitlement. The hypothetical case studies below illustrate some scenarios that are expected to result in increased or reduced welfare payments.

3.5 However, it should be noted that the expected impacts of Universal Credit considered to be most problematic relate not to amounts claimable but to other changes around delivery. For example, there are concerns that housing payments going to tenants rather than to landlords and the monthly payments may cause problem for individuals in terms of budgeting, particularly those with mental health problems or learning disabilities. Concerns have also been raised about the online application process and limited telephone and minimal face to face support for individuals who do not have internet access or the skills necessary to navigate the online form.

3.6 Universal Credit also extends the principle of conditionality currently in place for Job Seekers Allowance to most claimants. In order to claim Universal Credit, individuals must accept a 'claimant commitment' which sets out conditions that must be met to continue to claim UC. For those considered to be fit for work or work related activity, the claimant commitment will include 'work related requirements' such as a attending a set number of interviews a week or attending work preparation meetings. Those found in breach of their claimant commitment are sanctioned by having the UC payments reduced or suspended, with increased lengths of sanctions for repeated failures. Concerns have been raised about the appropriateness of certain work related requirements, the extent to which staff ensure that individuals understand their claimant commitments, lack of consistency in the application of guidance between Job Centres and the impact of sanctions on claimants who could be left destitute.

Case study 3.1. Winners - not currently eligible for WTC

Mr and Mrs K live in a 2 bedroom private rented flat in Falkirk with a weekly rent of £100 with their two daughters aged 4 and 7. Mrs K works 15 hours and Mr K works 12 hours both at a rate of £7.00/hour, earning a combined income of £89 a week, or £9,828 a year before tax. They have childcare costs of £100 a week.

Under the current system, they are not eligible for Working Tax Credit, or the childcare element of Working Tax Credit, as neither are working the required 16 hours a week. They are claiming Child Tax Credit of £115, Housing Benefit of £79, Council Tax Reduction of £12 and Child Benefit of £34 a week, giving them a combined weekly benefit income of £239.

Under Universal Credit, there is no threshold for working hours, and they will therefore be eligible for the standard allowance of £113 and the childcare element of £70. They will also get the Housing Element and the Child Element giving them £308 Universal Credit. They can also continue to claim Child Benefit. They will no longer qualify for Council Tax Reduction as their income is now too high.

Overall they will receive a weekly benefit income of £342, making them £103 a week or £5356 a year better off under Universal Credit.

In 2011/12 there were around 10,000 people in Scotland living in families where at least one parent was working but no one was working more than 16 hours a week, and where household incomes were in the range of where WTC would have been received.^[9]

Case study 3.2. Winners - claiming Housing Benefit and WTC

Ms L is a single mother living with her 3 year old son in a housing association flat in Glasgow costing £100 a week. She works 25 hours a week at a wage of £7.50/hour, earning £188 a week before tax, an annual income of £9,776. Her mother looks after her son and she therefore has no childcare costs.

Under the current system, Ms L receives £48 in Working Tax Credit, £63 in Child Tax Credit and £38 in Housing Benefit a week, a combined total of £149. She also receives £20 Child Benefit. Under the new system, Child Benefit will remain unchanged and the combined total for the three elements she will receive of Universal Credit (standard allowance, child element and housing element) is £156.

This is because under the current system Tax Credits and Housing Benefits are calculated separately and simultaneously so that Ms L's income is taken into account when tapering her Tax Credits, and then again when tapering her Housing Benefit. In contrast, under Universal Credit, the maximum entitlements for each element are added together before a single taper to account for income is applied.

Overall, Ms L will gain £7 a week or £382 a year when she moves onto Universal Credit.

In 2011/12 there were around 70,000 people in Scotland, including 40,000 children, living in households claiming both Housing Benefit and WTC^[10].

Case Study 3.3. Neutral - single unemployed adult

Mr R is 36 years old lives by himself in a one bedroom private rented flat in Fife for which he pays £75 a week in rent. He is unemployed and unable to find work and has no income.

Under the current system, Mr R can claim his weekly housing costs of £75 and Council Tax of £11 in full, and receives £72 a week in income-related Job Seekers Allowance.

Under Universal Credit, the housing element continues to cover the full housing costs, while the standard allowance for a single person is also £72. He also continues to receive Council Tax Reduction of £11.

Mr R will receive the same amount in benefits both under the current system and Universal Credit.

In 2011/12 there were around 70,000 childless single adults claiming Jobseekers Allowance in Scotland^[11]. This figure includes both contributory and income based JSA.

Case Study 3.4. Losers - claiming Working Tax Credits and working over 30 hours

Ms F is a single parent living with her two children in a 2 bedroom housing association property in Aberdeen with a rent of £150. She works 30 hours a week at a wage of £7.00/hour earning £210 before tax, an annual salary of £10,920, and has childcare costs of £250.

Under the current system, she receives £34 Child Benefit, £115 Child Tax Credit, £229 Working Tax Credit (including the childcare element), £131 Housing Benefit and £8 Council Tax Reduction, giving her a combined benefit income of £517.

Under Universal Credit she will receive the same amount of Child Benefit and £423 Universal Credit (made up of standard allowance, child element, childcare element and housing element). She will no longer receive any Council Tax Reduction. Overall, she will have a benefit income of £457.

Ms F's loss in benefits is due to changes in Council Tax Reduction after the introduction of Universal Credit^[12] and because under current rules, a higher rate of Working Tax Credit applies for individuals working 30 or more hours, for which there is no equivalent in Universal Credit.

Overall, Ms F will lose £60 a week or £3120 a year.

In 2011/12 there were around 290,000 people in Scotland, including 120,000 children living in families claiming WTC where at least one person worked at least 30 hours a week^[13].

Case study 3.5. Losers - High Earners on Tax Credits

Mr and Mrs P live in the Highlands with their three school age children. They own their property outright and therefore have no housing costs. Mr P works full time at 37 hours at a wage of £10.00/hour, while Mrs P works 25 hours a week at a wage of £7.00/hour. They have combined earnings of £545 a week before tax, an annual household income of £28,300 before tax.

Under the current system, they are eligible for £84 of Child Tax Credit and £47 of Child Benefit a week, a combined total of £131. Due to their comparatively high income and owner occupier status they are not eligible for any other benefits. After the reform is fully implemented, they will get £50 Universal Credit. The reduction compared to Child Tax Credits is due to a higher withdrawal rate under the new system. They will continue to be eligible for £47 a week of Child Benefit, a combined total of £97.

Overall, they lose £34 a week, or £1768 a year.

In 2011/12 there were around 660,000 people in Scotland, including 330,000 children living in families claiming CTC but no other means tested benefits (WTC, HB, JSA, CTB)^[14].