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New mums on low incomes will find it harder to make work pay under Universal Credit

28 November 2013

A failing in the design of the Government’s new Universal Credit system will undermine the Coalition’s stated intention that its reforms will guarantee work always pays. A reduction in the amount of childcare support given to parents on low incomes under the new system means that new mothers wanting to return to work from maternity leave will struggle to make additional hours of work pay.

The research by national charity Citizens Advice will alarm ministers, who have put support for families to pay childcare costs and raising the income tax threshold among their top priorities in Government.

Under Universal Credit, families not paying income tax will only be entitled to receive support amounting to 70 per cent of their childcare costs, whilst those earning a high enough wage to pay tax will be entitled to 85 per cent.  The increase in the personal tax threshold means that although some parents will gain money by no longer paying tax, they will suddenly lose 15 per cent of their childcare support and could end up with a significantly lower income.

To make every hour of work pay under the new system, parents will have to earn a high hourly rate or work a specific number of hours, which will be difficult for people to calculate. Part-time contracts and the extremely tough jobs market will mean that in reality, it will be extremely difficult for a new mother to negotiate the exact number of hours of work with her employer which are required to make work pay.

A single mother, earning minimum wage and working 31 hours, could suddenly lose nearly £200 per month if the income tax threshold was raised further because she would lose support for 15 per cent of her childcare costs. This situation could affect hundreds of thousands of families as the threshold increased further.

Citizens Advice Chief Executive, Gillian Guy, said:

“Helping families with childcare costs and encouraging people to get back into work are among the Coalition’s top priorities but this new system will fail many new parents on both counts.

“Ministers have failed to work out how flagship reforms of Universal Credit and raising the personal income tax threshold will work alongside each other. Some parents could find themselves in the confusing and unfair scenario of being taken out of income tax but losing access to additional support with childcare costs.

“Coping with young children is a huge challenge and ministers must ensure the support system helps new mothers not only to care for their children, but enables them to return to work if they choose to.

“Universal Credit is a potentially transformational reform and the rise in the income tax threshold helps many low income families, but ministers must ensure that the two schemes don't undermine each other and make some families poorer.  The worrying lack of attention to detail in ironing out problems is mirrored by the fact that ministers have been worryingly unclear about how people will be supported onto the new system.

“There is a huge amount of work to do to deliver Universal Credit safely. Our research in pilot areas shows one in five of our clients doesn’t have the basic banking services they need and half will struggle with the all-online process.

“Ministers should offer all Universal Credit claimants at least 85 per cent support for their childcare costs to ensure families on low incomes do not lose out as the income tax threshold rises.”

The chart below shows the impact on a lone mother, earning minimum wage, paying the average of £4.44 per hour for her two children aged 1 and 3 who wants to return to work after maternity leave. She will find it nearly impossible to make every hour of work pay due to the reduction in support to pay childcare costs. Her income will decline steadily for each hour worked above ten hours each week. Although she will see a sharp increase in total income from work by working thirty-one hours, the gain then drops significantly for working more than thirty-three hours. Even on a higher wage of £8.50 per hour, her income fluctuates with each additional hour of paid work.

Graph showing the gain for each hour of work for those on minumum wage and £8.50 per hour

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Notes to editors:

  1. The Citizens Advice service comprises a network of local bureaux, all of which are independent charities, the Citizens Advice consumer service and national charity Citizens Advice. Together we help people resolve their money, legal and other problems by providing information and advice and by influencing policymakers. 
  2. The advice provided by the Citizens Advice service is free, independent, confidential, and impartial, and available to everyone regardless of race, gender, disability, sexual orientation, religion, age or nationality.
  3. To find your local bureau in England and Wales, visit citizensadvice.org.uk
  4. You can get consumer advice from the Citizens Advice consumer service on 03454 04 05 06 or 03454 04 05 05 for Welsh language speakers
  5. Citizens Advice Bureaux in England and Wales advised 2.3 million clients on 5.4 million problems from October 2013 to September 2014. For full 2013/2014  service statistics see our quarterly publication Advice trends
  6. Citizens Advice service staff are supported by more than 21,000 trained volunteers, working at over 3,000 service outlets across England and Wales.