Work incentives aren't working: is the Universal Credit review asking the right questions?
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Summary
The Universal Credit (UC) system includes elements designed to encourage claimants’ transition into employment. These range from measures ensuring people are financially better off (such as the taper rate and the work allowance) to penalising people for failing to take active steps towards work (conditionality and sanctions). These mechanisms cannot necessarily offset the systemic barriers to work many claimants face, but can influence decisions to look for and enter employment. This briefing outlines circumstances where those elements either do not work as well as intended, or actively hinder claimants’ transition to work. It also explores some of the barriers existing beyond the benefit system and offers suggestions on how UC could respond to those. The key themes include:
Taper rate and its interaction with tax liabilities. For every pound earned, UC allowance is reduced by 55p. This allows claimants to keep some benefits when at work. However, the real income reduction is often higher than 55p as earnings trigger tax liability, alongside possible termination of Council Tax Support (CTS). Added costs of employment, such as travel, increase this reduction even further. This could be addressed through options such as: lowering the taper rate, introducing work trials, a more uniform and generous CTS and a more wide-spread use of Flexible Support Fund.
Fluctuating incomes. Pay cycles for working claimants do not always align with UC assessment periods. This can skew UC payments, because the system ‘thinks’ claimants earned significantly more or less than usual, even though their actual earnings stay the same. UC fluctuations are often unforeseen, which makes it stressful, difficult to budget, and can drive claimants into debt. If this happens repeatedly, it could disincentivise people from working at all. The mechanism of UC payments should be reviewed to avoid the need for a manual adjustment every time such a situation arises (although in some cases even that option is not available).
The work allowances. Claimants with childcare responsibilities and health conditions (those found to have limited capability to work) are eligible for a work allowance, which means their UC does not taper off straight away when they have earnings from work. This is important for many claimants on low incomes and can make work a feasible option. However, our advisers expressed reservations about the rates of work allowances, which were often considered too low, and the eligibility criteria, viewed as too rigid. The exclusion of people without children and not assessed as having limited capability to work was seen as ill-judged, especially because those people receive the least financial support via UC already. A similar concern arose in relation to the distinction between those claiming housing element (with a lower allowance) and those who aren’t (eligible for a higher rate). This was viewed as unfounded, especially because the housing element does not always cover claimants’ whole rent payments.
Conditionality and fear of losing benefits. The pressure of conditionality, combined with poor employment support, was one of the most commonly identified barriers to work. Both the severity of sanctions and the administrative earnings threshold often can limit people’s chances to find sustainable work, rather than enhance them. Conditionality decreases the trust in the system, which is key to constructive engagement. People are also worried that they might not be able to return to benefits if their job doesn’t work out, or that they would be sanctioned if they decide to leave.
Costs of entering the workforce. Living on empty is a suboptimal starting point when looking for work. Lack of money for essentials shifts the focus from securing employment to everyday subsistence. There are also many costs associated with working, especially childcare and travel, which could be key factors preventing people from working.
We acknowledge that ensuring work pays off is of vital importance. However, marginally increasing the gap between income with and without earnings might have a limited impact; especially if the supply of accessible, stable jobs is low and the cost of entry is high. The language of “incentives” needs to shift towards the language of genuine support, both to make work pay and make work viable.
This briefing has been authored by Jagna Olejniczak. Contact jagna.olejniczak@citizensadvice.org.uk for more information.