Cuts to work allowance affect all workers but action can be taken now to offer temporary protection
Much has been made of the Government’s reversal on the tax credits cuts being in reality a temporary measure. I wrote about this recently myself. If George Osborne had gone ahead with his cuts, millions of people would have lost significant amounts of money in April. Instead, at some point over the next five years, those same people will be moved on to Universal Credit (UC), triggering a complicated process of gains, losses and transitional protection that make all the money back for the Government anyway.
The fact that UC is a much less generous system than tax credits has been known for years, although it hasn’t been much debated until the autumn statement brought the comparison to the fore. Many commentators have posited that the cuts to UC announced in the summer alongside those to tax credits, and passed by parliament a few days before the spending review, brought about this unflattering comparison. This is misleading. A large majority of the people who would have lost out under the tax credits changes were already scheduled to lose out under UC.
What is the work allowance?
The conflation of cuts to UC and tax credits in reporting has meant the actual impact of the UC changes has become somewhat lost. If you missed it, the main change to UC is the reduction of the work allowance. Known to other benefits as the earnings disregard and similar in some ways to the tax credits threshold, the work allowance sets out an amount of money that a claimant can earn without it affecting their entitlement. In a move that exemplifies much of the UC project, a previously varied and complex system has been simplified and streamlined, resulting in many workers losing much of the advantage they were previously granted.
In the original work allowance system there were eight different rates, all substantially higher than the comparative figures in Jobseeker’s Allowance (JSA) or Housing Benefit. There are now just three rates, significantly reduced for all but one of those eight groups and in the case of households that have neither a child nor a disabled person amongst them, reduced to zero – worse than even the miserly rates that JSA currently grants.
As an example of how much people will lose, a couple without children, neither of whom are disabled will lose £865 if they earn at least that amount in a year. Cuts to working tax credit would have produced a minimum loss of around £1,300 but would only have affected those earning over £6,000 and working at least 16 hours a week. The UC cut comes from the first £865 earned in a year for everyone claiming, no matter how many hours you work.
What effect do the cuts have and what can be done about it?
What implications does this have? A primary purpose of Universal Credit is to encourage work. This premise is predicated on a system that ensures everyone should be better off in work than out of work. There are two components that ensure this, the work allowance that means anyone working can keep a fixed amount of their earnings without it affecting their entitlements and a taper that means for every one pound earned over their work allowance, UC entitlement is only reduced by 65 pence. By reducing the work allowance for most people and removing it entirely for many, this system is significantly weakened, albeit without rendering it entirely false.
What the reduction has done though, is make the comparison with the legacy benefit system increasingly unfavourable. Without these changes, UC had undoubtedly more generous work incentives than JSA, Income Support or Housing Benefit and is better than Employment and Support Allowance (ESA) for many. Only tax credits offered significantly better incentives. This is no longer true. Housing Benefit is now clearly more generous to many workers. JSA, ESA and Income Support are now better for a few and tax credits are even better in comparison than they were. Government figures at the conception of UC suggested that, when comparing directly with the legacy system, around a third of claimants would be better off under the new system and a third would be worse off, with the remaining third receiving about the same. These cuts have skewed this towards more people losing out under UC than gaining, with all workers receiving lower incomes in comparison to the earlier vision. In fact, reports yesterday show that the Government is suggesting that workers might need to work up to 200 extra hours to make up for the income lost in this cut.
What can advisors, landlords or other support groups do in the face of these changes? Crucially, a system of transitional protection is in place to support those whose entitlements under UC will be lower than their previous benefits. This is a cash protection that tops up their UC award to the previous entitlement, ensuring no one loses out in basic terms. It is not uprated with inflation meaning the extra help it provides is eroded over time and it is easily lost if circumstances change, but as some people may lose thousands of pounds without it, it is critical that those who can be helped with this scheme receive it for as long as possible.
Very importantly, transitional protection only helps people at the rate of benefits they receive when they move over to UC. The higher your benefits when you move, the greater the protection. With tax credits having been saved from cuts and UC becoming ever worse for working people, the imperative must be for those who can claim tax credits to do so now. Whether this means identifying those who could claim but don’t, or those who need to work a few hours more to qualify, it is massively in the best interests of anyone who can claim doing so before it is too late. With the vast disparity in entitlements potentially running into several thousands of pounds a year, transitional protection could protect household income for a decade – but only if they claim it in time. Within transition starting from May 2016 now is the time to get the message out.