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The Universal Credit

Plans for the Universal Credit (UC) were first announced in 2010. UC will replace a raft of existing benefits and commences for new claimants in October 2013. The new credit system will be administered online and is intended to streamline the benefits system.

The impact?

UC seeks to improve work incentives through a combination of earnings disregards and lower benefit withdrawal rates. It is also expected to smooth the transitions in and out of work. Merging the income-related jobseeker's allowance, housing benefit, the child tax credit, the working tax credit, and income-related employment support allowance into a single universal payment will also reduce the complexities and costs of the current multi-benefit system.

What constitutes the Universal Credit?

The UC is a means-tested benefit for anyone of working age. The upper age limit is set at qualification for the Pension Credit. The UC is not intended to be an in-work or out-of-work benefit but it is fundamentally a single credit irrespective of the claimant's employment status. UC aims to make it easier to manage the change from unemployment to employment since people won't need to keep changing from one benefit to another as their income circumstances change.

Timetable

UC is to be introduced in three phases spread over a period of four years from 2013 to 2017.

From October 2013 to April 2014, new claims for out-of-work support will be regarded as claims for the Universal Credit; no new claims for the jobseeker's allowance, employment and support allowances, income support or housing benefit will be accepted; anyone shifting from out-of-work benefits to work will be moved onto the UC by way of transition if that is appropriate.

As from April 2014, no new claims will be accepted for tax credits.

From April 2014 to October 2017, all existing benefits claimants will be switched across to the Universal Credit.

What remains and what is abolished?

The UC will, in time, see the end of a number of individual benefits. These include:

  • Income support
  • Income-based job seeker's allowance
  • Income-related employment and support allowance
  • Housing benefit
  • Council tax benefit
  • Child tax credit and the working tax credit
  • Crisis loans
  • Community care grants
  • Budgeting loans (these will be replaced with payments on account where cases of need demand.

Not all separate benefits are to vanish, though. Ongoing will be: the contribution-based jobseeker's allowance; the contributory employment and support allowance; child benefit; the carer's allowance; bereavement allowance; maternity allowance; statutory maternity, paternity and adoption pay; statutory sick pay; the disability living allowance (or its replacement, the personal independence payment); the industrial injuries disablement allowance; and cold weather payments.

Who can claim?

There are a number of provisions in the Act which determine who may claim the UC.

Single people or members of a couple together can make a claim. To qualify you will need to be at least 18 years of age and under the age that entitles you to the Pension Credit. In the case of couples, where one partner hits the Pension Credit age before the other, the pair must continue to claim the UC until both have reached the threshold for the Pension Credit.

What about income disregards and taper?

There are no changes to the regulations on capital as they apply to those on income support. In other words, people with savings above £16,000 will be excluded from the UC.

However, some income is to be disregarded. A disregard is the sum of money a person can earn before their benefit is gradually reduced or stopped altogether. The UC will see earnings disregards based on individual needs. For example: a couple with children will enjoy a higher disregard than a couple without children.

The disregards for the UC include the disability living allowance and the personal independence payment which replaces it in 2013. Other sources of income, such as workplace and personal pensions, will be taken into account when calculating any UC entitlement.

Different amounts will be disregarded from earnings to accommodate the circumstances of different individuals and families. The level of the disregards will be determined by future rules, but it is suggested by DWP that, initially, a couple will see the disregard set at £3,000 per household (or £4,250 per household if they have children); at £9,000 for a single parent; at £7,000 per household if the claimant or their partner is disabled; and at £700 for a single person without children.

The amount of earnings that can be disregarded will be curtailed according to the level of housing costs included in the UC. The intention is to reduce earnings disregards by one-and-a-half-times the claimant's eligible housing costs.

The rate at which benefits are reduced is measured by a taper rate. The pre-UC system employs a number of taper rates, some of which apply to gross earnings and some of which apply to net earnings. This makes it difficult for claimants to understand what effects an increase in earnings can have on their benefits.

The UC will have just the one taper rate of 65 per cent. That means earnings above the set disregard will be subtracted from UC benefits at a rate of 65 per cent (for every pound of additional income earned after tax). So claimants retain 35p in the pound for every pound above the disregard.

What will the UC pay?

Claims will be made on a household basis rather than on an individual basis. The sum awarded will be calculated according to the income and circumstances of all of the members of the household. The Government has committed itself to ensuring that no one, whose circumstances have not changed, will be worse off when they are transferred to the UC.

There will be a basic allowance with different rates for single people and couples.

As well as providing personal sums for individual claimants and for couples, the UC will offer extra amounts intended to cover children, paid on top of child benefit, and childcare, paid as a percentage of the costs of registered childcare and mirroring the childcare element of the working tax credit. There will be additional payments for disabled children.

Additional amounts will also be paid to those who have a limited physical ability to work, and to those who have regular and substantial caring responsibilities for someone with severe disabilities.

For anyone who rents their home, housing benefit will be worked out in roughly the same way that housing benefit is calculated. Except that, under the UC, the payment will go directly to the claimant rather than the landlord. For people with mortgages, there should be no changes to the way in which support is given in housing costs (with the proviso that mortgage support will only apply to those out of work).

The maximum claim will be limited by a cap based on median net earnings for a working family. It is thought the cap will be around £500 per week for April 2013.

There are, though, exceptions to the cap. These include; households in which someone is in receipt of the disability living allowance (or personal independence payment from 2013); people with a limited capacity for work; war widows; working families (probably 16 hours a week for single parents and 24 hours a week for couples with children); the newly unemployed.

How does this impact the self-employed?

Any self-employed person who applies for the UC may find themselves to be assumed to be on an income the equivalent to full-time earnings at the rate of the national minimum wage.

The self employed will be required to report their income after tax and NICs on a monthly basis, to the date of claim. So a person who claims UC on 15 June will report income every month to 14th of the month. Reporting of income is done online, as are other aspects of UC.

The income is reported on a cash basis, but losses (net cash outflows) are disregarded unless the business is in its start-up period of 12 months. Instead the minimum wage is substituted for any month in which the claimant reports income of lower than this amount. This is known as the minimum income floor.

This presents serious practical difficulties for all businesses, but particularly retail or other businesses carrying stock. When the business purchases stock but sells it in a subsequent month it is likely that the purchase will depress profits on a cash basis. The claimant would therefore be assessed based on minimum wage rates. When selling that stock in a subsequent period, there will be no cost of sales to set against the turnover, inflating reported profits.

Receiving payments

DWP will be in charge of administering the UC. It is intended that the vast majority of claims will be made and handled online. The UC will access the HM Revenue & Customs 'real-time' IT system to measure the level of earnings of any claimant. It is thought that payments of the UC will switch from fortnightly periods to monthly, and transactions will be fed directly into claimants' bank accounts.

National Insurance

The old system allows those entitled to income support, the jobseeker's allowance, and employment allowances to receive national insurance credits. The Government intends to investigate whether the UC will mean a similar eligibility in acquiring contributions to national insurance, though indications are that the principles of the previous regime will continue.

What are the conditions for claims?

The Government will be toughening up the conditions for benefit claimants. Every claimant will be expected to sign up to a commitment and will then be placed into a particular group depending on their circumstances and the mature of the claim.

These groups are: those with no work-related needs (such as disabilities, or caring responsibilities for children aged under one or for a severely disabled adult); those who will be asked to attend work-related interviews (such as single parents with a child aged over one but below a set schooling or pre-schooling age); those with a limited ability to return to work who will be asked to ready themselves for work by attending skills classes, or taking part in training or work placements; and those who will be required to look for work - sending in applications and registering with employment agencies - as they would be expected to do under the current jobseeker's allowance benefit.

Extra qualifying conditions can be set for every claimant in each of the groups.