Universal Credit, cliff edges and precipitous inclines: How earning more can leave low-income workers financially worse off

Dr Rita Griffiths is a Research Fellow at the University of Bath Institute for Policy Research (IPR). Dr Marsha Wood is a Research Associate at the Institute for Policy Research. This blog post is part of their work on the report 'Cliff edges and precipitous inclines: The interaction between Universal Credit and additional means-tested help for working claimants' which explores the interaction between Universal Credit (UC), earnings, ‘passported’ benefits and other means-tested help for working claimants. The research was funded by abrdn Financial Fairness Trust.

How much working people get to keep from gross earnings, and what they have left to spend on essential living costs once HMRC has deducted tax and national insurance, is known to influence the incentive to work and earn more, as well as people’s sense of fairness and financial well-being.  So how would you feel if, having paid your tax and NI, a further 55% of income was deducted from every additional £ of net earnings? Would it make you want to work longer or earn more?  55% is the proportion of Universal Credit that is lost, or ‘tapered’ away from entitlement, and that is intended to motivate claimants to earn more. For low-income people who may also qualify for additional help with living costs – such as reductions in council tax, utility bills, prescription charges or free school meals, for example - the trade-off between earning more and losing entitlement to that help can be starker still. Known as ‘cliff edges’, the extra take home pay may be worth less than the value of entitlements lost.

New research into working claimants on UC

Drawing on the findings of a qualitative research study exploring the experience of working claimants on Universal Credit (UC), we explored the interaction between earnings, ‘passported’ benefits and other means-tested help. These are income-based forms of financial and in-kind help with essential living costs that are administered and assessed separately from the main working-age benefits. This additional help is of increasing interest to politicians and policymakers due to the vital role the different schemes play in supporting low-income households. Also important to understand is the impact these schemes can have on work incentives when the help is withdrawn as earnings rise.

What the research found

While all participants had levels of earnings low enough to entitle them to UC, only in rare instances (such as the previous government’s Cost of Living payments) did UC receipt, of itself, automatically qualify them for additional help. Not only were application processes typically onerous and time-consuming, but many working claimants were ineligible for the help due to the very low earnings thresholds which applied to most of the schemes. Others had variable earnings which meant they dipped in and out of eligibility from one month to the next. Whether people know about, were entitled to, able to apply for and successfully awarded any help was a hit-and-miss lottery of postcodes, personal circumstances and happenchance. The schemes are also burdensome and costly for administering authorities to deliver, particularly when claimants’ income levels frequently change.

A particular concern was the sudden withdrawal of much relied-on sources of help when income rose above a certain level, leaving some people financially worse off. This is what happened to Sarah. When Sarah returned to work after maternity leave, she simultaneously lost entitlement to council tax reduction, free school meals, a school uniform grant and Healthy Start vouchers. As she explained:

“Last year I decided to go back to work and it just messed up everything … I don’t want to be on benefits, I do want to be working and off them... I had three letters from the council all at once, one was saying my eldest was no longer entitled to free school meals. Then the next letter said that we no longer get discount for our council tax. And then the third letter, they do a uniform grant every year, then they said that I earned too much to receive that. Oh, and then there was a fourth one saying that I no longer get the Healthy Start vouchers. It was absolutely ridiculous … So it’s not like I had any extra money from working.”

Although both Sarah and her husband were working, the cumulative effect of losing these different sources of help all at once meant that the family was worse off when she was in work than when she was not. Reluctantly, she gave up her job.

“When I put all that together” she said, “it worked out that we’d have more outgoings than we do incoming, with me being in work... when I was working, it just wasn’t doable … It just works out better if I’m not in work, for the minute anyway ... So I’ve just decided … I’m going to wait until my little one’s in full-time [school].”

Other difficulties arose for people whose monthly earnings varied. Automated linkages between UC and some council tax reduction schemes meant that eligibility for help, and liability for council tax, therefore, could fluctuate from one month to the next. As Zoe explained:

“It literally fluctuates every single month …  My wages are pretty steady … but it only takes an hour or two’s overtime for me to lose it and they have to readjust... If I didn’t work at all, I would have full council tax [support], but because I work … it changes each month.”

Even a small increase or decrease in earnings of just a few pounds could generate a new council tax demand, statement and monthly payment regime. Finding the money to pay council tax was hard enough, but a liability that varied each month was harder still to keep on top of.  She said,

“I can genuinely tell you, I never know from one month to the next what I’m paying! I just get a letter through the door, and I ring them up and I say, how much do I owe? … It’s really, really confusing and … really difficult to budget … It literally fluctuates every single month.”

The different entitlement rules and income thresholds of the disparate schemes also made it hard for claimants to reliably estimate the financial impact that working longer and earning more would have.  Evidence from the research suggests that the uncertainty and potential loss of household income caused by ‘cliff edges’ as earnings rose, discouraged some people from working longer hours or earning more.

What can be done?

With little strategic overview to date in terms of the design and role of the various schemes, our main recommendation is for a comprehensive review to be conducted of the additional means-tested benefits, entitlements and discounts that sit outside Universal Credit, exploring their interaction with earnings and their effects on work incentives and employment behaviours. This should be done as part of the review into UC announced in the Labour Party manifesto. A key priority would be to increase and standardise the low and variable earning thresholds applying to the disparate schemes. To remove the disincentive effects of ‘cliff edges’ on work decisions, fairer and more consistent methods are also needed for withdrawing support as earnings rise. Increasing take-up through smarter signposting and greater automation in the administration and payment of entitlements, is another priority. Without such improvements, the risk is that levels of household income in working families will fall further, countering UC’s pledge to ‘make work pay’ and potentially compromising the Government’s new child poverty strategy.