DWP overhaul of Universal Credit could boost work incentives for millions

Labour has been urged to make major changes to Universal Credit so more claimants are motivated to work

Millions of people could get a greater incentive to work and boost their pay if new plans to overhaul Universal Credit are adopted by the government. Labour has promised to address soaring levels of economic inactivity with its Back to Work Plan but analysts say the benefits system needs to be reformed to truly make work pay.

There are currently almost seven million people claiming Universal Credit, with 2.6 million (38 per cent) in employment and 4.3 million (62 per cent) out of work. Local figures for Birmingham show there are 206,000 people on Universal Credit with 62,000 (30 per cent) working and the other 144,000 (70 per cent) not in employment.

The Institute for Policy Research says changes to Universal Credit work rules are needed to make work a more attractive option. It points out that a recent rise in the Administrative Earnings Threshold (AET) - the minimum wage a claimant is required to earn if they are fit for work - has meant people may no longer qualify for other means-tested support such as free school meals, free prescriptions and council tax support, leaving them financially worse off. The AET is currently £892 a month for a single claimant and £1,437 jointly for a couple.

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The IPR's new report says the DWP should make changes to Universal Credit such as reducing the deduction from a claimant's benefits for the amount they earn. At the moment, this 'taper rate' means Universal Credit is reduced by 55p for every £1 in earnings.

Some people have a work allowance before this is applied. If you get help with housing costs, your benefits are only reduced when your wages reach £404 a month and if you don't get help with housing costs, the reduction doesn't begin until your wages hit £673. The IPR says these allowances should be increased and applied to all claimants.

The report also calls for a review of other means-tested support such as free school meals so that eligibility keeps pace with Universal Credit earnings thresholds rather than excluding people who boost their wages.

The IPR's new policy brief, Cliff Edges and Precipitous Inclines, says: "There is a need to simplify and streamline eligibility and application rules to increase take-up by reducing complexity and with a view to more explicitly supporting work incentives. The different means tests need to be better aligned and the low and variable earning thresholds applying to the different schemes need to be increased. Fairer and more consistent methods are also needed for withdrawing support as earnings rise.

"Consideration should be given to abolishing earnings limits for certain schemes, such as those targeted on families with young children, as has been done in Scotland. To ensure entitlements keep pace with rising costs, a system of annual uprating pegged to inflation or another agreed metric needs to be introduced.

"Reducing the UC taper, increasing work allowances and reinstating work allowances for all UC claimants would also help to compensate for the loss of entitlement to other means-tested help as people move into work and earnings rise."

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