Universal Credit change to give 1.2m households £420 a year boost

Over 1 million of the UK's poorest households are set to benefit from a change to universal credit, which will see them £420 better off annually on average. This change is expected to be announced in next week's budget.

The move is primarily aimed at assisting the most financially vulnerable families and is seen as an attempt by ministers to deflect criticism over decisions to cut winter fuel allowance for most pensioners and maintain the two-child benefit cap. "It’s a downpayment on poverty reduction. It is unacceptable that people are in this kind of deep poverty, and this is a small victory for people in deep poverty," a Whitehall source told the Guardian.

The measure, known as the Fair Repayment Rate, is anticipated to be implemented next April. It will limit the amount that can be deducted from benefit payments each month to repay short-term loans and debts.

Save the Children UK welcomed the move, describing the current level of benefit deductions borne by the poorest families as unfair and unsustainable. Ruth Talbot, Save the Children UK’s policy and advocacy adviser, said: "It is bold thinking from ministers and we know it will have a significant impact for families and put more money in their pockets for food, toys, clothes and books."

The initiative would cap the level of monthly deductions to individuals’ universal credit standard allowance at 15%, rather than the current 25%. It would assist 1.2 million households, including 700,000 families with children, who now see between about a sixth and a quarter of their monthly unive.

Universal credit payments may see less being clawed back. Automatically deducted benefit deductions cover various debts including DWP benefit advances, past child tax credit overpayments, and other arrears like rent, council tax, as well as water and utility bills.

By making this change, claimants could end up repaying these debts over extended periods, though the precise cost to the Treasury remains unclear. Earlier proposals for a more lenient scheme by Trussell were estimated at adding £3bn to the public sector net debt.

Save the Children has calculated that single parents could benefit from up to £39 extra per month of their universal credit payment with this measure, while two-parent households might see up to £62. In certain UK regions, two-thirds of children in families on universal credit find themselves further entrenched in poverty due to these deductions.

Helen Barnard, Trussell's policy director, acknowledged: "This would be a positive first step to tackling the appalling levels of hardship our community of food banks see every day. On its own, however, this is unlikely to significantly reduce the numbers of people forced to turn to food banks to survive."

Trussell's research found that most families affected by universal credit deductions had endured periods without food, heating, or adequate clothing in the past six months due to insufficient income. Despite these steps, there is a sense of disappointment that officials haven't taken bolder action like setting a minimum protected level.

The potential freezing of working-age benefits next year could save the Treasury over £4 billion, but at a "terrible cost" of pushing an additional 400,000 children into poverty, according to a think tank. The welfare secretary, Liz Kendall, co-chair of the government’s child poverty strategy, has reportedly been advocating for the introduction of the Fair Repayment Rate to provide some relief to low-income families severely affected by the cost of living crisis.

Families with the lowest incomes typically pay more for food and energy than wealthier households, with their daily bills consuming a larger portion of their budgets, leaving them more vulnerable to problem debt or going without food and heating. Latest figures reveal that there were 4.3 million children in relative poverty in 2022-23, equivalent to one in three of all UK children, and an increase of 700,000 since 2011.

Campaigners are particularly concerned about the rising numbers of children experiencing extreme levels of poverty or destitution. New research by the Joseph Rowntree Foundation estimates that the UK’s poorest families are up to £700 a year worse off than they were five years ago.

It predicted that living standards for the poorest third are due to fall over the next five years, widening income inequalities, unless the government takes action. Ministers unveiled the government’s 10-year child poverty strategy framework this week, ahead of a more detailed plan of action to be published in the spring.

"Tackling child poverty is both a moral imperative and crucial to building a stronger society and economy," the report stated.

The government has dismissed calls to scrap the two-child benefit limit, despite significant pressure from campaigners and backbenchers. They argue that abolishing the Tory-designed policy is financially unfeasible. The government has also faced criticism for reductions to the winter fuel allowance.

In a separate budget announcement, the Treasury revealed an increase in social housing funding, with an extra £500m allocated to the government’s affordable homes programme.

Furthermore, housing associations will be granted permission to set rents for five years, providing them with more stability to invest in additional housing. They will be permitted to increase rent by the consumer price index level of inflation plus 1% each year.

The BBC reported that the chancellor plans to raise the amount employers pay in national insurance to generate £20bn for public services. It's also expected that Reeves will lower the threshold for when employers begin paying the tax.