Written evidence from Entitledto CLP0057

About entitledto

entitledto is a leading provider of online benefit calculation software in the UK. We believe that everyone living in the UK should be able to understand his or her legitimate benefit entitlements and our mission is to help everyone to access the benefits they're entitled to.

We have been operating since 2000, and provide our calculators not just through our web site www.entitledto.co.uk but also to over 200 organisations including local authorities, housing associations, leading charities as well as other websites that choose to provide benefit calculators to support their users understand their entitlements. Over 6 million benefit checks were completed on our calculators in 2022/23.

We are submitting evidence to this inquiry because we believe the cost of living support payments can and have served as a powerful mechanism to promote benefits take-up. While the cost of living support payments continue it is important that DWP make the most of this opportunity to get more people to claim their underlying benefit entitlement. Even so, the conclusions of previous reports into the issue remain true: the administrative advantages of passporting benefits are offset, and potentially outweighed, by the pernicious effect of creating a cliff edge.

 

Unfairness of the cliff edge

The most visible problem with the cliff edge is the unfairness it creates between households who are otherwise (more or less) identical but one qualifies for the cost of living support payment and the other doesn’t. Rather than the amount of help reducing gradually, at the point where the benefit award is reduced to zero there is a hard line between households that are eligible and those that are ineligible for a payment.

At its simplest, this unfairness is experienced by households earning a few pounds above the eligibility threshold for benefits. While some of these ineligible households will not be claiming means-tested benefits, many will in fact have a live Universal Credit claim but with an award rate of zero (a ‘nil award’), perhaps because of a recent increase in their earnings.

In Universal Credit there is a more severe unfairness that affects claimants who are paid on a weekly basis (or any non-standard payment cycle). Because of the way Universal Credit’s assessment periods work, the amount of earnings taken into account varies from one month to the next depending on how many pay days fall in that month. So even if someone gets the same amount of earnings every week their Universal Credit will be reduced in ‘5 week’ months. For some the difference is enough to mean they get a ‘nil award’ in those months. If by chance their ‘5 week’ month coincides with the assessment date for the cost of living support payment then they will miss out.

The IFS’ evidence to the Treasury select committee on 25 April 2023[i] estimated that there are around 825,000 households who are affected by the cliff edge, in that they will end up worse-off than if they had earned less and qualified for (some) benefits and the cost of living support payment. This kind of effect is inevitable whenever eligibility is passported from means-tested benefits.

 

Incentive effects of the cliff edge

The cliff edge problem has the potential to affect the behaviour of households, skewing their choices about work and earnings, and potentially also their financial choices, in unintended ways.

One issue is the labour mark effect of the cliff edge. Consider a Universal Credit claimant earning close to the point where their award is reduced to zero, who will only receive a few pounds a week in benefits but also gets the cost of living support payments. The existence of the cliff edge means there is no incentive to earn more until their earnings move well above the eligibility threshold, to the point where the additional net earnings they receive are greater than the value of the lost passported entitlement.

The cliff edge issue associated with passported benefits is really an extreme version of the more pervasive issue of high withdrawal rates in the benefits and tax system. A recent reports from the Resolution Foundation[ii] looked at how the interaction between the Child Benefit high income charge and higher-rate income tax increases marginal tax rates for some households. The precise calculation varies with the number of children in the household, but with 2 children the effective tax rates is 63%.  Some of the estimated 50,000 households who also have entitlement to Universal Credit at these earning levels will only qualify by a marginal amount. For such households the loss of £100 a month in cost of living support payments would need a minimum increase of £270 in gross monthly earnings to compensate (i.e. in order for their net monthly income to increase at all).  

The other effect of the cliff edge is on the financial behaviour of households, though whether or not it has any effect in practice is unknown. The issue is that pension contributions can be used to circumvent the cliff edge problem, because they reduce net earnings and hence the income used in the means-test. This reflects the principle behind Universal Credit that net earnings data is supplied automatically by employers via PAYE, so it is more-or-less obliged to use the same rules as the tax system, where pension contributions are deducted in full before a calculation is made.

 

Take-up and the cliff edge

An unexpected positive consequence of the cliff edge is that the cost of living support payments can be used to promote benefit take-up.

For one, like any passported benefit the cost of living support payments make eligible households more likely to claim benefits, as the value of their claim is now higher. Even if they only qualify for a few pounds a month of Universal Credit they will also qualify for hundreds of pounds worth of cost of living support payments. In addition, because they have a qualification date the payments act as a natural ‘call to action’, rewarding people claiming benefits by a certain date.

entitledto believes the DWP should launch a benefits take-up campaign to accompany future cost of living support payments, and we are pleased it has already done so for pensioners[iii] .But why no campaign to promote Universal Credit take-up? Rightly or not, concern about the incentive effects of the cliff edge may have meant DWP confining the take-up campaign to pensioners.

To make a take-up campaign work for Universal Credit would need a small administrative change. At the moment DWP does not announce in advance the qualifying day for getting a cost of living support payment but instead only announces the date after the event. We would like to see DWP pre-announcing the qualifying date, so that it also acts as a ‘call to action’ for people of working-age to check their benefits entitlements, in spite of any effect of the cliff edge on claimants’ work or financial decisions.

 

Conclusion

The cliff edge issue is by no means new, even if its existence is frequently ignored in policy development. For instance, the issue was recognised in “Universal Credit: Welfare that Works”[iv], published a few months after the coalition government took office. It proposed putting a value on each passported entitlement and then “replacing the current rules with an income or earnings-related system that gradually withdraws entitlements to prevent all passported benefits being withdrawn at the same time.” It never happened.

The cliff edge was also looked at in great detail by the Social Security Advisory Committee in the run up to Universal Credit’s introduction[v]. They concluded that it was a knotty problem which, in general, was best avoided through making provision universal (as happened with school meals for Key Stage 1) or if at all possible through increasing benefit rates.

In many ways the question about the cost of living support payments is why they were invented at all. All evidence suggests that adding £100 a month to the rate of Universal Credit (and other benefits) for 9 months (or £50 for 18 months) would be just as effective in providing targeted help to households and would entirely avoid the cliff edge issue.

In choosing to create the cliff edge problem it seems that DWP are wary of repeating the furore that followed the withdrawal of the £20 weekly Covid-19 increase to Universal Credit rates in November 2021, so much so that they have chosen to ignore their own advice to do the precise opposite. Sometimes, politics trumps sensible policy making.

 

May 2023


[i] https://committees.parliament.uk/oralevidence/13064/html/ (Q18)

[ii] https://www.resolutionfoundation.org/app/uploads/2022/12/Inconsistent-Incentives.pdf

[iii] https://www.gov.uk/government/news/ten-days-to-claim-pension-credit-and-qualify-for-301-cost-of-living-payment

[iv] https://www.gov.uk/government/publications/universal-credit-welfare-that-works

[v] https://www.gov.uk/government/publications/universal-credit-the-impact-on-passported-benefits