The economics of Universal Credit

Ferret and Gareth Morgan

  1. Ferret, founded originally as a Citizens’ Advice Bureau project in 1981, works in the area of welfare benefits, producing advice and assessment systems, training in benefits law and practice and carries out modelling and consultancy in areas of social welfare law.
  2. Gareth Morgan focuses on assessing the impacts of changes to the benefits system, in particular, the ways in which the broader tax and benefits systems interact with citizens’ day to day circumstances, their financial decisions and options and the resultant effects. His Blog has been following and commenting on the development of Universal Credit since the publication of the Welfare Reform Bill in February 2011. He is also chair of Welfare Rights Advisers Cymru, the umbrella body for benefits advisers in Wales and a committee member of the National Association of Welfare Rights Advisers.


  1. Universal Credit is a very different creature to that which was promised at its inception. It was promoted as an easy to understand, simpler development from the overly complex system of benefits in place at the time.
  2. With the exception of the government and the DWP, few people would argue that it has met that ambition.
  3. Rather than offering a broad critique of the current state of Universal Credit, I will provide some more detailed analyses of three issues demonstrating the failure of these aims. Although looking at different rules and outcomes within the benefit, the examples are united by their complexity and lack of justification.
  4. The areas are

Monthly assessment period

  1. Universal Credit moved from the traditional weekly basis of assessment of means tested benefits, often paid fortnightly, to a monthly basis. The intention behind this was to reflect what the government saw as the real pattern of earnings and expenditure for those in work.
  2. Universal Credit focuses on encouraging personal responsibility. In line with this approach and the need for consistency with the real-time earnings approach that we are proposing, we are considering whether the period of the assessment and the frequency of payments should be monthly. About 75 per cent of all earnings are paid monthly, including most of those in the lower-earnings brackets. Rent and other major household bills are also usually paid monthly, rather than weekly.[1]
  3. the fact is that neither of these pay cycles are uncommon, the last working day of the month is the most popular pay day for monthly pay with 38.6% of earnings paid on that day, while 24.6% of employers pay some employees weekly, commonly on Friday. (CIPP Payslip Statistics Comparison 2008 – 2016).
  4. The consequence is that, for many claimants, there may be different numbers of paydays in each Universal Credit period. That means that there will be different numbers of paydays used in the Universal Credit calculation in that month. For the person paid monthly, there may be one, two or no paydays included, while for the weekly pay, it will either be four or five.
  5. Here is an example[2] of a couple who both work on the 2019/20 National Minimum Wage level of £8.21 an hour. One works for 35 hours a week, paid monthly, and the other works for 10 hours a week paid weekly. They have two children and pay rent to a social landlord of £150 a week.
  6. The full-time worker is paid £1116.31 a month net and the part-time worker earns £355.77 a month net. Their rent works out to £650 a month. Based on these figures, they would be entitled to £907.70 Universal Credit every month.
  7. That would leave them with £1,779.78 after paying their rent. Having consistent income and outgoings would make their budgeting and planning much easier.
  8. But despite having consistent earnings they do not have consistent income, because their Universal Credit will vary month by month. On top of this, the amount of rent that they must pay within each Universal Credit month may also differ from month-to-month, as more rent days may fall within the period. Figure 1 below shows what their actual disposable income after rent will be month by month for the next two years.

Figure 1

  1. Their income, from earnings and Universal Credit after paying rent due in that period will vary by up to £1,458.27 a month.  Table 1, below, shows the detail of the number of relevant days and amounts over 24 monthly assessment periods.



Table 1




  1. In some months they will have £2,483.05 left after paying their rent while, in other months, it could be as low as £1,024.78. Universal Credit has taken a family with steady consistent work and earnings and imposed what looks like a set of random variations upon them. It isn’t random, it is a deliberate consequence of the flawed design of Universal Credit. Table 1 shows why this happens.
  2. The monthly earner is affected because the last banking day of the month is very close to the assessment date of Universal Credit. This means that there could sometimes be one payday in the assessment period, sometimes two and sometimes none. The pattern appears irregular because of the number of days in a month and the effect, sometimes, of bank holidays, which differ between England and Wales, Scotland and Northern Ireland.
  3. The weekly earner is affected because sometimes there will be five paydays within the Universal Credit month instead of the normal four. The pattern is predictable but will depend upon the start date of the assessment period.
  4. Some earnings cycles may have other effects such as taking people above, or below, thresholds such as the benefit cap in different periods.
  5. A similar pattern applies to weekly rents, where sometimes there will be five days when rent is due within the assessment period and sometimes four.
  6. It must be remembered that if Universal Credit entitlement stops in an assessment period then there are additional consequences. Passported benefits and entitlements will also stop and Universal Credit must be reclaimed in the following month, as it does not restart automatically as in the pilot scheme, and the complex surplus earnings rules may apply to reduce future months benefits.
  7. An increasing number of social landlords are moving their rent cycles towards a four weekly or monthly basis. They are doing this to help with administrative costs as well as in the belief that moving closer to the Universal Credit cycle will help their tenants budget.
  8. Unfortunately, this may not be the case. For those tenants in a situation, like this example, this may make budgeting as difficult, as shown in figure 2 below.

Figure 2

  1. This demonstrates a four weekly rent cycle where the effect is that sometimes there will be four weekly rent amounts to meet, and sometimes eight, and an assessment period. In the example here, that means in some months the household will still have £2,483.05 left after paying their rent, but it could, again be as low as £1,024.78, although in a different pattern.
  2. Many private landlords, and some social landlords, charge their rent on a monthly basis and commonly, where rent is taken by direct debit, this may be due on the last banking day of the month. If the Universal Credit assessment period also falls at the end of a month, then that can mean one, two or no rent payment liabilities within an assessment period.

  3. Figure 3 below shows the effect of that where, in this example, in some months the household has £3,083.05 left and in other months £324.78.

Figure 3

  1. One of the promised results of Universal Credit was that “Universal Credit is a single system supporting those in and out of work. Hence, as people’s earnings increase or decrease, their Universal Credit amount will adjust smoothly to reflect this[3] . Far from making irregular earnings smoother, Universal Credit takes regular earnings, and outgoings, and turns them into irregular income.


Marginal deduction rates and National Living Wage


  1. So Universal Credit sweeps away perverse risks, barriers to work, and underlying complexity, to improve incentives. All of which clears the way to focus effort on finding work, instead of calculating whether a particular job will be beneficial.”[4]. Universal Credit was intended to make work pay, and to encourage people to work more, using a mixture of carrot and stick.
  2. The government has been very keen to point out its generosity to low earners recently
  1. These elements, welcome though they are, have all been presented as separate improvements to the system and without any mention, let alone emphasis, of the associated deductions.
  2. Increases in National Living Wage and in National Insurance and tax thresholds increase, as the government points out, take-home pay. Increased take-home pay, however, in means tested benefits such as Universal Credit also means a reduction in benefit. The increase in work allowance, although still not approaching the original levels in the scheme, is welcome, particularly for first earners in households.
  3. This combination of giving with one hand, and taking back with the other, makes understanding the real gains of working or increasing pay hard to understand. Many people think only of the tax and national insurance impacts on extra earnings, without considering the overall impact of different elements. Figure 4 below shows the very different marginal deduction rates, for those working at the 2020/2021 National Living Wage hourly rates for different hours of work.

Figure 4

Figure 5

  1. For those Universal Credit claimants who have no work allowances, because they are neither incapacitated nor have children, the 63% deduction taper applies to all net earnings. Those with work allowances at the lower rate, because there are housing costs included in the Universal Credit assessment, or at the higher rate see deductions beginning well before National Insurance, and then tax, kick-in for those not on benefits.
  2. If we look at the step change in marginal deduction rates, hour by hour, at National Living Wage levels, the incentives for each step are likely to be even harder for workers and claimants to understand.
  3. Figure 5 shows the hourly earnings at which the lower and higher work allowances, National Insurance and PAYE income tax begin to affect earnings. Workers may see a very different gain in net income at different levels of hourly work, for each extra hour worked.
  4. Assessing the year-on-year benefits, for those working at National Living Wage rates, in 2019 and in 2020, takes account of the increased hourly rate and the increased thresholds of tax and National Insurance, to produce the gains shown in figure 6, without considering inflation.

Figure 6

  1. Universal Credit is not the only deduction that low earners are likely to face. Many will also find themselves entitled to Council Tax Reduction and face an additional deduction from that for their increased earnings, giving a higher MDR.
  2. It should not be forgotten that the beneficiary of these higher marginal deduction rates is the government itself. For every extra pound an employer pays to a worker claiming Universal Credit and earning over £12,500 a year then, as well as about 75p going to the government through reduction in Universal Credit payments together with additional tax and National Insurance, they will be paying 13.8% more employers National Insurance contributions. It can be argued that the National Living Wage increase is, in reality, a stealth tax on employers.

Mixed Age Couples

  1. People used to be able to get Pension Credit when the claimant, or the oldest person in a couple, reached 60. That was because it was the age when women could get their state pension. As the state pension age has increased, in order to equalise men and women's qualifying age to 65, the Pension Credit age increased in line, and continues to increase, as the state pension age goes up, increasing to 66 by October 2020, and to 67 by 2028.
  2. At the same time as the government introduced changes to make it take longer to get old, in benefit terms, it introduced powers in the Welfare Reform Act 2012 to change the rules for couples so that entitlement was to be based on the age of the youngest partner. The powers were not used until 2019 when a written announcement was made, the night before the Brexit vote, bringing the rule into force in May 2019. These couples, with one under and one over state pension age, are called Mixed Age Couples and the rules can be found in the snappily titled ‘The Welfare Reform Act 2012 (Commencement No. 31 and Savings and Transitional Provisions and Commencement No. 21 and 23 and Transitional and Transitory Provisions (Amendment)) Order 2019’.
  3. For couples containing someone aged 60 to 69, the median age difference between the older and the younger partner is 3 years and 7 months[5]. For couples, dependent upon benefits, that is the length of time that they will now have to remain on the much lower levels of working age benefits. The differences are shown in table 2 below.

Table 2

  1. While mixed age couples already receiving Pension Credit are not moved onto working age benefits, those claiming for the first time or where the older partner reaches state pension age are subject to the new rules. The reduction in benefit, for those with the average age difference, will be substantial. The £140.44 weekly difference in the couple rates (£7,300 a year) amounts to about £27,170 over the period until the younger person partner reaches state pension age. By the time they reach the current state pension age, that may, of course, have risen for them, increasing the effect.
  2. A single person, already receiving Pension Credit, who forms a new couple with a partner under state pension age will find the new benefit claim to be assessed under the working age rules. That means that, while a single person, they had been assessed as needing £167.25 a week, when becoming a couple their needs are now assessed as £114.81 a week. That might be considered as taking the old saying ‘two can live as cheaply as one’ to an extreme.
  3. Had both partners been receiving benefits previously, then the effect is, of course, even larger. A single pensioner plus a single non-pensioner would have total needs assessed as £240.39 a week, well over twice the joint assessment.
  4. It is unlikely that the pensioner, at least, would have no income at all. If they had a full old-state pension of £129.20 then their Guarantee Pension Credit entitlement, as a single person, would be £38.05 a week. As a new couple they would have no entitlement to Universal Credit as their income would be too high, based solely on the state retirement pension, unless they have additional needs such as rent.
  5. These figures might be expected to be dissuasive where two people were considering forming a joint household. Further, they might encourage existing couples to separate into two households.
  6. If the intention of the measure was to reduce expenditure on benefits, then that would not be helped by the costs of supporting two households. Single people, over 35, and couples are both entitled to housing support at a single bedroom rate. A random choice, from the list of local Housing allowance rates, produced a one-bedroom rate in of £113.03 a week.
  7. Table 3, below, compares three possible situations. The first is the situation of couple affected by the mixed age rules, only income being the state retirement pension and the housing costs being the LHA in Swindon. The second shows the situation where the couple have a Pension Credit entitlement and the third shows the situation where the couple have separated or not formed a joint household.

Table 3

  1. It shows clearly that if the effect of these harsh changes is to place such financial pressure on people that they feel they must separate, or maintain separate households then the policy may well backfire.
  2. As well as the additional financial support that would be paid to 2 households, a one-bedroom home would be unavailable for use by anyone else.
  3. These direct financial losses are not the only consequence of moving onto working age benefits. Any capital held by the couple may put them at risk of losing benefits entirely, if over £16,000, or having a much higher notional income rate for lower sums. Making use of pension savings, while perhaps forced upon couples because of the new rules, may also have more impact than would have been the case on Pension Credit.


  1. Universal Credit was broadly welcomed initially, as it promised a simpler, more integrated, more easily delivered benefits system. It promised a better use of technology, with few perils - “This would involve an IT development of moderate scale, which the Department for Work and Pensions and its suppliers are confident of handling within budget and timescale.”[6]it has instead delivered a more complex, contradictory and administratively dysfunctional system. It began with unrealistic ambitions and untested assumptions, and, on those has created a system which is unable to provide support for many of those in need.
  2. It still pretends to be simple and understandable, and because of that, has encouraged the dismantling of many of the support services that those affected by the benefit changes need. “It is anticipated that the demand for services will change; some will decline, (for example the extensive advisory service needed to serve the complicated network of existing benefits)”[7]
  3. The three areas touched on in this note, could easily be added to, with many others. I hope these will contribute to the committee’s investigation.


24 February 2020



[1] Universal Credit: welfare that works, White Paper DWP November 2010

[2] All calculations, tables and charts are produced by Ferret’s modelling and assessment applications from the example scenarios described.

[3] Universal Credit: welfare that works. DWP White Paper 2010

[4] Universal Credit at Work, DWP October 2014

[5] Changes to pension credit rules for 'mixed age couples' mean a large number have to wait many years before they can claim, IFS July 2019

[6] Universal Credit: welfare that works. DWP White Paper November 2010.

[7] Universal Credit - Local Support Services Framework, DWP, February 2013