The economics of Universal Credit

About Policy in Practice

  1. Policy in Practice was founded by one of the architects of Universal Credit. Our mission is to make the welfare system simpler and easier for people to navigate through our policy research, benefit calculation software and advanced analytics for the public sector. 10,000 people each day use our benefit calculator to navigate the benefit system. We work with more than 100 councils to identify and engage vulnerable households and track the impacts of policy (including Universal Credit). Our research work has been supported by the Joseph Rowntree Foundation, Welsh Government, Local Government Association, Trust for London and the Cabinet Office among others.
  2. We welcome this call for evidence as Universal Credit (UC) replaces the legacy benefit system for people across the UK. This submission is based on our own analysis, alongside feedback and recommendations from the frontline organisations with work with.


  1. We would be pleased to provide further assistance or evidence to the committee on our proposed solutions to the key challenges Universal Credit faces, or to the opportunities it offers. It is a better platform on which to build than the legacy system it replaces and can become a benefit system fit for the future.


  1. The core aims of Universal Credit, to simplify the benefit system and improve work incentives, had broad cross-party support in 2012.


  1. The success of Universal Credit in its current form is mixed. This variety of experience is primarily due to the diverse needs of a wide range of claimants. For working claimants previously in receipt of tax credits there is a high rate of approval of Universal Credit. For some other groups, the new benefit is problematic.


  1. Groups struggling with Universal Credit include those with irregular earnings, vulnerable households with barriers to managing an online claim, households with insufficient resources to manage the five week wait for first payment, and those struggling with ongoing reductions in support due to repayment of advances. Many of the issues preventing success of Universal Credit can be overcome given sufficient will and resources.


  1. Many of the current problems with Universal Credit are self-inflicted. These include the introduction of a five-week wait, an inflexible approach to payments and debts, and a highly risk averse approach to data sharing. There have been missed opportunities to make changes to Universal Credit that better support people who are struggling. There have also been missed opportunities to simplify the benefit system as a whole, specifically by rolling council tax support and free school meals into Universal Credit.


  1. Councils currently use administrative data to identify people who are struggling under the legacy system, and who are likely to struggle with Universal Credit. They are supported to claim council tax support, free school meals, food vouchers and social tariffs for their utility bills. These proactive approaches should be applied nationally to households likely to struggle with the transition to Universal Credit.


  1. When evaluating the impact of Universal Credit, the Committee should recognise that Universal Credit is being rolled out against the backdrop of austerity, and that a fair comparison of its challenges need to be set against the challenges faced by those navigating the legacy system. With this in mind, Universal Credit is clearly a better platform on which to build than the legacy system it replaces.


  1. Reduced benefit support has been implemented through freezing benefit rates for working-age claimants and introducing cost-saving measures such as the benefit cap, the freeze in LHA rates, the bedroom tax, and continues through the two-child limit. These measures are often considered as part of Universal Credit but, in fact, apply equally to legacy benefits. Even so, the imposition of austerity measures alongside Universal Credit rollout has had a significant effect on the ability of Universal Credit claimants to manage on the new benefit and caused reputational damage.


  1. This submission offers solutions to some of the key challenges to the success of Universal Credit. These include proposals to mitigate the five-week wait and the budgeting difficulties caused by the interaction of Universal Credit and fluctuating earnings. We also raise serious concerns about a lack of support and loss of focus toward those unable to work. Despite its serious implementation challenges, often exacerbated by austerity, we believe Universal Credit’s current flaws can be resolved.

How well has Universal Credit met its original objectives, and were these the right ones?


  1. The original objectives of Universal Credit, to simplify the benefit system and to make work pay remain worthwhile objectives and core guiding principles.

To simplify the benefits system


  1. Simplicity in policy development is often undervalued. The legacy system segregated in-work and housing support from DWP administered benefits. This introduced uncertainty for claimants (and advisors) when their circumstances changed. People would often fail to claim all of the benefits to which they were eligible. The legacy system required claimants and advisors to split their administration efforts across three separate agencies, each with different entitlement provisions and claim processes.


  1. Universal Credit responds to these issues and simplifies the system in a number of ways:

Against this backdrop, Universal Credit is undoubtedly simpler than the legacy system.

  1. However, there have also been missed opportunities around simplification. Particularly relating to other support that falls outside Universal Credit.
  1. Beyond the mechanics of support levels, there have also been missed opportunities to simplify both the claim processes and payment systems that support Universal Credit. UC has the potential to become the hub for means-tested support across government, with the underlying data shared securely to support proactive and purposeful interventions
  1. Our work with frontline organisations has also highlighted that, for some claimants, the online claim process is seen as long, complex, and a barrier to claiming Universal Credit. This is most likely to be the case for those that have barriers to making and maintaining an online claim and those lacking the required documentation. For example, those with insufficient literacy skills, lack of access to the required technology, addiction, recently homeless, or where English is not a first language. For these claimants, claiming and managing a Universal Credit claim can be more complex than the more supportive face-to-face options available under legacy systems.
  2. Two recent research projects undertaken by Policy and Practice illustrate claim barriers: Universal Claims and Supported Housing (on behalf of four leading supported housing providers), and the The implication of Universal Credit for People Living with Motor Neurone Disease (on behalf of the Motor Neurone Disease Association). One conclusion common to both reports is that the claim process and claim management could be simplified through better support. In particular, through ensuring that the social security system explicitly recognises the role of those supporting claimants (e.g. support workers or medical professionals) and that the DWP develop better communication processes, specifically to enable the claimant to give time-limited access to third-party advocates to support claims administration. 

To make work pay

  1. For most claimants Universal Credit offers a better route to ensuring work pays than through legacy benefits. Under legacy benefits, rules governing the number of working hours that confer eligibility to a benefit meant that for some claimants increased earnings did not translate into increased household income. In addition, the requirement to move benefits from out-of-work provision to in-work provision acted as a disincentive to increase working hours.
  2. Under Universal Credit, a single taper (the amount support reduces as earnings rise), combined with higher work allowances (the amount that can be earned before benefit is affected), means that claimants of Universal Credit retain a higher proportion of earned income. Policy in Practice’s data analysis (following the Autumn 2018 budget) showed that employed households were likely to be £39/month better off under Universal Credit than under legacy benefits.
  3. Nevertheless, there are still concerns that for specific groups of claimants the move to work may not always be financially beneficial:

Economic impact and fiscal entrenchment

  1. The benefit system has become less generous as Universal Credit has rolled out. Of particular note are:
  1. Cost-saving measures have had a significant impact on households reliant on benefits for support. Our evidence to the Work and Pensions Select Committee showed that the two child limit alone would push just under a quarter of a million additional households into poverty. Recent research undertaken by Policy in Practice for the Local Government Association on the impact of the freeze in the Local Housing Allowance, showed that only 13% of private tenancies are affordable to households in receipt of means-tested benefits and for every 1,000 households with rent above their LHA, 44 will incur often significant homelessness support costs to the council.
  2. In the minds of customers and the media, these changes (that also affect legacy benefits) are related to Universal Credit. This is partially due to changes of circumstances that trigger a move to Universal Credit, also triggering the ending of any transitional support (e.g. from removal of the ESA WRAG group addition).
  3. As the welfare state has become less generous, people have less capacity to cope with the changes that Universal Credit brings. Councils and the advice sector have less money to support people with these changes. If the benefit freeze had not occured, fewer households would have been pushed into crisis through repayment of advances or through small changes in benefit rates. The erosion of the welfare safety net is the key reason for Universal Credit's reputational problems.

Which claimants have benefited most from the Universal Credit reforms and which have lost out?


  1. Universal Credit has been designed with work at its heart. Those gaining financial support tend to be working households. This is due to the combined effect of a higher retention of earnings (claimants retain 37% of their earnings) and the application of work allowances (the amount of earnings that households can retain with no reduction in their Universal Credit award).  The 2018 budget aimed additional financing of Universal Credit solely at those in work. Following this budget, employed households saw an average £38/month increase in support compared to legacy benefits. This increase in support to working households is to be welcomed.
  2. Policy in Practice’s analysis of support levels (following the Autumn budget 2018), showed the following groups are most likely to lose support as they move to Universal Credit:

How has the world of work changed since the introduction of Universal Credit? Does Universal Credit’s design adequately reflect the reality of low-paid work?


  1. Universal Credit was introduced in part to be more responsive to people with flexible earnings or in multiple jobs. There has been a notable increase in the level of irregular, and often insecure income (a trend that started before the introduction of Universal Credit). This is manifested through increased levels of self-employment and a greater proportion of work characterised by part-time working and irregular hours. The number of households working within zero hour contracts remains low at under 3% of the workforce, however these forms of employment are particularly prevalent amongst low-income households.


  1. Policy in Practice has undertaken data analysis using Housing Benefit and Council Tax Support data from a number of local authorities. This shows self-employment typically accounting for about 10% of the low-income cohort. This equates to approximately 1 in 5 low-income working households.
  2. Self-employed households are amongst the most adversely affected by Universal Credit. The financial impact on self-employed households affected by the introduction of a notional income (the Minimum Income Floor) is given elsewhere in this submission. The rationale behind the Minimum Income Floor is that the objective of a benefits system is not to support businesses, and to reinforce the minimum wage. It is also arguable that households with significantly low income from self-employment would be better off moving into employment to gain greater financial stability. However, self-employment may be a first step into work. It can provide flexibility that makes work possible alongside illness, caring responsibilities, or other barriers to work. In deciding the level of conditionality, and therefore the level of notional income for the self-employed, the DWP takes barriers to work into account. Our work with support organisations indicates that the DWP rarely vary conditionality from that set out in guidance. In order to fully understand a claimant’s barriers to work the DWP would require a more flexible approach and the resources to allow more time to be spent with customers.


  1. In many ways the impact of irregular hours of work is better served under Universal Credit than under legacy benefits. Universal Credit is designed to react to earnings over time without a need to change between in-work and out-of-work benefits, or to inform DWP of a change in earnings. However, as Universal Credit is paid monthly in arrears, payments of Universal Credit are offset by earnings in the prior assessment period. This means that a claimant could have minimal earned income in a month coinciding with low UC, because of higher earnings in the preceding month. This combination of low earnings and a low Universal Credit award can potentially cause hardship, particularly if higher earnings from the previous month have already been spent. This issue particularly affects households that do not have a work allowance, typically younger households without children who also have irregular earnings. For these households, any fluctuation in income, however small, has an impact on their next months Universal Credit award.


  1. There are solutions to the lagging nature of Universal Credit payments for those with irregular earnings. Firstly, the restoration of a work allowance for all households, as in the original design for Universal Credit, would provide some dampening of effect. Secondly, it is possible to introduce a system of payment reconciliation that separates payments from the calculations of the Universal Credit award. For example, an initial payment at the two week point (based on the estimated award) with reconciliation at the end of the month would limit the impact of the five week wait. Ongoing reconciliation each month, based on payments of Universal Credit and earnings year to date would also create stability and dampen the effect of fluctuating earnings.

How can Universal Credit better meet the lived experience of claimants?

  1. This submission contains a number of suggestions for change that have the potential to improve the experience of Universal Credit for claimants. These have been informed by our own research or through our work with frontline organisations including local authorities, Housing Association, charities, and support agencies. Suggestions included in this submission are brought together below for ease of reference.

Increase simplification


  1. Bring Council Tax Support, currently designed and administered by Councils, into Universal Credit. This would ensure all the main means-tested benefit support is under one roof. This would simplify application for benefits, increase take-up, and remove the postcode lottery that currently exists.


  1. Remove the five-week wait for vulnerable households through a targeted grant and flexible claimant-centered support. This would be offered in addition to the interest-free advance loan, that could help some claimants combat the high cost of existing debt. Alongside this, the government should consider an extension to the two-week run on of DWP benefits to include Child Tax Credit to help families with children.


  1. Explicitly recognise the role of those supporting claimants (e.g. support workers or medical professionals) and develop better communication processes, specifically to enable the claimant to give time-limited access to third-party advocates to support claims administration. 

Incentivise work for all claimants

  1. Restore the work allowance for claimants without children, ahead of work allowances for second earners.
  2. Make changes to the mechanisms for eligibility to free school meals and free prescriptions in order to avoid a significant cliff-edge for work incentives. For example, by using the work allowance mechanism to partially fund school meals for all claimants of Universal Credit.


  1. Make provision for supporting claimants with upfront childcare charges. For example, though partial payment from DWP to the childcare provider. This could be backed by a sufficiently funded Flexible Support Fund.

Mitigate reputational damage due to austerity measures

  1. Recalibrate working-age benefits and LHA rates in line with inflation from 2016. This would bring greater fairness between working-age and pension-age support.
  2. Consider extension of additional elements within Universal Credit to include greater support for those in receipt of disability benefits.

Increase support and the type of support available

  1. Ensure that there is sufficient, specialised support for those that are vulnerable and distant from work. The loss of Universal Support, and the role of local authorities in supporting people on Universal Credit is a source of some regret. Effective support from central or local government would not only require additional funding but an acceptance that a work-focused regime will negatively impact those who, at least in the short-term, are unable to work.

Reduce the impact of irregular payments

  1. Reinstate work allowances for all earners so that small changes in earnings for the lowest earners would not result in change in support. For those with earnings above the work allowance, the impact would be dampened.
  2. Separate payments from the assessment of the Universal Credit award and consider methods to dampen the impact of irregular payments. For example, through a mechanism for partial early payment of the estimated award, followed by reconciliation of award at the end of the assessment period.




  1. One benefit that is intended to provide support to all low-income households, with vastly varied circumstances, will also differ in how successfully it supports those different households.
  2. For some claimants, the digital nature is preferable and many working households will be financially better off. For other claimants the digital nature, the 5-week wait, fluctuating level of awards, debt recovery levels, and lack of explicit consent around support, means the new system can be as problematic as the system it replaces.
  3. There have been missed opportunities to further simplify the benefit system which could be amended by integration of council tax support and the removal of cliff-edges in other benefits such as free school meals and free prescriptions. Issues around the five-week wait, the approach to debts, fluctuating awards, and available support could all be overcome if the will, and resources, are there.
  4. The introduction of Universal Credit alongside austerity measures has led to a lack of confidence in the new benefit - cuts to support are now associated with Universal Credit. This is a self-inflicted problem; a wholescale redesign of benefits cannot be implemented on the cheap. The erosion of benefit levels leaves claimants little room to manoeuver and cope with change. And this erosion of the safety net, and removal of discretionary crisis grants from the system, means there is no additional mechanism to support households who may be falling into crisis.
  5. Universal Credit addresses some of the serious shortcomings of the legacy benefits system. Rollout is significantly advanced and a return to legacy systems is neither feasible nor desirable. Policy in Practice believes that Universal Credit has the potential to meet the needs of a diverse range of claimants and to become a benefit fit for the future. In this submission we have outlined a number of suggested improvements that would help Universal Credit achieve this. 

29 February 2020



[1] How to give 1 million more children free school meals under Universal Credit, Policy in Practice, July 2018