Tax Credit & Universal Credit: a 75% taper?

On 26 October 2015 the Government was defeated in the House of Lords following a debate on its proposed changes to tax credits.  The Chancellor responded that the Government would “continue to reform tax credits and save the money needed so that Britain lives within its means, while at the same time lessening the impact on families during the transition.”  Plans are to be set out in the Autumn Statement on 25 November.

In response to concerns about the impact of tax credit changes as originally announced in the Summer Budget, Ministers cited examples of families who would be better off as a result of the overall package of changes announced in the Summer Budget. In several cases these figures were derived from Table 1.8 of the Summer Budget Red Book. Our previous blog piece, Tax Credit & Universal Credit changes: impact on example families, examined how these calculations can be replicated and expanded upon.

On 5 November 2015 the Chancellor was reported to be considering increasing the net income taper in Universal Credit from 65% to 75%.

Setting aside the issue of whether the family scenarios in the Red Book table are representative of families as a whole, how would the families presented in the Red Book fare should the Universal Credit taper be increased from 65% to 75%?

Note: this blog follows on from Tax Credit & Universal Credit changes: impact on example families (Part 1) 

Universal Credit: “work allowances” and “taper rates”

Universal Credit (UC) is replacing means-tested social security benefits and tax credits for people of working age. A family’s award is dependent upon, among other things, the “work allowance” for which they qualify – the level of earnings they are able to earn before their award starts to be reduced – and the Universal Credit “taper rate” – the rate at which awards are reduced for families with earnings in access of their work allowance.

From the outset, the Government has claimed that under UC “work pays, and more work pays, for everyone” due to, among other things, its “work allowances” being more generous that the equivalent earnings disregards in current systems, and a “single taper” that ensures that, as earnings increase, families keep 35p for every additional £1 of net earnings.

In the Summer Budget, the UC work allowances were cut sharply for most groups, and removed entirely for some (single persons and couples without children, and not having a “limited capability for work”) – a development which the Director of the Resolution Foundation, Torsten Bell, said recently could be viewed as a “very, very large removal of the original purpose of that entire project.”

On 11 November 2015 the House of Commons Work and Pensions Committee announced it was “concerned” by reports the Chancellor was considering increasing the Universal Credit taper to 75% as “any such change would either just shift the burden of cuts to different low income families or further undermine the objective of making work pay.”

Impact on families of a 75% taper rate

As shown in Figure A of our previous blog post, families A, C, D, F and G all receive a Universal Credit award in 2020-21 if they are privately renting and in receipt of the housing component of Universal Credit.

Figure C, below, shows the net income of these families in 2020-21 under two scenarios:

• Scenario (A) assumes no change in the Universal Credit taper rate; thus, the column highlighted in grey reflects calculations shown in Figure A and Table 1.8 of the Summer Budget.
• Scenario (B), highlighted in red, shows the net income of these families should the Universal Credit taper rate be increased to 75% for all claimants in 2020-21. Note that these calculations do not account for any transitional protection for which claimants transferring from “legacy benefits” to Universal Credit may be eligible.

Note: as explained in our previous blog post, families A – F are those detailed in Table 1.8 of the Summer Budget 2015. Family G is an additional example family added by the Library.

Analysis

The following series of charts shows the change in each family’s net income in years 2020-21 under Scenarios A and B compared to net income in 2015-16. Net income is represented by a white marker. If this marker is above the Y-axis (that is, above £0) in any given year this represents a cash terms increase in net income compared to 2015-16. Note that all figures in these charts are in cash terms.

A – Dual earner family

In 2020-21 under Scenario A this family would:

• Receive a Universal Credit award of £1,635.
• Receive £2,348 less in benefits (inc. Child Benefit) & tax credits than in 2015-16.
• Have a net income £5,585 greater in cash terms than in 2015-16, a 10% rise in real terms.

In 2020-21 under Scenario B this family would:

• Receive a Universal Credit award of £0.
• Receive £3,983 less in benefits (inc. Child Benefit) & tax credits than in 2015-16.
• Have a net income £3,950 greater in cash terms than in 2015-16, a 5% rise in real terms.

B – Part-time second earner

Family B experiences no change to their net income as they are not in receipt of a Universal Credit award in 2020-21 under either Scenario (A) or (B). (Note that, as detailed in our previous blog, this family was not in receipt of tax credits or Housing Benefit in 2015-16).

C – Single earner family

In 2020-21 under Scenario A this family would:

• Receive a Universal Credit award of £11,463.
• Receive £1,472 less in benefits (inc. Child Benefit) & tax credits than in 2015-16.
• Have a net income £2,495 greater in cash terms than in 2015-16, a 1% rise in real terms.

In 2020-21 under Scenario B this family would:

• Receive a Universal Credit award of £10,194.
• Receive £2,741 less in benefits (inc. Child Benefit) & tax credits than in 2015-16.
• Have a net income £1,226 greater in cash terms than in 2015-16, a 4% fall in real terms.

D – Working lone parent

In 2020-21 under Scenario A this family would:

• Receive a Universal Credit award of £6,416.
• Receive £2,385 less in benefits (inc. Child Benefit) & tax credits than in 2015-16.
• Have a net income £1,582 greater in cash terms than in 2015-16, a 1% fall in real terms.

In 2020-21 under Scenario B this family would:

• Receive a Universal Credit award of £5,147.
• Receive £3,654 less in benefits (inc. Child Benefit) & tax credits than in 2015-16.
• Have a net income £313 greater in cash terms than in 2015-16, a 7% fall in real terms.

E – Single person

This person experiences no change in net income under Scenario (B) as they were not eligible for a Universal Credit award.

F – Out of work couple

This family experiences no change in income as a result of an increase to the Universal Credit taper rate as they are out-of-work and assumed to have no income.

G – Lone parent

This family, the Library’s additional example, is a lone parent with two children working 35 hours a week and earning £20,000 a year. For simplicity we have assumed this wage remains constant (in cash terms) across the course of this Parliament.

In 2020-21 under Scenario A this family would:

• Receive a Universal Credit award of £7,950.
• Receive £686 less in benefits (inc. Child Benefit) & tax credits than in 2015-16.
• Have a net income £1,116 greater in cash terms than in 2015-16, a 4% fall in real terms.

In 2020-21 under Scenario B this family would:

• Receive a Universal Credit award of £6,481.
• Receive £783 less in benefits (inc. Child Benefit) & tax credits than in 2015-16.
• Have a net income £353 less in cash terms than in 2015-16, a 10% fall in real terms.

Picture Credit: Ian Duncan Smith by Number 10, Creative Commons Attribution 2.0 Generic (CC by 2.0)