Universal Credit: Part 3 - For better or worse?


How will Universal Credit hit self-employed parents, as well as childminders?

The roll-out of Universal Credit (UC) is set to speed up again in the coming months. Already covering around 730,000 cases, that figure is set to rise towards two million over the next year. Importantly, a system which has so far largely dealt with single unemployed people will start to include an increasing number of working families, and those with children.

The system now faces two big tests – can it handle a far greater number of claims, and can it cope with more complicated cases, where households are entitled to multiple elements of support such as for housing, the number of children or childcare costs. After all, it’s relatively easy to determine the level of benefit entitlement for a single unemployed person. For a family with children, the number of characteristics and changes in circumstances month-to-month soon start to multiply.

Self-employed

One of the keys to making a success of UC is ensuring people find the system easy to use. UC will simplify working-age welfare by combining six benefits into a single scheme. However, there are question marks about how simple the system is to navigate.

This is particularly true for the self-employed – whose interaction with the benefit system is set to change completely, and who are treated far more harshly in UC than under the current tax credits system.

UC automatically determines employees’ entitlement by collecting earnings information via a regular feed of data from HMRC. But of course no such system exists for self-employed workers. Under UC they will be expected to report their incomings and outgoings on a monthly basis so their entitlement can be determined. For a group used to reporting their earnings annually and in arrears for tax purposes, that’s a lot of extra budgeting and paperwork.

‘Minimum income floor’

The even greater challenge will be the generosity of support. Under UC, support for self-employed workers is capped when their earnings fall below the minimum income floor (MIF). The MIF is a monthly imposed floor equivalent to up to £1,200 a month (or 35 hours a week at the appropriate minimum wage). If earnings fall below this, the UC award will be calculated as if they have stayed at this ‘minimum’ level. That means the amount you get if you earn £700 in a given month will be no higher than if you earn £1,200. This matters a lot if your income fluctuates a lot, which is often the case for the self-employed.

There are exceptions – the MIF is lower for people with caring responsibilities and only applied after a business’s first year of operation. But even so the policy is set to save the Government a total £1.2bn a year by 2022-23.

The aim is to reduce fraud while offering support to struggling businesses. However, it also creates an inequity in benefit entitlement – a self-employed worker gets less than an employee with the same annual earnings. And it penalises self-employed people with fluctuating earnings far more than the tax credits system. The Government’s own estimates show that around two-thirds of self-employed workers on UC (430,000 people in total) will lose an average of £3,000 a year.

Childminders

For childminders this could create particular risks. For one, earning £1,200 a month could be hard if providing care for a small number of children, or in areas where fees tend to be lower than the national average. There are also likely to be periods when income is lower, such as when children are on family holidays, or when providing wraparound care during term-time. The cap on entitlement if their net earnings fall below £1,200 could put a big strain on family finances.

Fortunately, this problem is easy for the Government to resolve by moving the MIF and monthly reporting requirements to an annual basis, and longer term by matching the requirements of planned reforms to the tax system. This would deal with both the issue of fluctuating earnings for the self-employed, and massively reduce the red-tape burden that UC is set to impose on them.

Of course, this flexibility runs counter to one of the guiding principles of UC that everyone should be paid monthly and in arrears, which explains why the Government is reluctant. But – as the trouble with the six-week wait for UC payment highlights – making UC better fit the reality of people’s working lives should take precedence over trying to make people’s working lives fit the reporting requirements of the benefit reform.

It’s inevitable that UC will face teething problems. But many of these are easy to spot in advance and require the Government to take a proactive approach in solving them. UC will bring about a welcome simplification of the benefit system. But ministers need to ensure that principle extends to the way people interact with it too.

David Finch is a senior economic analyst at the Resolution Foundation

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