Universal Credit could penalise women and lone parents

Last month, the Government announced that for the first time families who work less than 16 hours a week would be able to claim support for up to 70 per cent of childcare costs when the Universal Credit is introduced in 2013.

Ministers said that this would mean that around 80,000 families would benefit from an extra £300m invested into the Universal Credit.

However, an analysis of the Universal Credit for the Resolution Foundation and Gingerbread has found that to pay for the increase to childcare support for families earning less than 16 hours a week, support for everyone else has been reduced.

This will affect work incentives for people on ‘modest wages’, people working enough hours not to have access to Housing Benefit and second earners.

The report’s author academic Donald Hirsch concludes, ‘ Overall, it will mean that while universal credit helps some of the poorer families on benefits to become a bit better off, it will limit the potential for families on modest means to rise above the minimum living standard. For such families, it will put a lid on aspiration.’

The report says that families with young children working extra hours are often frustrated by the system which means that for every £1 they earn, income tax and national insurance contributions up, but benefits and tax credits fall.

Meanwhile, the cost of childcare – even after tax credits – can go up.

The report calls this the ‘hours trap’.

It says that under Universal Credit, the changes from pre-2011 to the post 2013 system affect the hours trap in several ways.

The report said that the real change will be that there will be no incentive to take a part-time job of 16 hours or more.

Currently a second earner on the minimum wage can gain about £50 a week from working 16 hours or more, but under Universal Credit the same second earner would in some cases take home less than £20 a week.

It gives the example of a parent whose partner is on low-pay, taking a £6.08 an hour job for 16 hours a week to boost the family income, earning an extra £97.28 a week.

Under the previous system, before support for childcare costs was cut from 80 per cent to 70 per cent, it says that the second earner would have kept around half their extra earnings - that is £46.19 a week, after childcare costs of £11.20 and a loss of tax credits of 39.89 are taken into account.

However, under Universal Credit, of the extra £97.28 a week earned, £63.23 will be lost in tax credits and £16.80 will go towards childcare costs.

This means that the second earner is left just £17.25 a week better off.

The hours trap will also be worse for single parents under Universal Credit.

For example, a single parent earning £10.80 an hour who increases their hours from 28 to 32 a week, will lose most of their extra earnings in increases to income tax

(£-8.66) National Insurance (£-5.20), lost benefits (-£19.15) and childcare costs

(-£4.20).

This will leave them just £6.11 better off for working an extra four hours a week.