The government wants people to work more to replace the £20 Universal Credit (UC) cut coming up in October.
If you would like a simple guide to UC, written by people who are “experts by experience”, check out Universal Credit: A guide by claimants, for claimants.
Many people would love to earn more but can’t get the hours. Others can’t work for health reasons or caring responsibilities.
But let’s look at the situation for people who may be able to earn more. Usually, extra income reduces their UC because a taper of 63p in the £ is applied. Then there is National Insurance and Tax.
I asked Gareth Morgan, a benefits expert, how much someone would need to earn to replace the £20 and be no worse off.
There isn’t a simple answer, so Gareth has written this guest post with some examples.
The £20 a week drop in Universal Credit, and Working Tax Credit, is going to create hardship and debt for many people. It will be a shock for all those who have had to claim Universal Credit since the pandemic began, as well as to those previously receiving benefits, who will have become used to the increased amount.
While working more may not be a realistic option for many, that’s what the government has suggested people should do to replace the loss.
So, how much extra work would people need to do to make up the £20 a week lost?
It’s not straightforward, because there are a number of other factors that need to be taken account of with earnings. Here we are going to look just at income tax and National Insurance but there are other variables such as pension contributions, deductions from earnings and tax-code variations.
Where people have earnings below the tax and NI thresholds, they will need to earn less extra to get an extra £20 a week net, than people who have tax and NI deducted from their earnings.
The numbers in here are based on current NI and tax rates, so they don’t take account of the extra 1.5% increase to NI planned from April 2022 to fund care costs, increasing further what people will have to earn to replace the £20 UC cut.
Universal Credit
The first issue with Universal Credit will be the £20 a week cut, or £86.67 a month.
If the amount of Universal Credit being received is less than that, then UC will finish. With the end of UC any passporting entitlements that might be received will vanish too.
Where UC is higher than £20 a week, then, in the absence of any other changes, at least some benefit will continue. To make back the lost £20 from earnings will require different figures depending upon the level of earnings.
If earnings are below £184 a week, then no tax or National Insurance is payable and the extra earnings needed will be £54.05 a week (£234.23 a month). £34.05 will be taken into account as earnings for Universal Credit, using the 63% taper, and remaining £20 will be kept by the claimant.
If earning above £184 a week but less than £241.73 then NI is payable on earnings but no tax. For most people an extra £67.23 a week (£291.33 a month) will be the required increase in earnings to give a net increase of £20 after the UC has been reduced by the taper and NI has been paid.
For earnings above £241.73 then tax and NI will be payable. For most people, an extra £79.50 a week (£344.50 a month) will be the required increase in earnings to give a net increase of £20 after the UC has been reduced by the taper and NI and tax has been paid.
The following table gives some simple examples of how much more someone needs to earnto replace the £20 a week cut. All numbers are per week:
| current earnings | NI? | tax? | extra earnings needed |
|---|---|---|---|
| 0 | no | no | £54.05 |
| 100 | no | no | £54.05 |
| 200 | yes | no | £67.23 |
| 300 | yes | yes | £79.50 |
For some, the situation will be a little different, where, for example, the increased earnings take someone into the tax or NI brackets and some of the extra income has those deductions applied.
The DWP gives some people who have a limited capacity for work or have a child a “work allowance” – they can earn up to this amount net without it affecting their UC. These people may find it hard to earn any more money, but if they can, they only need to earn £20 a week to replace the cut.
Then there are the self-employed! For them, the minimum income floor (MIF) is being reintroduced now, although there is a discretion for this not to be applied to some cases affected by Covid up to July 2022. Where the MIF is applied, the resultant UC may already be at a low level and will drop further after the £20 cut. But here the person can increase their net earnings up to the MIF without it reducing their UC further.
Working Tax Credit
Working Tax Credit is calculated using gross earnings, so that is less complicated, but tax credits are calculated over an annual basis, corrected retrospectively with a bit of a buffer, which makes things less simple.
For Working Tax Credit, there is a taper of 41% applied to gross earnings so an extra £48.78 a week might seem to be required; but for many people there will also be Housing Benefit and Council Tax Reduction to take into account. A reduction in tax credit can mean an increase in those benefits (remembering that, in England, each local authority has its own CTR scheme which may differ) so there may be consequential changes in those benefits.
Tax credits are also assessed on an annual basis, so increased earnings for part of a year will be spread out and there is also a ‘buffer’ of £2,500 a year of increased income which is ignored.
Online benefit calculators can help
It’s not easy, as you’ll have seen, to produce an easy answer when someone asks, “How much extra will I need to earn to replace the £20?”. Online benefit calculators, such as the one at Turn2Us can help people by allowing them to put in their personal details and then try ‘what-if’ figures to quickly see the effects of different earning figures.
If you’re already working full-time, or can’t work, the government hasn’t offered anything else by way of help. And, of course, there are also those who don’t get all the benefits that they’re entitled to at all.
Gareth Morgan
Gareth Morgan is Chief Executive of Ferret Information Systems which produces benefit and other financial calculators and training courses. He 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. He comments on these matters in his blog, Benefits In The Future.
Timothy Seaside says
Thank you for this, Gareth and Sara.
I am a fan of Gareth’s work – he tackles complicated benefits issues in a logical and practical way, and he suggests solutions to problems.
I think the paragraph about work allowance could be clearer – it is only if the total earnings remain within the work allowance (currently only £293 per month for anybody who qualifies and has rent to pay) that a £20 increase in earnings equates to a £20 increase in income.
I would also seek to clarify that the reason a self-employed person earning less than the MIF can make up £20 of income by earning £20 more is because UC will already be treating them as if they were earning the MIF (likely to be the equivalent of about £16,250 per annum in most cases) even though they are earning less.
Having made both of those points, I have to acknowledge that even those brief additions are incomplete – it is, as Gareth stresses, incredibly complicated, and basically impossible to cover it fully without writing a whole book.
Tracy says
Im looking at taking a job 16 hours a week at £10.45 a hour will I be worse of if I get offered the job as I end up with £455 uc after rent and allowances are taken out my award for 1.400 I’m also a carer will I lost that
Sara (Debt Camel) says
Hi Tracy – have a look at the Turn2Us calculator linked to in the article above. Put your current situation in. then do it again and pretend you take this new job and see what that says.
It will look at your entire situation, including things like council tax which are different depending where you live.
It is very unlikely you will be worse off – but you need to know how much better you will actually be!
Shaista says
No I couldn’t understand it is too complicated for me to understand it. My earning is not fixed. UC changed my assessment period and went back where I earned more. They went one month back. Who will justify it.
All are working blindly. Not mechanism to check every where is froude.
Sara (Debt Camel) says
your local Citizens Advice can help you look at your UC if you think it’s not right.
Richard says
The problem with this £20 per week ‘rise’ is that it was not given to people who were claiming legacy benefits such as ESA, JSA etc. We just got a slap in the face.
Sara (Debt Camel) says
I agree it should have been given to everyone. Very unfair. But that is not a reason to remove from the people who did get it.
cyrilv says
Remember that this is being challenged in the High Court by two ESA claimants on 28th/29th September.
Richard says
Thanks very much, I didn’t know about that. I’ll be sure to follow the case now.
Richard says
Hi Cyrilv,
I Googled the Court Case, well it’s a Judicial Review and there are 4 claimants now, 2 on ESA stating discrimination against disabled people, 1 on IS, and 1 on JSA.
The DWP had stated that the legacy benefits IT system couldn’t cope with making the payments.
I can only see 2 outcomes off-hand, either the DWP have to pay £1500 (18 months) arrears to 2 million disabled people and the other legacy claimants, or, the DWP have to claw the ‘Uprise’ payments back from UC claimants ?
As an ESA Support group claimant I was miffed about the £20 ‘Uprise’ payment to UC claimants, but hopefully this Judicial Review will resolve the issue.
Sara (Debt Camel) says
Not being pessimistic but clearly there is a third option that the DWP win and nothing changes.
Richard says
So there will be imparity between UC and Legacy benefits ?
It’s unfair my neighbour on JSA gets around £39 per week and someone on UC gets more ?
Sara (Debt Camel) says
I didn’t invent the rules! Someone on JSA can change to UC if they want. Some people will be better off – talk to your local Citizens Advice or use a good benefit calculator to see if this applies to an individual.
Richard says
I know you didn’t invent the rules, IDS started all of that then followed by Penny Mordaunt.
Yes Sara, they can in certain areas change or if they move to a new area, but have to go possibly 4-6 weeks with no money (as I did when changing from Indefinite DLA to Ongoing PIP, naturally I had to borrow £600 from Provi to pay my carers as you can get no advance ).
If you take the UC advance a lot of people find themselves unable to cope financially due to the repayments deducted at 0%).
0
Here in Islington only new claims can go onto UC, there has been a 3 year freeze on being able to transfer from legacy benefits.
B says
This is going to be an unpopular comment but the words “universal credit cut” are really frustrating. It was only ever a temporary increase so using words such as ‘cut’ that is continually used in the media is the reason why there’s so much animosity in this country. Everybody is facing increases in living expenses but the rest of the country that are not on universal credit don’t get a reduction in tax or a monthly grant to compensate. I appreciate that people struggling with finances sends them
Further into poverty but where do you draw the line honestly?
Adrian says
B I completely agree with you, it was a temp boost. If reports are true and the taper rate is being changed thats a better way of doing things.
Sara (Debt Camel) says
Dropping the taper rate from 63p to 60p will only make a tiny difference compared to the £20 a week cut. Say you earn £20 more… then you will get to keep an extra 60p because of changing the taper rate.
And all the extra £20 did was bring the UC rates back up what they were in real terms in 2013 – they had been eroded so much by inflation and the government had frozen benefits.
If this cut goes ahead, it will mean many families are going to go into poverty.