The government wants people to work more to replace the £20 Universal Credit (UC) cut coming up in October.
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.
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|
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 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.