Benefits after the White Paper

Benefits in the Future Welfare after the White Paper

F e r r e t I n f o r m a t i o n S y s t e m s

D e c e m b e r 2 0 1 0

1 . 4

Gareth Morgan

Examining the effects of the changes to the UK benefits system following the Emergency Budget, the Comprehensive Spending Review and the White Paper - Universal Credit- Welfare That Works.

1 Benefits in the Future – Welfare after the White Paper

© Ferret Information Systems 2010 1.4

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Contents Benefits in the Future ............................................................................................................................. 3

The Impact of the Changes to the Benefits System ............................................................................ 3

Consolidated Cuts and Increases from the Budget and CSR ............................................................... 4

Universal Credit: welfare that works ...................................................................................................... 6

Some notes on changes ...................................................................................................................... 7

Abolition of unemployment ............................................................................................................ 7

Disregards ....................................................................................................................................... 7

Mortgage Support in work .............................................................................................................. 7

Capping of total benefits ................................................................................................................. 7

Self-Employed assumed to earn at least minimum wage............................................................... 7

Transitional Protection ................................................................................................................... 7

Two systems from 2013 - ? ............................................................................................................. 7

One standard deduction rate of 65% .............................................................................................. 7

Housing support goes local ............................................................................................................. 7

Sanctions and penalties .................................................................................................................. 8

On-Line benefit claims and automatic operation ........................................................................... 8

Contributory benefits time limited and means-tested ................................................................... 8

Modelling and Examples ......................................................................................................................... 9

Methodology ....................................................................................................................................... 9

Examples and notes. ............................................................................................................................. 10

Steady state examples ...................................................................................................................... 11

Example 1. Steady State Employment – Tenant ..................................................................... 11

Example 2. Steady State Employment – Owner ..................................................................... 12

Example 3. Steady State Employment - Tenant 4 children .................................................... 13

Example 4. Steady State Unemployment - Owner 2 children ................................................ 14

Example 5. Steady State Unemployment - Owner 4 children ................................................ 15

Example 6. Steady State Unemployment - Tenant 2 Children ............................................... 16

Example 7. Steady State Unemployment - Tenant 4 Children ............................................... 17

Example 8. Single, childless owner ......................................................................................... 18

Example 9. Single Childless Tenant .......................................................................................... 19

Examples following changes of circumstance .................................................................................. 20

Example 10. Recent Unemployment - Owner 2 Children ........................................................ 20

Example 11. Recent Unemployment - Owner 4 Children ......................................................... 21



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Example 12. Single Childless Owner - Recently Unemployed Early 2010 ................................. 22

Example 13. New Employment - Home Owner 2 Children ....................................................... 23

Example 14. New Employment - Tenant 2 children ................................................................ 24

Example 15. Lost Job Home - Owner 2 Children ....................................................................... 25

Example 16. Lost Job - Tenant 2 children ................................................................................. 26

The Effect of Children on Benefits. ................................................................................................... 27

Example 17. Couple – Tenants, Working, £15,000 pa – Varied by Children ............................ 27

Example 18. Couple – Tenants, Unemployed – Varied by Children ......................................... 28

Example 19. Couple – Owners, Working £15,000pa – Varied by Children ............................... 29

Example 20. Couple – Owners, Unemployed – Varied by Children .......................................... 30

Example 21. Owner Employed at £20,000 by Children ............................................................ 31

Anomalies caused by Capping .......................................................................................................... 32

Example 22. 9 Children, £86.54pw Rent ................................................................................... 32

Example 23. 9 Children £200pw Rent ....................................................................................... 34

Example 24. 9 Children Mortgage £100,000, 4.5% Interest £86.54 interest pw ...................... 36

Example 25a. High Rent capping ............................................................................................... 38

Example 25b. High Rent capping .............................................................................................. 40

Changes in Tax Credit Hours Rules.................................................................................................... 42

Example 26. 20 Hours Work – Owner ....................................................................................... 42

Example 27. 20 Hours Work Tenant ......................................................................................... 43

Some comparisons of Universal Credit and the current system. ......................................................... 44

Couple, 2 Children, £86.54 Rent, £1250pa Council Tax ................................................................ 45

Couple, 2 Children, £86.54 Mortgage Interest, £1250pa Council Tax .......................................... 46

Couple, 2 children, No Rent or Mortgage Interest, 1250 Council Tax .......................................... 47

Disposable income after rental housing costs .............................................................................. 48

Disposable income after mortgage interest costs ........................................................................ 49

Disposable income after housing costs – No Rent or Mortgage .................................................. 50

Universal Credit Disposable Income after Housing Costs ................................................................. 51

Conclusion ............................................................................................................................................. 52

Main Benefits Related Measures in the Emergency Budget ................................................................ 53

Financial Results of the Budget Measures ........................................................................................ 55

The Comprehensive Spending Review .................................................................................................. 57

Main Benefits Related Changes in the Comprehensive Spending Review ....................................... 57

Ferret Information Systems .................................................................................................................. 61



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Benefits in the Future

Not for publication without written permission. December 2010

The Impact of the Changes to the Benefits System

We now have a clearer view, albeit incomplete in details, of the government’s intentions towards

the future of welfare support in the UK.

Three sets of announcements have given us a picture of short term cuts and a longer term ambition

for a more integrated, simpler in the view of the government, Universal Credit for supporting people

of working age, whether in-work or not.

The Emergency Budget of June 22nd introduced net cuts to the welfare system of £11bn a

year by 2015.

The Comprehensive Spending Review of October 20th added another £7bn to that.

The White Paper Universal Credit: welfare that works published on November 11th is

intended to look forward to the system which will replace the current mix of benefits for

those of working age.

It is important to recognise that the development of the Universal Credit has overlapped the introduction of the cuts in welfare and that there are some contradictions between the targeting of the cuts and the structure of the new benefit. In particular, some of the changes to Tax Credits seem at odds with the ‘seamless’ approach of Universal Credit.

In this paper we have used a real present value approach, as described in the methodology on page 9 and carried this forward into Universal Credit.

The cuts and additions made in the Budget are described in more detail on page 55 and those made in the CSR can be found on page 57.

The overall impact is shown in figure 1 and figure 2.

It will be seen that the largest impact is made by moving from uprating benefits in line with RPI, and the Rossi Index, to uprating by the, usually lower, CPI.

It is for this reason that we have used present values in the modelling.



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Consolidated Cuts and Increases from the Budget and CSR

Figure 1

5.80

4.51

2.42

2.02

2.01

1.23

0.49

2.70

0.00

5.00

10.00

15.00

20.00

25.00

Billions

Total Welfare Cuts

Other

CTB

Disability benefits

ESA

Housing Benefits

Child Benefit

Tax Credits

CPI Indexing



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Figure 2

2.55

1.00

17.59

0.00

5.00

10.00

15.00

20.00

25.00

Billions

Total Additional Spending and Savings

Net Savings

Cold Weather Payments

Pension reforms

Child Tax Credit



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Universal Credit: welfare that works

The White Paper owes much to the work of the Centre for Social Justice and its publication of

Dynamic Benefits: Towards Welfare That Works in 2009. It describes the core elements of the new

benefit but much detail is yet to be described, or decided. The White Paper is less definitive than is

usual and, we suspect, the scheme more susceptible to change than is normally the case.

It is clear that, initially at least, the benefit will share much with the existing structure of benefits and

credits. The way in which the ‘needs’ section of the means-test is determined will be an amalgam of

existing benefits. So will much of the ‘means’ section mirror the way in which existing schemes look

at income and capital. The major change occurs in the way in which the use of these elements to

determine the amount payable will be carried out.

Instead of several separate benefits carrying out their own assessments with complex interlinking,

passporting and overlapping, there will be one single method of withdrawal of benefit from a

maximum figure.

If this can be made to work, simply and efficiently, it will be welcomed. If it can do this and meet the

needs of those it helps, it will be a breakthrough.

Launching the White Paper Iain Duncan Smith, the Secretary of State, said:

"At its heart, the Universal Credit has a simple ambition – to make work pay, even for the poorest.

This will finally make it easier for people to see they will be consistently and transparently better off

for each hour they work and every pound they earn.

"It will cut a swathe through the massive complexity of the existing benefit system and make it less

bureaucratic to run.”

However, even with the limited information given in the White Paper about the mechanics of the

scheme, it is already clear that there are numbers of technical anomalies appearing, as will be seen

in some of the examples.

As always in areas of social support, simplicity of approach collides with the reality that people live in

complex ways. Any scheme, unless it is astoundingly generous, must balance the needs of

administrative and financial rigour against the special circumstances of small numbers of those

within it. It is at that point that the ‘tweaking’ begins and simplicity starts to unravel.

Nonetheless, there are numerous changes, some radical, many welcome, to the structure of support

that has been in place for over 20 years and it is worth noting some of these, from the White Paper

and from announcements in the Budget and CSR.



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Some notes on changes

Abolition of unemployment

There will be no clear division between unemployment and employment. People will remain on the

same benefit as their hours of work move up and down from zero to what is now considered full-

time. Only earnings will matter, hours of work will be irrelevant for most decisions. The traps and

rewards attached to certain numbers of hours will largely disappear except for some areas such as

conditionality and childcare support. How this will affect some things which are passported by

unemployment is unclear, even concessionary rates for tickets often use unemployment as a test.

Disregards

The ‘disregard’ – the amount of earnings which people are allowed to keep before it affects their

benefits – will be abolished for single people but made much larger for some other groups. It will

however be reduced sharply for those who need help with their housing costs. There is a clear

policy intention to reward those who lower their housing costs.

Mortgage Support in work

Help with mortgage interest for home owners will be available to all instead of, with the current

system, being limited to those ‘not in full-time work’.

Capping of total benefits

Total amounts of benefit, for those not in receipt of DLA, war widows or receiving Working Tax

Credit, will be limited to the median level of earnings of working families. It will be seen later that,

applied in the way announced, this can cause extremely large poverty traps.

Self-Employed assumed to earn at least minimum wage

Self-employed people will be assumed to have a minimum level of earnings under a rule being

considered.

Transitional Protection

Transitional protection, possibly for a long period, will make sure that nobody getting benefits will

move onto a lower amount when transferring to Universal Credit.

Two systems from 2013 - ?

The old and new systems will run in parallel for some years from 2013. No transfer from old to new

systems in recent years has been achieved in the target period. Child Support and Child Tax Credit

are worrying precedents.

One standard deduction rate of 65%

There will be one single, standard rate of deduction from net earnings, ensuring that people will

keep some of the increase in earnings as they earn more. The real marginal deduction rate will be

higher after tax and national insurance.

Housing support goes local

Housing support for tenants and Council Tax Benefit will become much more localised and variable

from place to place. Councils will be able to operate their own Council Tax support schemes while

rent limits for Housing Benefit will become embedded at different levels in different areas.



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Sanctions and penalties

There will be more ‘conditionality’ – benefit penalties for people who do not meet job-seeking

conditions. The groups which must meet these conditions will be extended.

On-Line benefit claims and automatic operation

Claiming Universal Credit will normally be done over the internet, be much more automated, and

there will be a single place for contacting the benefits system.

Universal Credit will automatically, month by month, reflect changes in earnings from employment

using a new, yet to be introduced, HMRC PAYE computer system.

Contributory benefits time limited and means-tested

The White Paper says “Under the new system, contributory benefits would retain an insurance

element, but in most circumstances would only be paid for a fixed period, only to facilitate a

transition back to work”.

Employment and Support Allowance will be limited to one year.

The White Paper says “Contributory Jobseeker’s Allowance will continue in its current form but with

the same earnings rules (such as disregards and tapered withdrawal) as Universal Credit”. How this

means-testing will operate is unclear.



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Modelling and Examples

This set of modelling compares the effects, for some common circumstances, of the changes to tax

and benefits rules announced in the Emergency Budget of June 2010 and the Comprehensive

Spending Review October 2010. It also includes assessments using the proposals for a Universal

Credit as given in the White Paper, Universal Credit: welfare that works published in November

2010.

Methodology

The examples in this document consolidate the changes to tax and benefits rules announced in the

Emergency Budget of June 2010 and the Comprehensive Spending Review October 2010. This

document includes modelling for the effects of reductions in real values of benefits caused by

government changes to up-rating methods.

Assessments start with the current values, rules and rates in force at the time of the 2010 general

election and progress from those.

Values used are based on starting figures and then adjusted in 3 ways:

Earnings, other incomes, tax bands etc. use current values.

Benefits which are to be up-rated by CPI in future have their current values reduced by the

cumulative year by year difference between RPI and CPI

Benefits, and elements of benefits, which have been frozen have their current values

reduced by the cumulative RPI.

This, crudely, allows comparison of the real future values of income to be compared with starting

values.

The CPI and RPI forecast figures used are those produced by the Office for Budget Responsibility.

Universal Credit assessment has been modelled by using forecast benefit values together with the

tapers and disregards proposed in the White Paper, Universal Credit: welfare that works Cm 7957.

For LHA, the VOA current and 30th percentile national figures have been averaged and the reduction

applied to rental figures. Those figures have then been treated in the same way using the CPI

reduction in following years when the LHA figures will be up-rated by CPI.

Examples for cases with carers, elderly or disabled claimants are not included as all are expressly

excluded from the White Paper proposals as they are awaiting decisions on their future structure.

Changes in Council Tax Benefit, outlined in the CSR and white paper have not been included as no

detail is yet available, instead the current rules are used with a 10% reduction from the proposed

date.



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Examples and notes. Most of these examples are based on the situation of a couple with two children.

They are both aged 45 and have 2 children aged 8 and 10. They do not have any childcare costs and

make no pension contributions.

They pay rent of £86.54 per week which is exactly the Local Housing Allowance (LHA) for their home

(the figure is chosen to match the mortgage interest payable in the examples for home owners with

a mortgage of £100,000 at an interest rate of 4.5%)

They pay council tax of £1250 per annum.



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Steady state examples

In these examples we are considering circumstances which have persisted for some time and which

are likely to continue in the same way. The variations in the examples are largely caused by changes

in the real value of benefits, because of the method of indexation, and by announced changes to

some benefit rates and rules.

Example 1. Steady State Employment – Tenant

In the first example, we look at a ‘steady-state’ situation where one member of a couple works 35

hours a week for annual earnings of £10,000, £20,000, £30,000, £40,000 and £50,000.

Gross Earnings Net Weekly Income

2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

£10,000.00 £416.78 £415.84 £405.33 £398.84 £394.71

£20,000.00 £426.57 £425.68 £423.24 £418.19 £433.48

£30,000.00 £479.33 £480.35 £479.10 £477.77 £479.25

£40,000.00 £611.95 £611.12 £609.87 £608.54 £597.15

£50,000.00 £732.84 £717.05 £684.43 £684.43 £684.43

Year 2014 / 2015 uses the Universal Credit in place of current benefits.

The drop in income for the £50,000 a year earner from 2012 onwards is caused by the loss of Child

Benefit.

Note that these values are adjusted for the effect of CPI up-rating and the freezing of some elements

and benefits. Headline, unadjusted figures can be presented as an increase in income for some of

these assessments.

£300.00

£400.00

£500.00

£600.00

£700.00

£800.00

2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

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£86.54pw Rent - Couple 2 Children£10,000pa - £50,000pa Earnings

£10,000.00

£20,000.00

£30,000.00

£40,000.00

£50,000.00



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Example 2. Steady State Employment – Owner

The circumstances are identical but the housing costs, of the same amount, are mortgage interest on

a mortgage of £100,000 at 4.5% per annum.


2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

£10,000.00 £374.35 £380.13 £378.89 £373.17 £386.65

£20,000.00 £421.64 £423.72 £423.24 £418.19 £425.42

£30,000.00 £479.33 £480.35 £479.10 £477.77 £471.19

£40,000.00 £611.95 £611.12 £609.87 £608.54 £597.15

£50,000.00 £732.84 £717.05 £684.43 £684.43 £684.43

The chart and table above include mortgage interest, at the SMI level, in the UC calculation where it

is used in the same way as rent in the requirement figure and in the calculation of earnings

disregards. It should be noted that the recently announced benefits cap, as we understand it,

applies to the amount of benefit compared to the average income not, as some commentators have

interpreted it to be, a cap on any benefits for those above average income.

£0.00

£100.00

£200.00

£300.00

£400.00

£500.00

£600.00

£700.00

£800.00

2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

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£100,000 Mortgage - Couple 2 Children£10,000pa - £50,000pa Earnings

£10,000.00

£20,000.00

£30,000.00

£40,000.00

£50,000.00



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Example 3. Steady State Employment - Tenant 4 children


2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

£10,000.00 £554.72 £553.26 £540.99 £531.66 £518.38

£20,000.00 £563.37 £561.05 £548.78 £540.48 £554.80

£30,000.00 £594.60 £596.22 £597.84 £590.48 £600.26

£40,000.00 £652.29 £648.14 £649.76 £642.40 £646.03

£50,000.00 £759.64 £742.99 £684.43 £684.43 £684.43

Note the larger effect of the loss of Child Benefit for the highest earner and the real drop in benefits

of the lowest paid under Universal Credit.

£400.00

£450.00

£500.00

£550.00

£600.00

£650.00

£700.00

£750.00

£800.00

2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

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£10,000.00

£20,000.00

£30,000.00

£40,000.00

£50,000.00



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Example 4. Steady State Unemployment - Owner 2 children

2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

Unemployed £376.35 £334.42 £334.76 £328.20 £323.51

For unemployed owners, the October 2010 reduction in the interest rate for mortgage support,

which is now in force, creates the initial large drop in income.

£290.00

£300.00

£310.00

£320.00

£330.00

£340.00

£350.00

£360.00

£370.00

£380.00

£390.00

2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

Unemployed - Owner 2 Children

Unemployed



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Example 5. Steady State Unemployment - Owner 4 children

2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

Unemployed £491.62 £455.00 £457.44 £448.56 £441.28

£410.00

£420.00

£430.00

£440.00

£450.00

£460.00

£470.00

£480.00

£490.00

£500.00

2010/2011 2011/2012 2012/2013 2013/2014 2014/2015


Unemployed



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Example 6. Steady State Unemployment - Tenant 2 Children

2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

Unemployed £345.97 £350.38 £343.94 £328.39 £331.57

In this case Universal Credit seems likely to provide a small real increase in net income.

£315.00

£320.00

£325.00

£330.00

£335.00

£340.00

£345.00

£350.00

£355.00

2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

Unemployed - Tenant

Unemployed



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Example 7. Steady State Unemployment - Tenant 4 Children

2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

Unemployed £461.23 £470.96 £466.61 £448.76 £448.24

In this case the changes in the Child Tax Credit rates of children’s elements provides a real increase

in the short term but this is eroded by up-rating policies and other changes to the housing benefit

scheme.

£435.00

£440.00

£445.00

£450.00

£455.00

£460.00

£465.00

£470.00

£475.00

2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

Unemployed - Tenant

Unemployed



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Example 8. Single, childless owner

2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

Unemployed £206.41 £158.90 £158.02 £154.68 £153.63

The chart shows the situation from the date of the General Election 2010. The large drop shown

from 2010 to 2011 is caused by the change in Mortgage Interest Rate which took place in October

2010. The current benefit entitlement is therefore already at the lower figure.

£0.00

£50.00

£100.00

£150.00

£200.00

£250.00

2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

Unemployed - Owner

Unemployed



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Example 9. Single Childless Tenant

2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

Unemployed £176.03 £175.64 £167.97 £155.65 £161.36

The chart demonstrates the effect of the reduction in Housing Benefit by 90% from 2013 for those

on JSA for more than 12 months. The increase in 2014 /2015 reflects the absence of an equivalent in

Universal Credit as it is not known how, or whether, this would be implemented.

It does not show the effect of increasing the age threshold for the Shared Room Rate in Housing

Benefit from 25 to 35 nor the capping of LHA levels. The changes in LHA percentiles are averaged.

These are all locally variable so would need to be assessed within individual areas.

£145.00

£150.00

£155.00

£160.00

£165.00

£170.00

£175.00

£180.00

2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

Unemployed - Tenant

Unemployed



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Examples following changes of circumstance

Example 10. Recent Unemployment - Owner 2 Children

2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

Unemployed £376.35 £334.42 £264.18 £260.02 £255.17

Complete loss of mortgage interest support due to 2 year limit of support in Job Seekers Allowance,

this is carried forward into Universal Credit by assumption.

£0.00

£50.00

£100.00

£150.00

£200.00

£250.00

£300.00

£350.00

£400.00

2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

Recently Unemployed - Owner2 children

Unemployed



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Example 11. Recent Unemployment - Owner 4 Children

2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

Unemployed £491.62 £455.00 £386.86 £377.98 £370.70

£0.00

£100.00

£200.00

£300.00

£400.00

£500.00

£600.00

2010/2011 2011/2012 2012/2013 2013/2014 2014/2015


Unemployed



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Example 12. Single Childless Owner - Recently Unemployed Early 2010

2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

Unemployed £206.41 £158.90 £88.21 £84.87 £83.82

The chart shows the situation from the date of the General Election 2010. The large drop shown

from 2010 to 2011 is caused by the change in Mortgage Interest Rate which took place in October

2010. The current benefit entitlement is therefore already at the lower figure.

The further drop is caused by the two year limit in JSA for new claimants which came into force in

January 2009 and which will affect the first claimant in January 2011.

The income of this person will consist solely of JSA Personal Allowance and passported Council Tax

Benefit.

£0.00

£50.00

£100.00

£150.00

£200.00

£250.00

2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

Unemployed - Owner

Unemployed



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Example 13. New Employment - Home Owner 2 Children


2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

£10,000.00 £406.68 £402.71 £378.89 £373.17 £386.65

£20,000.00 £561.95 £502.57 £423.24 £418.19 £425.42

£30,000.00 £713.88 £554.49 £479.10 £477.77 £471.19

£40,000.00 £865.80 £611.12 £609.87 £608.54 £597.15

£50,000.00 £1,029.48 £727.47 £715.94 £684.43 £684.43

Taking a new job, in September 2010, after a lengthy period of unemployment.

The effects of the changes to the system, and the existing rules, mean that the immediate income on

taking a new job is unlikely to be constant. It may take up to two tax years before the income settles

and, even then, the effect of the new proposals will make the real value variable.

Typically a job taken part way through a year will offer a higher immediate income, when in-work

benefits are considered than will be the long term income, because of the large disregard applied to

the immediate increase in earnings. The short term increase will often be considerably larger at

higher earnings levels.

£0.00

£200.00

£400.00

£600.00

£800.00

£1,000.00

£1,200.00

2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

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Effect on Net Income of a New Job

£10,000.00

£20,000.00

£30,000.00

£40,000.00

£50,000.00



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Example 14. New Employment - Tenant 2 children


2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

£10,000.00 £422.84 £420.08 £405.33 £398.84 £393.61

£20,000.00 £561.95 £502.57 £423.24 £418.19 £432.38

£30,000.00 £713.88 £554.49 £479.10 £477.77 £478.15

£40,000.00 £865.80 £611.12 £609.87 £608.54 £597.15

£50,000.00 £1,029.48 £727.47 £715.94 £684.43 £684.43

The same comments apply as in example 13.

£0.00

£200.00

£400.00

£600.00

£800.00

£1,000.00

£1,200.00

2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

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Effect on Net Income of a New Job

£10,000.00

£20,000.00

£30,000.00

£40,000.00

£50,000.00



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Example 15. Lost Job Home - Owner 2 Children

In this example, we look at a situation where one member of a couple was working 35 hours a week

for annual earnings of £10,000, £20,000, £30,000, £40,000 and £50,000. Their partner has been, and

remains in full time employment at £10,000pa. The first member stops work half way through the

tax year, in September 2010. Their situation otherwise is as in set 1.

They are both aged 45 and have 2 children aged 8 and 10.

They do not have any childcare costs and make no pension contributions.

They have a £100,000 mortgage at 4.5% which means £86.54 a week interest.

They pay council tax of £1250 per annum.


2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

£10,000.00 £344.35 £380.13 £378.89 £373.17 £386.65

£20,000.00 £312.92 £380.13 £378.89 £373.17 £386.65

£30,000.00 £275.42 £380.13 £378.89 £373.17 £386.65

£40,000.00 £237.92 £380.13 £378.89 £373.17 £386.65

£50,000.00 £237.85 £380.13 £378.89 £373.17 £386.65

The effects of one partner losing a job in a couple where both are working can mean a greater

immediate drop in income than will be the long term situation.

In this example, where one partner remains in full time work earning £10,000 a year, it can be seen

that the immediate drop is greater, the higher the previous earnings.

The increase in Universal Credit is due to the inclusion of mortgage interest support while in full time

work

£200.00

£220.00

£240.00

£260.00

£280.00

£300.00

£320.00

£340.00

£360.00

£380.00

£400.00

2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

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1 of a Couple Loses Job - Owner

£10,000.00

£20,000.00

£30,000.00

£40,000.00

£50,000.00



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Example 16. Lost Job - Tenant 2 children

In this example, we look at a situation where one member of a couple was working 35 hours a week

for annual earnings of £10,000, £20,000, £30,000, £40,000 and £50,000. Their partner has been, and

remains in full time employment at £10,000pa. The first member stops work half way through the

tax year, in September 2010.

They are both aged 45 and have 2 children aged 8 and 10.


2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

£10,000.00 £411.16 £415.84 £405.33 £398.84 £393.61

£20,000.00 £399.46 £415.84 £405.33 £398.84 £393.61

£30,000.00 £361.96 £415.84 £405.33 £398.84 £393.61

£40,000.00 £324.46 £415.84 £405.33 £398.84 £393.61

£50,000.00 £324.39 £415.84 £405.33 £398.84 £393.61

£300.00

£320.00

£340.00

£360.00

£380.00

£400.00

£420.00

£440.00

2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

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1 of a Couple Loses Job - Tenant

£10,000.00

£20,000.00

£30,000.00

£40,000.00

£50,000.00



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The Effect of Children on Benefits.

One of the dangers in the proposed changes appears to be the effect on families who are outliers,

exceptions to the norm. In particular this seems to affect those with high housing costs or large

numbers of children. It may, in future also affect some of those with disabilities but we do not yet

know the detailed proposals for those cases.

We will look later at some other effects of the capping proposals but we will start with the clear

effects on families with children.

Example 17. Couple – Tenants, Working, £15,000 pa – Varied by Children

Children Employed Net Weekly Income

2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

0 £262.00 £261.57 £257.87 £255.53 £266.07

1 £352.14 £351.03 £341.40 £336.84 £348.36

2 £421.11 £419.74 £409.23 £403.25 £411.82

3 £490.08 £488.45 £477.06 £469.66 £475.28

4 £559.05 £557.16 £544.88 £536.07 £535.49

5 £628.02 £625.86 £612.71 £602.48 £595.70

6 £696.98 £694.57 £680.54 £668.89 £655.91

7 £765.95 £763.28 £748.37 £735.30 £716.12

8 £834.92 £831.99 £816.20 £801.70 £776.33

9 £903.89 £900.70 £884.03 £868.11 £836.54

10 £964.35 £969.41 £951.86 £934.52 £896.74

As might be expected, each child attracts a higher level of support, principally from Child Tax Credit

and the equivalent factor in Universal Credit.

£0.00

£200.00

£400.00

£600.00

£800.00

£1,000.00

£1,200.00

2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

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Net Income by Number of Children - £15,000pa Earnings

0

1

2

3

4

5

6

7

8

9

10



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Example 18. Couple – Tenants, Unemployed – Varied by Children

Children Unemployed Net Weekly Income

2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

0 £213.33 £212.71 £204.54 £191.69 £196.80

1 £288.34 £290.10 £282.60 £268.21 £271.59

2 £345.97 £350.38 £343.94 £328.39 £330.47

3 £403.60 £410.67 £405.28 £388.58 £389.35

4 £461.23 £470.96 £466.61 £448.76 £448.24

5 £518.86 £531.25 £500.00 £500.00 £500.00

6 £576.49 £591.53 £500.00 £500.00 £500.00

7 £634.12 £651.82 £500.00 £500.00 £500.00

8 £691.76 £712.11 £500.00 £500.00 £500.00

9 £749.39 £772.40 £500.00 £500.00 £500.00

10 £807.02 £832.68 £500.00 £500.00 £500.00

If they become unemployed however, the effect of the proposed benefits capping becomes clear.

Capping, in this example, starts with 5 children. With 10 children the benefit will be capped by over

£330 a week in 2012 in today’s values. Universal Credit figures are shown as capped on the same

basis.

£0.00

£100.00

£200.00

£300.00

£400.00

£500.00

£600.00

£700.00

£800.00

£900.00

2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

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Net Income by Number of Children - Unemployed

0

1

2

3

4

5

6

7

8

9

10



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Example 19. Couple – Owners, Working £15,000pa – Varied by Children


2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

0 £260.15 £260.09 £257.87 £255.53 £259.11

1 £337.13 £338.63 £336.79 £332.93 £341.40

2 £397.43 £400.90 £399.65 £394.46 £404.86

3 £457.73 £463.17 £462.52 £455.99 £468.32

4 £518.02 £525.44 £525.38 £517.53 £528.53

5 £578.32 £587.71 £588.25 £579.06 £588.74

6 £638.62 £649.98 £651.11 £640.60 £648.95

7 £698.92 £712.24 £713.98 £702.13 £709.16

8 £759.22 £774.51 £776.84 £763.66 £769.37

9 £819.52 £836.78 £839.71 £825.20 £829.57

10 £877.81 £899.05 £902.57 £886.73 £889.78

£0.00

£100.00

£200.00

£300.00

£400.00

£500.00

£600.00

£700.00

£800.00

£900.00

£1,000.00

2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

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Net Income by Number of Children - Employed Owner

0

1

2

3

4

5

6

7

8

9

10



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Example 20. Couple – Owners, Unemployed – Varied by Children


2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

0 £243.71 £196.75 £195.36 £191.49 £189.84

1 £318.72 £274.13 £273.42 £268.01 £264.63

2 £376.35 £334.42 £334.76 £328.20 £323.51

3 £433.98 £394.71 £396.10 £388.38 £382.39

4 £491.62 £455.00 £457.44 £448.56 £441.28

5 £549.25 £515.28 £500.00 £500.00 £500.00

6 £606.88 £575.57 £500.00 £500.00 £500.00

7 £664.51 £635.86 £500.00 £500.00 £500.00

8 £722.14 £696.14 £500.00 £500.00 £500.00

9 £779.77 £756.43 £500.00 £500.00 £500.00

10 £837.40 £816.72 £500.00 £500.00 £500.00

£0.00

£100.00

£200.00

£300.00

£400.00

£500.00

£600.00

£700.00

£800.00

£900.00

2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

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Net Income by Number of Children - Unemployed

0

1

2

3

4

5

6

7

8

9

10



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Example 21. Owner Employed at £20,000 by Children


2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

0 £302.39 £306.55 £306.55 £306.55 £306.55

1 £364.01 £363.43 £361.90 £358.01 £363.29

2 £421.64 £423.72 £423.24 £418.19 £425.42

3 £480.80 £484.01 £484.58 £478.37 £487.55

4 £541.10 £546.21 £546.15 £538.82 £546.74

5 £601.40 £608.48 £609.02 £600.35 £606.95

6 £661.70 £670.75 £671.88 £661.88 £667.16

7 £722.00 £733.01 £734.75 £723.42 £727.37

8 £782.30 £795.28 £797.61 £784.95 £787.58

9 £842.59 £857.55 £806.55 £806.55 £806.55

10 £902.89 £919.82 £806.55 £806.55 £806.55

In this example, the benefits amount is capped when Working Tax Credit runs out even though they

are in, what is currently termed, full time work. The amount of capping that is applied is

2012 2013 2014

9 Children

£53.93 £39.64 £41.24

10 Children

£116.79 £101.47 £101.45

£0.00

£100.00

£200.00

£300.00

£400.00

£500.00

£600.00

£700.00

£800.00

£900.00

£1,000.00

2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

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Net Income by Number of Children - Employed, £20,000pa

0

1

2

3

4

5

6

7

8

9

10



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Anomalies caused by Capping

Example 22. 9 Children, £86.54pw Rent

Capping for families in work will be applied, we are told, only when Working Tax Credit is not in

payment. It limits the maximum amount of most benefits to the median earnings level, about

£500pw currently. For Universal Credit we have assessed whether WTC would be payable at the real

levels in 2014 / 2015 and not considered capping if it would be.


2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

£15,000.00 £903.89 £900.70 £884.03 £868.11 £836.54

£20,000.00 £908.22 £904.60 £806.55 £806.55 £806.55

£25,000.00 £912.55 £908.49 £871.93 £871.93 £871.93

£30,000.00 £916.87 £912.39 £904.52 £891.40 £893.57

£35,000.00 £921.20 £923.62 £930.48 £917.36 £916.45

The tables and charts below show some of the effects that can be caused by this policy.

At £15,000pa WTC is in payment so no capping applies although benefits exceed £500pw by:

2012/ 2013 £126.15

2013 / 2014 £112.59

2014 / 2015 £95.37

At £20,000pa capping is applied of:

2012/ 2013 £81.38

2013 / 2014 £65.98

£800.00

£820.00

£840.00

£860.00

£880.00

£900.00

£920.00

£940.00

2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

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£15,000.00

£20,000.00

£25,000.00

£30,000.00

£35,000.00



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2014 / 2015 £48.20


2012/ 2013 £19.89

2013 / 2014 £5.01

2014 / 2015 £1.03

At £30,000pa benefits have fallen below £500pw and no capping takes place.

The combination of the cap and net earnings creates a poverty trap where someone, in these

circumstances, earning £20,000 a year will be over £75 a week worse off in net income than if they

earned £5,000 a year less.



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Example 23. 9 Children £200pw Rent


2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

£15,000.00 £1,017.35 £1,014.16 £988.59 £971.21 £938.19

£20,000.00 £1,021.68 £1,018.06 £806.55 £806.55 £806.55

£25,000.00 £1,026.01 £1,021.95 £871.93 £871.93 £871.93

£30,000.00 £1,030.33 £1,025.85 £937.32 £937.32 £937.32

£35,000.00 £1,034.66 £1,033.50 £1,002.70 £995.88 £1,002.70

£40,000.00 £1,044.53 £1,042.58 £1,020.96 £1,004.96 £1,041.00

If the rent is increased to £200pw, a more realistic level for the large house needed for the family

size, the effect is even clearer.


2012/ 2013 £230.72

2013 / 2014 £215.69

2014 / 2015 £197.03


2012/ 2013 £185.94

2013 / 2014 £169.08

2014 / 2015 £149.86

£800.00

£850.00

£900.00

£950.00

£1,000.00

£1,050.00

2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

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£200pw Rent - Couple 9 Children£15,000pa - £35,000pa Earnings

£15,000.00

£20,000.00

£25,000.00

£30,000.00

£35,000.00



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2012/ 2013 £124.45

2013 / 2014 £108.11

2014 / 2015 £102.69


2012/ 2013 £65.47

2013 / 2014 £49.48

2014 / 2015 £57.91


2012/ 2013 £9.17

2013 / 2014 No Capping

2014 / 2015 £15.41


In 2012 /2013 this couple, with one person earning £15,000pa, will be over £180pw net better off

than if they earned £20,000 a year. If they were to become better off in real terms they would need

to earn almost £35,000 a year.

These examples may be outliers but they will need to be taken account of, which will introduce more

complexity into a move to a simpler system.



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Example 24. 9 Children Mortgage £100,000, 4.5% Interest £86.54 interest pw


2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

£15,000.00 £819.52 £836.78 £839.71 £825.20 £829.57

£20,000.00 £842.59 £857.55 £806.55 £806.55 £806.55

£25,000.00 £865.67 £878.32 £871.93 £867.77 £866.00

£30,000.00 £888.75 £899.09 £904.52 £891.40 £886.61

£35,000.00 £911.83 £923.62 £930.48 £917.36 £909.49

£40,000.00 £940.44 £949.58 £956.44 £943.32 £932.38


2012/ 2013 £81.83

2013 / 2014 £69.67

2014 / 2015 £88.41


2012/ 2013 £53.93

2013 / 2014 £39.04

2014 / 2015 £41.24


£700.00

£750.00

£800.00

£850.00

£900.00

£950.00

2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

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£86.54pw Mortgage Interest- Couple 9 Children£15,000pa - £35,000pa Earnings

£15,000.00

£20,000.00

£25,000.00

£30,000.00

£35,000.00



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2012/ 2013 £9.31

2013 / 2014 Not Capped

2014 / 2015 Not Capped


Once again there is a clear poverty trap between £15,000 and £20,000 of earnings. The model is

simpler than for that of tenants as no mortgage interest support is payable to those in full time work

under the current rules.

It is somewhat surprising that the introduction of mortgage support in Universal Credit has a

relatively small apparent impact on income levels but it typically offsets what would otherwise be a

deduction and the higher earnings disregard in Universal Credit is reduced by a multiplier of the

interest support.



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Example 25a. High Rent capping

Modeling the effects of high rental levels on smaller families produces interesting results. Much

comment has been made on the effects of capping on such families, particularly in Inner London.

This example looks at a family with 4 children and paying rent of £540pw which matches the LHA

rate for Inner West London for a four bedroom house.

Looking only at the ‘total benefit’s cap, ignoring the introduction of maximum LHA rates, we see,


2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

£15,000.00 £1,012.51 £1,010.62 £962.79 £948.13 £941.78

£20,000.00 £1,016.83 £1,014.51 £806.55 £806.55 £806.55

£25,000.00 £1,022.73 £1,021.68 £871.93 £871.93 £871.93

£30,000.00 £1,032.83 £1,030.77 £937.32 £937.32 £937.32

£35,000.00 £1,042.92 £1,039.86 £993.71 £979.54 £1,002.70

£40,000.00 £1,053.02 £1,048.94 £1,002.79 £988.63 £1,051.22


2012/ 2013 £204.92

2013 / 2014 £192.60

2014 / 2015 £200.62

£750.00

£800.00

£850.00

£900.00

£950.00

£1,000.00

£1,050.00

2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

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£540pw Rent - Couple 4 Children£15,000pa - £35,000pa Earnings

£15,000.00

£20,000.00

£25,000.00

£30,000.00

£35,000.00



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2012/ 2013 £160.14

2013 / 2014 £145.99

2014 / 2015 £153.84


2012/ 2013 £103.60

2013 / 2014 £89.44

2014 / 2015 £110.64


2012/ 2013 £47.31

2013 / 2014 £33.14

2014 / 2015 £68.14


2012/ 2013 No Capping

2013 / 2014 No Capping

2014 / 2015 £25.64


Again there is a clear poverty trap created when earnings rise enough to remove entitlement to

Working Tax Credit and, again, it takes between £15,000 and £20,000 more earnings to better the

overall net income received at £15,000 per year.



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Example 25b. High Rent capping

This example looks at a family with 4 children and paying rent of £540pw which matches the LHA

rate for Inner West London for a four bedroom house. It applies the £500 total benefits capping

used in example 25a but also applies the LHA cap of £400pw for a four bedroom property.


2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

£15,000.00 £872.51 £870.62 £865.13 £851.83 £846.83

£20,000.00 £876.83 £874.51 £806.55 £806.55 £806.55

£25,000.00 £882.73 £881.68 £871.93 £865.07 £871.93

£30,000.00 £892.83 £890.77 £886.96 £874.16 £910.50

£35,000.00 £902.92 £899.86 £896.04 £883.24 £933.39

£40,000.00 £913.02 £908.94 £905.13 £892.33 £956.27


2012/ 2013 £107.26

2013 / 2014 £96.31

2014 / 2015 £105.67

£700.00

£750.00

£800.00

£850.00

£900.00

£950.00

2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

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£400pw Rent Cap- Couple 4 Children£15,000pa - £35,000pa Earnings

£15,000.00

£20,000.00

£25,000.00

£30,000.00

£35,000.00



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2012/ 2013 £62.48

2013 / 2014 £49.70

2014 / 2015 £58.50


2012/ 2013 £5.94

2013 / 2014 No capping

2014 / 2015 £15.69


Again there is a clear poverty trap created when earnings rise enough to remove entitlement to

Working Tax Credit but, because of the £400 rent cap, it applies, in this example, only to the £20,000

a year earner.



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Changes in Tax Credit Hours Rules One , unexpected, change in the CSR means that from 2012 in order to claim Working Tax Credit,

couples with children will require 24 hours of work a week instead of the current 16 hours. This

seems to run very strongly against the proposals for Universal Credit and also counter to the

philosophy of encouraging work.

Example 26. 20 Hours Work – Owner


2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

£10,000.00 £358.78 £364.95 £330.56 £325.99 £392.80

£20,000.00 £406.45 £409.01 £415.91 £413.21 £425.42

£30,000.00 £479.26 £480.35 £479.10 £477.77 £471.19

£40,000.00 £611.95 £611.12 £609.87 £608.54 £597.15

£50,000.00 £732.84 £717.05 £684.43 £684.43 £684.43

In the case of an owner on the lowest earnings, the severe loss is only offset by the increase in

Council Tax Benefit.

The absence of any hours rule in Universal Credit is shown by the increased net income.

£0.00

£100.00

£200.00

£300.00

£400.00

£500.00

£600.00

£700.00

£800.00

2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

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20 Hours Work - Owner

£10,000.00

£20,000.00

£30,000.00

£40,000.00

£50,000.00



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Example 27. 20 Hours Work Tenant

2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

£10,000.00 £399.97 £399.10 £382.38 £375.50 £399.76

£20,000.00 £410.14 £409.42 £415.91 £413.21 £432.38

£30,000.00 £479.26 £480.35 £479.10 £477.77 £478.15

£40,000.00 £611.95 £611.12 £609.87 £608.54 £597.15

£50,000.00 £732.84 £717.05 £684.43 £684.43 £684.43

For tenants, less of an effect is seen than might be expected.

At £10,000 a year income, Working Tax Credit worth £43.64 is lost in 2012 but a consequent increase

in Housing Benefit of £17.66 and in Council Tax Benefit of £6.53 mitigates much of this.

£0.00

£100.00

£200.00

£300.00

£400.00

£500.00

£600.00

£700.00

£800.00

2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

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20 Hours Work - Tenant

£10,000.00

£20,000.00

£30,000.00

£40,000.00

£50,000.00



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Some comparisons of Universal Credit and the current system.

We have compared some of the results using the adjusted real values for the current system if it

continued into 2015 and the announced rules and rates for Universal Credit in the same year.

They demonstrate that individual circumstances make it difficult to identify, at this stage, groups of

winners or losers.

Nonetheless it is also clear that, for individuals, moving from the current system to Universal Credit

may be advantageous in some circumstances and transitionally protected in others. One side effect

of the lower uprating policy, using CPI, will be to erode transitional protections more slowly.

As the two system will run in parallel for some time there will also be, for some at least, a better-off

issue where they may be better off ending a claim for current benefits and claiming Universal Credit

instead. This is likely to be a complex calculation and subject to rules about linking periods which

have yet to be written.



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Couple, 2 Children, £86.54 Rent, £1250pa Council Tax

Comparison of Current v UC UC Current

£10,000.00 £393.61 £392.61

£20,000.00 £432.38 £412.63

£30,000.00 £478.15 £476.34

£40,000.00 £597.15 £607.11

£50,000.00 £684.43 £684.43

£0.00

£100.00

£200.00

£300.00

£400.00

£500.00

£600.00

£700.00

£800.00

£10,000.00 £20,000.00 £30,000.00 £40,000.00 £50,000.00

Rental

UC

Current



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Couple, 2 Children, £86.54 Mortgage Interest, £1250pa Council Tax


£10,000.00 £386.65 £367.70

£20,000.00 £425.42 £412.63

£30,000.00 £471.19 £476.34

£40,000.00 £597.15 £607.11

£50,000.00 £684.43 £684.43

£0.00

£100.00

£200.00

£300.00

£400.00

£500.00

£600.00

£700.00

£800.00

£10,000.00 £20,000.00 £30,000.00 £40,000.00 £50,000.00

Mortgage

UC

Current



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Couple, 2 children, No Rent or Mortgage Interest, 1250 Council Tax


£10,000.00 £371.07 £367.70

£20,000.00 £409.84 £412.63

£30,000.00 £466.38 £476.34

£40,000.00 £597.15 £607.11

£50,000.00 £684.43 £684.43

£0.00

£100.00

£200.00

£300.00

£400.00

£500.00

£600.00

£700.00

£800.00

£10,000.00 £20,000.00 £30,000.00 £40,000.00 £50,000.00

No Rent or Mortgage

UC

Current



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Disposable income after rental housing costs

Comparison of Current v UC - after housing costs UC Current

£10,000.00 £283.03 £282.03

£20,000.00 £321.80 £302.05

£30,000.00 £367.57 £365.76

£40,000.00 £486.57 £496.53

£50,000.00 £573.85 £573.85

£0.00

£100.00

£200.00

£300.00

£400.00

£500.00

£600.00

£700.00

£10,000.00 £20,000.00 £30,000.00 £40,000.00 £50,000.00

Rent

UC

Current



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Disposable income after mortgage interest costs


£10,000.00 £276.07 £257.12

£20,000.00 £314.84 £302.05

£30,000.00 £360.61 £365.76

£40,000.00 £486.57 £496.53

£50,000.00 £573.85 £573.85

£0.00

£100.00

£200.00

£300.00

£400.00

£500.00

£600.00

£700.00

£10,000.00 £20,000.00 £30,000.00 £40,000.00 £50,000.00

Mortgage

UC

Current



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Disposable income after housing costs – No Rent or Mortgage


£10,000.00 £347.03 £343.66

£20,000.00 £385.80 £388.59

£30,000.00 £442.34 £452.30

£40,000.00 £573.11 £583.07

£50,000.00 £660.39 £660.39

£0.00

£100.00

£200.00

£300.00

£400.00

£500.00

£600.00

£700.00

£10,000.00 £20,000.00 £30,000.00 £40,000.00 £50,000.00

Rent

UC

Current



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Universal Credit Disposable Income after Housing Costs

UC Incomes after Housing Costs Rent Mortgage

No Housing Costs

£10,000.00 £283.03 £276.07 £347.03

£20,000.00 £321.80 £314.84 £385.80

£30,000.00 £367.57 £360.61 £442.34

£40,000.00 £486.57 £486.57 £573.11

£50,000.00 £573.85 £573.85 £660.39

The higher after housing costs income figure, where the only housing costs are Council Tax, is

because, in this example, the earnings disregard figure is £109.62 while, with rent or mortgage the

earnings disregard is £25.00, the floor level disregard, because 1.5 times the rent or mortgage

interest is deducted from the maximum disregard.

The effect of this is to reward those with lower housing costs, the policy intention, so that people

will be encouraged to seek cheaper housing. Of course those fortunate enough to own their own

home outright, or to have been given one by parents, for example, will benefit from this policy.

£0.00

£100.00

£200.00

£300.00

£400.00

£500.00

£600.00

£700.00

UC After Housing Costs Income

Rent

Mortgage

No Housing Costs



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Conclusion

The combination of the changes announced in the budget and the additional changes in the

comprehensive spending review are shown here to be broadly regressive when examined in terms of

the real value of benefits. It is too early to be confident about the effect of Universal Credit but

initial modelling shows a slight bias towards home owners. However it is clear that, as in the current

system, individual circumstances will affect benefits greatly. This may be seen as a factor raising

some doubt about the potential for simplification without impacting some families unfairly.

Much of the effect will be felt locally; both the changes in Housing Benefit and Local Housing

Allowance rules will disproportionately affect those in higher cost urban areas, particularly London.

The Council Tax Benefit changes may permit some local authorities to attempt some social

engineering and this has usually, historically, again been tried by the higher cost urban areas.

Much has already been written about the possibility that these changes will cause a migration from

inner cities outwards or to other areas entirely. The strange effect, for lower earners, of the capping

rules may cause a middle element and the unemployed to be squeezed out while upper and lower

earners are able to remain.

It would be possible to micro-model the effects of these changes in particular authorities or BRMAs

(Broad Rental Market Areas – the geographical areas used to determine market rents for Local

Housing Allowance purposes) if required but that is beyond the scope of this paper.

If you would like to receive further papers, or receive the detailed figures behind the examples in

this paper now, please contact Ferret.



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Main Benefits Related Measures in the Emergency Budget

22nd June 2010

Benefits and tax credits to be up-rated by the consumer price index (CPI)

The budget announced that all non-pensioner benefits will be up-rated by the CPI instead of the RPI or Rossi index. The CPI normally rises at a lower rate than the RPI. This means that the real value of benefits is likely to fall, or rise less than earnings, and is expected to fall compared to previous up-rating rules. The budget estimates the change will cut spending on benefits by £5.8bn a year by 2014. On the latest monthly figures the CPI was 3.4% while the RPI was 5.1%. In this paper the reduction has been modelled at 0.76% the average over the last decade.

From 2012 pensioner benefits will rise in line with earnings.

This continues the previous administration’s generous treatment of the elderly.

An annual Child tax credit (CTC) increase of £150 above CPI in 2011-12 and £60 above CPI

in 2012-13

The headline increases, for each child, will, of course, be worth less in real terms because of inflation and increased prices by the time they are introduced.

Child benefit frozen for the next three years

Although this is a universal benefit, it forms a higher proportion of the income of low income

families and the consequent real reduction will affect such households more.

Withdrawal of child tax credit for higher income families

Almost two million families currently receive just the £10.50 a week family element of child tax credit. At the moment, when a household’s gross income reaches £50,000, this element starts to be reduced. From 2011 this family element will start to be reduced at a gross income of £40,000. About half a million families will stop being entitled to tax credits. From 2012, there will no longer be any flat rate entitlement to the £10.50 family element which will be tapered away as part of the normal Tax Credit assessment at lower incomes.

Baby element of child tax credit abolished from 2011

Families with babies under one will lose the £545 baby element of child tax credit.

Tax Credits taper rises from 39% to 41%

The increased rate at which tax credit entitlement is reduced as incomes rise, means that only those on the lowest incomes will benefit from the announced increase in child tax credit. It will, however, also cut entitlement to working tax credit for households without children.

Introducing a £2,500 disregard for households with a drop in income

A reduction in income will not be immediately reflected in increased Tax Credits. Only if income is more than £2,500 a year lower than in the previous year will the award increase.



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Reducing the income disregard for increased income

The generous income disregard which was increased from £2,500 to £25,000 in 2006/07, largely to avoid the political storm caused by the harsh recovery of overpayments caused by in-year increases of income, will be reduced to £5,000 by 2013/14. This will reduce the, sometimes large, immediate income increases in the first years of entering, or returning to, employment.

Over-fifties returning to work

The 50-plus element in Tax Credit is for claimants over 50 returning to work after six months or more unemployment. From April 2011, this will be abolished.

Local Housing Allowance (LHA) caps and restriction to 4 bedroom rate

From April 2011 the weekly LHA rates, which determine maximum Housing Benefit, will be capped at maximum figures set centrally. The impact of these caps will only affect Greater London but may be substantial for some tenants there. The higher LHA rate for families needing five bedrooms will be abolished.

LHA to be set at the 30th percentile

LHA is currently set at the median of local private rents in the broad market area. From October 2011 the figures will be based on the 30th percentile instead. These new rates will be used to assess claimants’ entitlements on the annual review of their LHA. The effect of this change will be to lower, on average, the rental figure from which Housing Benefit is assessed, lowering benefit levels. It will, however, be extremely variable by area, having little or no effect in some and large effects in others.

CPI linking of LHA

From 2013/14 LHA rates will be up-rated in line with the CPI rather than being linked to actual rental

figures.

Non-dependant deductions to be increased

An amount is deducted from housing support in the benefits system where other people, typically

relatives, share the household. These figures have not increased since 2001. From April 2011 they

will be increase in steps until they reach the level they would have been had they been fully up-rated

since 2001.

Social rented sector limiting rents

From 2013/14, working age claimants in council and housing association tenancies will be treated in

the same way as private tenants, with their HB entitlement restricted to the rent for an

appropriately sized property.



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HB reduced to 90 per cent of assessed entitlement after 12 months of receiving JSA

From 2013/14 any claimant on JSA for more than 12 months will have their HB entitlement cut by 10

per cent.

A medical assessment for Disability Living Allowance from 2013 for new and existing

claimants.

This will move to a more objective, less discretionary, assessment which is expected to reduce the

number of recipients.

Financial Results of the Budget Measures

The overall annual saving from these measures is forecast to reach about £11bn by 2014/15.

2010 2011 2012 2013 2014

Specific welfare measures - Millions

385 2,010 4,710 8,150 11,040

Benefits, tax credits and public service pensions: switch to CPI indexation from 2011 - 12

0 1,170 2,240 3,900 5,840

Disability Living Allowance: reform gateway from 2013-14

0 0 0 360 1075

Lone parent benefits: conditionality extended to those with children aged 5 and above from October 2011

0 0 50 150 180

Health in Pregnancy Grant abolished

40 150 150 150 150 Sure Start Maternity Grant: applies to first child only from 2011-12

0 75 75 75 75

Support for Mortgage Interest: payments set at the average mortgage rate from October 2010

15 -75 -10 40 65

Saving Gateway: not introduced in July 2010

10 0 75 110 115

Housing Benefit reforms: Local Housing Allowance: set at the 30th

percentile of local rents from 2011-12

0 65 365 415 425 Deductions for non-dependents: reverse previous freezes on uprating and maintaining link with prices from 2011-12

0 125 225 320 340

Social sector housing: limit working age entitlements to reflect size of family from 2013-14

0 0 0 490 490

Switch to CPI indexation for Local Housing Allowance from 2013-14

0 0 0 300 390

Reduce awards to 90% after 12 months for claimants of Jobseekers Allowance

0 0 0 100 110

Additional bedroom for carers from 2011-12

0 -15 -15 -15 -15 Local Housing Allowance: caps on maximum rates for each property size, with 4-bed limit from 2011-12

0 55 65 70 65

Additional Discretionary Housing Payments from 2011-12

0 -10 -40 -40 -40



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Tax Credits Tax credits second income threshold: reduced

to £40,000 from 2011-12

0 140 145 155 145 First and second withdrawal rates: increased to 41% from 2011-12

0 640 710 730 765

Child Tax Credit: taper the family element immediately after the child element from 2012-13

0 0 510 515 480

Child Tax Credit: remove the baby element from 2011-12

0 295 275 270 275

Working Tax Credit: remove the 50 plus element from 2012-13

0 0 35 40 40

Child Tax Credit: reversed the supplement for children aged one and two from 2012-13

0 0 180 180 180

Reduced the income disregard from £25,000 to £10,000 for two years in 2011-12 then to £5,000 from 2013-14

0 105 140 340 420

Introduced an income disregard of £2,500 for falls in income from 2012-13

0 0 550 560 585

New claims and changes of circumstances: reduce backdating from 3 months to 1 month from 2012-13

0 0 315 320 330

Child Tax Credit: increased the child element by £150 in 2011-12 and £60 in 2012-13 above indexation

0 -1200 -1845 -1930 -1995

Child Benefit: rates frozen for three years from 2011-12

0 365 695 940 975

Basic State Pension: introduce triple guarantee from 2011-12

0 0 -195 -420 -450

Pension Credit Minimum Income guarantee: matching basic State Pension cash increase in 2011-12

0 -415 -535 -535 -535

Child Trust Funds: phased abolition of Government contributions from 2010-11

320 540 550 560 560

Cuts 385 3725 7350 11090 14075

Additions 0 -1715 -2640 -2940 -3035

Total 385 2010 4710 8150 11040



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The Comprehensive Spending Review

October 20th 2010.

Welfare spending has been widely seen as bearing the brunt of the cuts in the CSR and Emergency

Budget. As in the Budget, much of the saving is spread over future years and is achieved by up-rating

more slowly and freezing some benefit rates so that inflation will reduce real values. There are some

larger savings from targeting particular groups. Some of the changes are hard to quantify precisely

as details have not yet been revealed.

The CSR also confirmed the intention of the government to introduce a simpler, seamless Universal Credit to be phased in over the next two parliaments. The Government have expressed their intention to ensure that work really does pay more than staying on benefits. It seems strange then that the main in-work welfare benefit, WTC, is being effectively cut. Perhaps the intention is simply to ensure that in-work benefit is cut less and therefore the net gain increased

The CSR has produced an additional £7bn of reduction in welfare in addition to the cuts made in the Emergency Budget.

Main Benefits Related Changes in the Comprehensive Spending Review

Capping benefits

The government will cap household benefit payments from 2013 at around £500 per week for couple and lone parent households and around £350 per week for single adult households, so that no family can receive more in welfare than median after tax earnings for working households. All Disability Living Allowance claimants, War Widows, and working families claiming the working tax credits will be exempt from the cap. This will have the greatest effect on families with larger numbers of children or high housing costs as can be seen in later examples.

Child Benefit

The government will withdraw Child Benefit from families with a higher rate taxpayer from January 2013. The intention is to save £2.5 billion a year by 2014-15. This proposal has created political furore because a working couple with overall income of over £80,000 a year could continue to receive Child Benefit while a couple with single earner would lose the benefit at about £44,000. The Chancellor said that he did not propose to make any further cutbacks to child benefit.

Tax Credits

The percentage of childcare costs that parents can claim through the childcare element of the Working Tax Credit (WTC) is being reduced from 80 per cent to 70 per cent in April 2011, saving £385 million a year by 2014-15. 60% of recipients of this help are single parents. The eligibility rules for Working Tax Credit will mean that couples with children must work 24 hours a week between them, with one partner working at least 16 hours a week in order to qualify for the WTC, saving £390 million a year by 2014-15. Previously the requirement was simply for 16 hours work. This means that couples where the hours of work are between 16 and 24 will be working too



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few hours to receive in-work benefits but, even where the claimant is working less than 16 hours, their income may be too high to receive JSA. The basic and 30 hour elements of the WTC are being frozen for three years from 2011-12, saving £625 million a year by 2014-15 The child element of Tax Credit is being increased above indexation by a further £30 in 2011-12 and £50 in 2012-13, in addition to the £150 and £60 increases provided at the June Budget. The government state that this will ensure that the overall outcome of the Spending Review will have no measurable impact on child poverty in the next two years. Pre-announcing such additions means, of course, that the real value of the increases will be reduced by the RPI index when introduced as well as the reduction in real values of the normal up-rating caused by the move to CPI from RPI

Employment and Support Allowance

Time limiting contributory Employment and Support Allowance for those in the Work Related Activity Group to one year is intended to save £2 billion a year by 2014-15. Those with no other resources will move onto the means-tested equivalent but those who, for example, have working partners will lose the entire income.

Housing Benefit

The government is increasing the age threshold for the Shared Room Rate in Housing Benefit from 25 to 35, saving £215 million a year by 2014-15. This means that single people will not qualify for the one-bedroom rate of LHA but only the lower shared room rate for another 10 years. Once again this may impact urban areas where young people tend to wish to live independently. It may be that shared accommodation is more likely to be rented furnished than self-contained properties.

Council Tax Benefit

The government has announced that it is reducing spending on Council Tax Benefits by 10 per cent and localising it, saving £490 million a year from 2013-14. In addition, the Government will provide greater flexibilities to local authorities to manage pressures on council tax from the same date. Council Tax Benefit will be devolved to Scotland and Wales. Although details have not been released it is understood that CTB is to be replaced by grants to local authorities in April 2013, who can then choose their own way of using money to rebate CT bills Grants are expected to be lower than current spending on CTB. This saves £0.5bn a year, but means losses amongst poor households. The move in many ways goes directly against ideas behind Universal Credit with different levels of government running different parts of the benefit system. It may create a “postcode lottery” or local authorities could use the scheme to persuade low-income households to live elsewhere. Experience shows that, as in many areas, giving policy creation powers to LAs results in radically different policies.

Disability Living Allowance

The government are removing the mobility component of Disability Living Allowance from people in residential care, except for those who are self-funding, saving £135 million a year by 2014.



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Pension Credit

In one of the few moves affecting the elderly, the government are freezing the maximum Savings Credit award in Pension Credit for four years, saving £330 million a year by 2014-15. This is the element which rewards those who have made some provision for their retirement. Capping the maximum increases the number of people who will see a penny for penny reduction in benefit for increases in income.

Support for Mortgage Interest

The government is extending for a further year the temporary change to the Support for Mortgage Interest scheme, to reduce the waiting period for new working age claimants to 13 weeks and increase the limit on eligible mortgage capital to £200,000, both of which were due to expire in January 2011 No announcement has been made about extending the two year limit of SMI for Job-Seekers Allowance claimants which will first affect people in January 2011.

Cold Weather Payments

The Chancellor said that he was making permanent the temporary increases to Cold Weather Payments provided in the past two winters, at a cost of £50 million a year, so that eligible households receive £25 for each seven day cold spell recorded or forecast where they live.

Pensions

The government reiterated their promise to uprate the basic State Pension by a triple guarantee of earnings, prices, or 2.5 per cent, whichever is highest The Government will speed up the pace of State Pension Age equalisation for women from April 2016 so that Women’s State Pension Age reaches 65 in November 2018. The State Pension Age will then increase to 66 for both men and women from December 2018 to April 2020. Following the faster increase to 66, the Government is also considering future increases to the State Pension Age to manage the ongoing challenges posed by increasing longevity, and will bring forward proposals in due course. In addition, the Government says that they will improve the quality and access to pensions in the Spending Review period.

Educational Maintenance Allowance

The Educational Maintenance Allowance which pays 16-18 year olds to remain in education in

England is to be “replaced” by “locally managed discretionary funds” to target support. More details

will be given later. For families with numbers of older children, even though the payments are made

to the children themselves, household incomes could be severely affected.

Social Housing

Landlords in England will be able to set rents between social and market levels for new tenants. They

will also be able to offer fixed-term tenancies rather than agreements for life. As current HB rules

allow full benefit payments for social rents we would assume that this change will presage the

application of LHA levels to, at least new, social rents. Again this can be expected to affect high rent,

high demand urban areas most.



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CSR Measures - Millions 2011 / 2012 2012 / 2013 2013 / 2014 2014 2015

Contributory Employment and Support Allowance: time limit for those in the Work Related Activity Group to one year

0 1,025 1,530 2,010

Housing Benefit: increased age limit for shared room rate from 25 to 35

0 130 225 215

Total household benefit payments capped on the basis of average take-home pay for working households

0 0 225 270

Disability Living Allowance: remove mobility component for claimants in residential care

0 60 130 135

Savings Credit: freeze maximum award for four years from 2011-12

165 215 260 330

Support for Mortgage Interest: extend temporary changes to waiting period and capital limit until January 2012

-70 -20 0 0

Cold Weather Payments: increase rate permanently to £25 from November 2010

-50 -50 -50 -50

Council Tax Benefit:10% reduction in expenditure and localisation

0 0 485 490

Child Benefit: remove from families with a higher rate taxpayer from January 2013

0 590 2,420 2,500

Working Tax Credit: freeze in the basic and 30 hour elements for three years from 2011-12

195 415 575 625

Working Tax Credit: reduce payable costs through childcare element from 80% to 70% restoring 2006 rate

270 320 350 385

Child Tax Credit: increase the child element by £30 in 2011 and £50 in 2012

-190 -510 -545 -560

Working Tax Credit: increase working hours requirement for couples with children to 24 hours

0 380 385 390

Child and Working Tax Credits: use real time information

0 0 0 300

Cuts 630 3135 6585 7650

Additions -310 -580 -595 -610

Total 320 2555 5990 7040



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Ferret Information Systems Ferret is the world’s leading company specialising in the application of technology to advanced

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Benefits after the White Paper

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