What is universal credit - and what's the problem?

woman with pushchair and man walking into a job centre Image copyright Getty Images

Labour leadership hopeful Lisa Nandy has said the principle of universal credit - the major reform to simplify the benefits system - was "the right one", but criticised cuts and a lack of support for claimants.

Universal credit was introduced by the Conservative-led coalition government in 2010, but has proved controversial almost from the beginning.

So what is universal credit?

Universal credit is a benefit for working-age people, replacing six benefits and merging them into one payment:

  • income support
  • income-based jobseeker's allowance
  • income-related employment and support allowance
  • housing benefit
  • child tax credit
  • working tax credit

It was designed to make claiming benefits simpler.

A single universal credit payment is paid directly into claimants' bank accounts to cover the benefits for which they are eligible.

Claimants then have to pay costs such as rent out of their universal credit payment - though there is a provision for people who are in rent arrears or have difficulty managing their money to have their rent paid directly to their landlord.

The latest available figures show that there were 2.6 million universal credit claimants as of October 2019. Just over a third of claimants were in employment.

How does it work?

The idea of universal credit is that it can be claimed whether you are in or out of work.

There's no limit to the number of hours you can work per week if you receive it, but your payment reduces gradually as you earn more.

It is designed to mean that no-one faces a situation where they would be better off claiming benefits than working.

Under the old system many faced a "cliff edge", where people on a low income would lose a big chunk of their benefits in one go as soon as they started working more than 16 hours.

In the new system, benefit payments are reduced at a consistent rate as income and earnings increase - for every extra £1 you earn after tax, you will lose 63p in benefits.

How much you can receive in universal credit payments in the first place depends on things like whether you have children and if you qualify for housing or disability payments.

Payments are then reduced from this maximum amount the more you earn - although each household can earn a certain amount, called a work allowance, before they lose anything.

What are the concerns?

Cuts to universal credit since it was announced have made the overall system significantly less generous.

For example, the work allowance has been cut so people can earn a smaller amount of money before their benefit payments start to reduce.

Low pay charity the Resolution Foundation warned that these kind of cuts may weaken the benefit's main purpose - to make sure people always feel it's worthwhile to work more hours.

There have also been concerns over how long new claimants have to wait before receiving the benefit.

Universal credit is paid in arrears. For example, if you sign on on 1 January, you'll receive your first payment on 5 February, based on what you earned in the previous month.

So four weeks of earnings are assessed, plus a further week to process the payment.

Those who don't have enough money saved to wait 35 days from claim to payment can get an advance on their first instalment of the benefit. But this is treated as a loan that is then taken off future benefits payments for the following year.

The fact that it is assessed monthly has also proved difficult for some people who are paid weekly and whose pay fluctuates throughout the month.

In a written statement to Parliament, Work and Pensions Secretary Therese Coffey said. "we provide alternative payment arrangements such as more frequent payment options and managed payments to landlords."

Will some people lose money?

Transferring onto universal credit from the old system will mean a loss of at least £1,000 a year for 1.9 million adults, and a gain of at least £1,000 a year for 1.6 million adults, according to an April 2019 report by independent think tank the Institute for Fiscal Studies.

Those with the lowest incomes stand to lose the most.

The government has set aside £3bn in total to ease this process, designed to ensure that no-one moving from the old to the new system will lose out initially.

But new claimants won't benefit from the protection and if people's circumstances change or if they come off benefits and then go back on them, they will lose this transitional protection.

Think tank the Resolution Foundation in 2017 said that, "the long list of conditions that are deemed to reflect a change in circumstance, bringing such support to an end, is likely to mean relatively short durations of protection".

The independent Office for Budget Responsibility said in 2018 that around 400,000 claimants would receive the protection.

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