Benefits After The Act

Transcription

1 Benefits After The Act The Future of Means-Tested Benefits after the Welfare Reform Act 2012 Gareth Morgan Examining the effects of changes to UK means-tested benefits by the coalition government. February 2013 Ferret Information Systems February

2 1 Benefits After The Act The Future of Means-Tested Benefits after the Welfare Reform Act 2012 Contents Benefits After The Act... 5 The Context... 5 Changes to the current system... 6 Main Benefits Related Measures in the Emergency Budget... 6 Financial Results of the Budget Measures... 8 Main Benefits Related Changes in the Comprehensive Spending Review Financial Results of the CSR Measures Autumn Statement Overall Impact Consolidated Cuts and Increases from the Budget and CSR Autumn Statement Budget Autumn Statement The New Structure of Means-Tested Benefits Two systems from 2013 until -? Universal Credit Abolition of unemployment Disregards Mortgage Support in work Capping of total benefits Transitional Protection One standard deduction rate of 65% Housing support goes local Sanctions and penalties On-Line benefit claims and automatic operation Social Tenants Capital Cut-Off in Universal Credit The Structure of Universal Credit Needs Assessment Universal Credit Rates from April Assessment of resources Income Capital... 28

3 2 Benefits After The Act The Future of Means-Tested Benefits after the Welfare Reform Act 2012 The Calculation of Universal Credit Modelling and Examples Methodology The Effects on Working Age Claimants Steady state examples Example 1. Steady State Tenant 2 Children Example 2. Steady State - Tenant - 4 children Example 3. Single Childless Tenant Example 4. Steady State Owner 2 Children Example 5. Home Owners with Low Earnings and Universal Credit Example 6. Single, childless owner Mortgage limits Example 7. Owner 2 Children Example 8. In- work mortgage support exclusion Childcare in Universal Credit Example 9. 2 Children Example Children Couples and Childcare Example Children Example Children The Benefits Cap Capping in the Current System Universal Credit and Capping The Effects of Capping in the Current System Example 13. Renting Four Children and No Children Example 14. A Cliff-Edge Cap The Effect of Children on Benefits and the Cap Example 15. Children and the Housing Benefit Cap Example 16. Children and the Universal Credit Cap Welfare Reform and Older People Pension Credit Guarantee Pension Credit Savings Pension Credit The New Housing Credit in Pension Credit Plus... 64

4 3 Benefits After The Act The Future of Means-Tested Benefits after the Welfare Reform Act 2012 Children The effects on older people Increases in benefit rates Limited take-up of benefits Pension Credit Savings Element Two systems from ? Over-fifties returning to work Changes in pension age Abolition of retirement age Work in Retirement Work in Retirement post Universal Credit Benefits Reliance in Couples and Single Claimants Income Make up of Pensioners Qualifying age for Pension Credit Income & younger partners Cold Weather Payments Capital Cut-off Carers addition Single Tier Pensions Mortgage support Mortgages and younger partners Mortgages and younger partners - example Consultation on repayment of Mortgage Interest Support (SMI) Disregard of home when in residential care Non-dependant deductions Support for those with disabilities Personal Independence Payment Capital and tariff incomes Passporting Older People Protected Council Tax Support England Older People Working Age Scheme... 82

5 4 Benefits After The Act The Future of Means-Tested Benefits after the Welfare Reform Act 2012 Default Scheme Timing and introduction Scotland Wales Northern Ireland Conclusion How Ferret can help you understand and mitigate the changes Advisers Authorities, networks, associations and organisations Individual advice systems Data collection, transformation and assessment Sustainability and affordability Workflow, embedding and batch processes Pilot and local Employment and HR Specialist assessments Consultancy The Future Benefits Model (FFBM) ucforward Ferrcalc Webben and Webben-Pro e-learning & Training e-learning Beat The Cuts! ucforward Ferrcalc E-Learning Strati Webben Costs... 92

6 5 Benefits After The Act The Future of Means-Tested Benefits after the Welfare Reform Act 2012 Benefits After The Act Not for reproduction without written permission. January 2013 The Context The government published the Welfare Reform Bill 2011 on February 16 th 2011 and, after a contentious passage through both houses, Royal Assent was given on the 8 th of March We now have a clear picture of the redesign of social security that this government, with some consensus, is introducing. Draft regulations have now been published which lay out the detail of the future system of means-tested benefits which will be introduced over the next few years. Although some fine detail is still to appear, the broad structure is now set down. The Act encapsulates much that had been pre-announced. Four 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 22 nd 2010 introduced net cuts to the welfare system of 11bn a year by The Comprehensive Spending Review (CSR) of October 20th 2010 added another 7bn to that. The White Paper Universal Credit: welfare that works published on November 11 th 2010 looked forward to the system which will replace the current mix of benefits for those of working age and forms much of the basis for the Act. The Autumn Statement of November 2011 removed a proposed increase in Child Tax Credit and froze some elements of Working Tax Credit. The Autumn Statement of December 2012 introduced a further 3.7bn of cuts. It is important to recognise that the development of the Universal Credit has overlapped the introduction of severe cuts to the existing welfare benefits system and that there are some contradictions between the targeting of the cuts and the structure of the new benefit. In particular, some of the short-term changes to Tax Credits seem at odds with the seamless approach of Universal Credit. It is also important to note that, even after the passage of the Act, the existing schemes will continue to operate and significant changes will come into effect as a consequence of amendments. Some of these changes will be in force for only a short time before the new scheme takes over. Some proposed changes have already been cancelled and these are marked by strikethrough. In this paper we have set out to present the human impact of changes and have used a real present value approach, described in the methodology on page 28. The cuts and additions made in the Budget are described in more detail on page 6 and those made in the CSR can be found on page 10. 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, or the Rossi Index, to uprating by the, usually lower, CPI. It is for this reason that we have used present values in the modelling.

7 6 Benefits After The Act The Future of Means-Tested Benefits after the Welfare Reform Act 2012 Changes to the current system It is important not to focus solely on the new system which is brought into being by the Welfare Reform Act Much of the impact of welfare reform on benefits recipients will be caused by the changes to the existing benefits system, the effects of which will be to lower the base from which the new system will start and from which its results will be measured. The changes, almost entirely cost-savings, are substantial in scale and effect as can be seen when considering them in a consolidated list. Main Benefits Related Measures in the Emergency Budget 22 nd 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 uprating rules. The budget estimates the change will cut spending on benefits by 5.8bn a year by On the September figures, normally used for benefits uprating, the CPI was 5.2% while the RPI was 5.6%. From 2012 pensioner benefits will rise in line with earnings. This continues the previous administration s generous treatment of the elderly. But see later the Triple Guarantee. An annual Child tax credit (CTC) increase of 150 above CPI in and 60 above CPI in The headline increases, for each child, will, of course, be worth less in real terms because of inflation by the time they are introduced. The Autumn Statement in 2011 removed the proposed increase in 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 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 started 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 is no longer be any flat rate entitlement to the 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.

8 7 Benefits After The Act The Future of Means-Tested Benefits after the Welfare Reform Act 2012 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 from April 2012 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. 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 10,000 in April 2011 and to 5,000 in April 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 2012, 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 April 2011, for new claims, the figures will be based on the 30 th 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 the maximum rental figure from which Housing Benefit is assessed, lowering benefit levels where rent is in excess of that. 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 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 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. 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. This proposal was removed from the Welfare Reform Act.

9 8 Benefits After The Act The Future of Means-Tested Benefits after the Welfare Reform Act 2012 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 and lower costs by about 20%. Financial Results of the Budget Measures The overall annual saving from these measures is forecast to reach about 11bn by 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 ,170 2,240 3,900 5,840 Disability Living Allowance: reform gateway from Lone parent benefits: conditionality extended to those with children aged 5 and above from October Health in Pregnancy Grant abolished Sure Start Maternity Grant: applies to first child only from Support for Mortgage Interest: payments set at the average mortgage rate from October Saving Gateway: not introduced in July Housing Benefit reforms: Local Housing Allowance: set at the 30th percentile of local rents from Deductions for non-dependents: reverse previous freezes on uprating and maintaining link with prices from Social sector housing: limit working age entitlements to reflect size of family from Switch to CPI indexation for Local Housing Allowance from Reduce awards to 90% after 12 months for claimants of Jobseekers Allowance Additional bedroom for carers from Local Housing Allowance: caps on maximum rates for each property size, with 4-bed limit from Additional Discretionary Housing Payments from Tax Credits Tax credits second income threshold: reduced to 40,000 from First and second withdrawal rates: increased to 41% from

10 9 Benefits After The Act The Future of Means-Tested Benefits after the Welfare Reform Act 2012 Child Tax Credit: taper the family element immediately after the child element from Child Tax Credit: remove the baby element from Working Tax Credit: remove the 50 plus element from Child Tax Credit: reversed the supplement for children aged one and two from Reduced the income disregard from 25,000 to 10,000 for two years in then to 5,000 from Introduced an income disregard of 2,500 for falls in income from New claims and changes of circumstances: reduce backdating from 3 months to 1 month from Child Tax Credit: increased the child element by 150 in and 60 in above indexation Child Benefit: rates frozen for three years from Basic State Pension: introduce triple guarantee from Pension Credit Minimum Income guarantee: matching basic State Pension cash increase in Child Trust Funds: phased abolition of Government contributions from Table 1 Cuts Additions Total

11 10 Benefits After The Act The Future of Means-Tested Benefits after the Welfare Reform Act 2012 Main Benefits Related Changes in the Comprehensive Spending Review October 20 th The CSR produced an additional 7bn of reduction in welfare spending in addition to the cuts made in the Emergency Budget. 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 The intention is to save 2.5 billion a year by 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) was reduced from 80 per cent to 70 per cent in April 2011, saving 385 million a year by % 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 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 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 , saving 625 million a year by The child element of Tax Credit was increased above indexation by a further 30 in and a further 50 in , 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. The Autumn Statement in 2011 removed the proposed child element increases for 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 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.

12 11 Benefits After The Act The Future of Means-Tested Benefits after the Welfare Reform Act 2012 Housing Benefit The government is increasing the age threshold for the Shared Room Rate in Housing Benefit from 25 to 35 in 2012, saving 215 million a year by 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. 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 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. 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. The government announced in late 2011 that its intention is to retain broadly the current CTB scheme for pensioners while local authorities set-up their own schemes for working age people. 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 Following campaigning, it has now been decided not to go ahead with the proposal 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 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 The two year limit of SMI for Job-Seekers Allowance claimants which first affected people in January 2011 has been extended into Universal Credit. 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

13 12 Benefits After The Act The Future of Means-Tested Benefits after the Welfare Reform Act 2012 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 The State Pension Age will then increase to 66 for both men and women from December 2018 to April Following the faster increase to 66, the Government is also considering future increases to the State Pension Age to manage the on-going challenges posed by increasing longevity, and will bring forward proposals in due course. In addition, the Government says that they will improve the quality of, and access to, pensions in the Spending Review period. Educational Maintenance Allowance The Educational Maintenance Allowance which pays 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 Social 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. Financial Results of the CSR Measures CSR Measures - Millions 2011 / / / 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 Total household benefit payments capped on the basis of average take-home pay for working households Disability Living Allowance: remove mobility component for claimants in residential care Savings Credit: freeze maximum award for four years from Support for Mortgage Interest: extend temporary changes to waiting period and capital limit until January Cold Weather Payments: increase rate permanently to 25 from November

14 13 Benefits After The Act The Future of Means-Tested Benefits after the Welfare Reform Act 2012 Council Tax Benefit:10% reduction in expenditure and localisation Child Benefit: remove from families with a higher rate taxpayer from January ,420 2,500 Working Tax Credit: freeze in the basic and 30 hour elements for three years from Working Tax Credit: reduce payable costs through childcare element from 80% to 70% restoring 2006 rate Child Tax Credit: increase the child element by 30 in 2011 and 50 in Working Tax Credit: increase working hours requirement for couples with children to 24 hours Child and Working Tax Credits: use real time information Cuts Additions Total Table 2 Autumn Statement 2011 As well as the alterations to previous announcements, included above, the statement also froze the couple and lone parent elements of Working Tax Credit for Overall Impact As can be seen in Figures 1 and 2 below, the net impact of these changes is an overall cut of about 18 Billion a year by The cancellation of the proposed increase in Child Tax Credit will add almost 1 Billion pounds a year to that.

15 14 Benefits After The Act The Future of Means-Tested Benefits after the Welfare Reform Act 2012 Consolidated Cuts and Increases from the Budget and CSR Total Welfare Cuts Other CTB Disability benefits ESA Housing Benefits Child Benefit Tax Credits CPI Indexing Figure 1 Billions

16 15 Benefits After The Act The Future of Means-Tested Benefits after the Welfare Reform Act Total Additional Spending and Savings Net Savings Cold Weather Payments Pension reforms Child Tax Credit Figure 2 Billions

17 16 Benefits After The Act The Future of Means-Tested Benefits after the Welfare Reform Act 2012 Autumn Statement 2011 The Autumn Statement removed the proposed child element increases in child tax credit for Budget 2012 Child benefit to be gradually withdrawn from January 2013 for those with annual incomes between 50,000 and 60,000 by income tax increases. No child benefit for those with incomes over 60,000. A flat rate pension announced to be introduced in the next parliament. Further proposals for pension age changes to be announced to reflect longevity. Working tax credit to be available for 16 hours work for couples where one partner receives carer s allowance. Autumn Statement 2012 Most working age benefits and tax credits will be uprated by 1% for a three year period from This will not include disability, carers and pensioner premiums and elements or the support component in employment and support allowance which will all continue to be linked to CPI. Local Housing Allowance which was to be linked to CPI will increase, in most areas, by 1% for two years from 2014.

18 17 Benefits After The Act The Future of Means-Tested Benefits after the Welfare Reform Act 2012 The New Structure of Means-Tested Benefits Two systems from 2013 until -? The move of working age claimants to Universal Credit will be a gradual transition rather than an overnight switch. The old and new systems will run in parallel for some years from 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. The announced timetable, which has already seen some slippage, is: In April 2013, in Tameside, Oldham, Wigan and Warrington councils will begin to operate Universal Credit as pilot areas. Between October 2013 and April 2014, new claimants will begin to receive universal credit in place of jobseeker's allowance, employment and support allowance, housing benefit, working tax credit and child tax credit. This was originally the date to begin the national implementation of universal credit. The timetable now says this will be the date to begin roll-out of the national implementation of universal credit. From the same date a further 500,000 existing claimants (and their partners and dependants) will also move on to universal credit as and when their circumstances change significantly, such as when they find work or when a child is born. From April 2014, the second phase will give priority to households who will 'benefit most from the transition' such as those working tax credit claimants who currently work a small number of hours a week but 'could work more hours with the support that universal credit brings'. Overall 3.5 million existing claimants (and their partners and dependants) will be transferred onto universal credit during this second phase The last and final phase, which begins at the end of 2015 and runs through to the end of 2017, will see around 3 million households being transferred to Universal Credit by local authority boundary with a focus on safeguarding financial support, such as housing benefit payments to claimants as the old benefit system winds down. Now a very different timetable is appearing. In the limited pilot area around Manchester, Universal Credit will be available only for new claims by single jobseekers without children who are either paying rent or who are nonhouseholders. In October 2013, one Jobcentre in each of the seven Benefit Delivery Groups will take similar claims In January 2014 the remaining districts start taking claims

19 18 Benefits After The Act The Future of Means-Tested Benefits after the Welfare Reform Act 2012 In April 2014 all districts will be taking jobseekers claims but including those with mortgages and children. Some people will still claim JSA after this the Tail including those in further education, pregnancies and fixed future events These will still only be new claims. Migration will start later and is still in the early planning stages. Transitional protection will be provided to existing claimants who have a calculated entitlement to Universal Credit that is lower than the total of relevant benefits and tax credits they were previously receiving. This will be at a fixed cash rate which will be eroded by future benefit increases and ended by significant changes of circumstance. Older people will see large changes to the Pension Credits system but will not, if already receiving Pension Credit, be transferred, or be able to transfer, to Universal Credit even where they would be awarded Universal Credit if making a new claim.

20 19 Benefits After The Act The Future of Means-Tested Benefits after the Welfare Reform Act 2012 Universal Credit Universal Credit will share much of the structure of existing benefits and credits. All means-tested benefits must assess the needs of the claimant and test those, in some way, against their existing resources. The way in which the needs section of the means-test for Universal Credit is determined will be an amalgam of those used for existing benefits. So will much of the means section mirror the way in which existing schemes look at income and capital. The major differences lie in the aggregation of the needs from several different current benefits and the way in which the use of earnings, in particular, will be used to determine the amount of Universal Credit payable. Instead of several separate benefits carrying out their own assessments with complex interlinking, passporting and overlapping, there will be one single method of reduction of benefit from a maximum possible figure of Universal Credit. There are a number of features which will differentiate Universal Credit from the existing system. Abolition of unemployment There will be a less clear division between unemployment and employment. People will receive the same benefit, Universal Credit, at different rates, 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 were intended to largely disappear but in some important areas such as conditionality, capping and mortgage interest support the division seems likely to persist. Many of the current tests which use hours of work will be replaced by tests of threshold amounts derived from hours and rates of pay. Disregards The disregard the amount of earnings which people are allowed to keep before it affects their benefit will be made much larger for some groups in Universal Credit. During the course of the bill the original proposed disregards were increased, and a disregard introduced for single people, to compensate for potential Council Tax Benefit changes. This disregard will however be reduced sharply, with a much lower minimum, for those who have housing costs included in their Universal Credit needs calculation. Mortgage Support in work Help with mortgage interest for home owners will not be available to all, instead it is being limited to those who have no earnings at all. This creates a clear poverty trap for those homeowners with mortgages who are considering low paid or part time employment. A consultation document has recently invited responses to further changes to the support for mortgage interest 1 scheme and these are discussed later. Capping of total benefits Total amounts of benefit for those not in receipt of DLA, the support component of ESA, industrial injuries benefits, war pensions or qualified, by work hours, to receive Working Tax Credit, will be limited to the median level of earnings of working families or single people. 1 Support for Mortgage Interest - Informal call for evidence December DWP.

21 20 Benefits After The Act The Future of Means-Tested Benefits after the Welfare Reform Act 2012 The cap will apply to the combined income from the main out-of-work benefits (Jobseeker s Allowance, Income Support, and Employment Support Allowance) and other benefits such as Housing Benefit, Child Benefit and Child Tax Credit, Industrial Injuries Disablement Benefit, Carer s Allowance (unless a member of the household is entitled to Disability Living Allowance, Personal Independence Payment, Attendance Allowance or Constant Attendance Allowance). One-off benefits (for example Social Fund Loans) and non-cash benefits (for example Free School Meals) will not be included in the assessment of benefit income. In Work Credit, which can be paid to lone parents, and Return to Work Credit, which can be paid to those leaving incapacity benefits, are intended to act as work incentives and so will also not be included when calculating benefit income. There will be a Housing Benefit only cap, operated by local authorities, from April 2013, which will be applied to those yet to move to Universal Credit. Transitional Protection Transitional protection, which may apply for a long period, will make sure that nobody getting benefits will move onto a lower cash amount when transferring to Universal Credit. The protection will be cash limited and thus eroded as benefit rates increase each year while the topped-up total remains the same. How this will work in more complex situations such as later reconciliation of tax credits or limited periods of mortgage support is not clear. The ending of this protection because of changes of circumstance is expected to be triggered only by a major change rather than a trivial one. One standard deduction rate of 65% There will be one single, standard rate of deduction from net earnings, ensuring that people will keep more of the increase in earnings, as they earn more, than under current rules. In practice the total marginal deduction rate will be higher than 65% after tax and national insurance. Housing support goes local Housing support for tenants will become much more localised and variable from place to place, as rent limits for Housing Benefit and Universal Credit become embedded at different levels in different areas. These levels will be increased in line with CPI annually rather than being linked to the rental market. 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. The Act introduces a claimant commitment which will be a formal statement of requirements and penalties. Civil Penalties Failure to disclose information, report changes or negligence may result in financial penalties. Administrative Penalties These are intended to penalise fraud and are linked to the amount of benefit gained.

22 21 Benefits After The Act The Future of Means-Tested Benefits after the Welfare Reform Act 2012 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 point for contacting the benefits system. Universal Credit will automatically, month by month, reflect changes in earnings from employment, for most claimants, using a new, yet to be introduced, HMRC PAYE computer system. Social Tenants The Act provides that the dwelling size limits for social tenants will be implemented by imposing a percentage cut, linked to the number of additional bedrooms, rather than by the equivalent of a Local Housing Allowance. The draft regulations introduce a 14% reduction in Housing Benefit for one extra bedroom and 25% for two or more. Capital Cut-Off in Universal Credit The intention is that the treatment of capital will be similar to that under Income Support and other means tested benefits currently. Capital below a certain level will be fully disregarded and there will be a notional income from capital above that amount. Where a claimant has capital above a certain level, they will not be entitled to Universal Credit. In Tax Credits today there is no such concept as a cut-off or notional interest. Real income from capital is used in the same way as for tax. When those currently getting tax credits, with more than 16,000 in capital, claim Universal Credit they ll find that they re not entitled to the benefit. The government estimate that by 2014/15 the Tax Credits population will include up to 100,000 households with capital over 16,000 and around 100,000 with capital between 6,000 and 16,000. Transitional protection will apply to these cases while their circumstances remain the same.

23 22 Benefits After The Act The Future of Means-Tested Benefits after the Welfare Reform Act 2012 The Structure of Universal Credit Needs Assessment How much the household needs is determined by a number of factors. These mirror the elements in current means-tested benefits schemes but bring them together into one calculation. Universal credit will be calculated for a household and will be made up of personal amounts payable for single adults and couples (with lower rates for claimants under 25), plus additional amounts for children, disability, caring and housing costs. Personal Elements There will be an adult s standard allowance, with different rates for single people and for couples. There will be lower rates, as now, for those under 25 years of age. There will be a single rate of child element for those up to 19 years of age, with similar requirements to today s rules, but with a higher rate for the oldest child, to compensate for the family element in tax credits. Disability and incapacity The current benefit system includes a range of payments for disabled people (for example Employment Support Allowance and its components, disability premium in income-related benefits, additional severe and enhanced disability premiums and disability elements within tax credits). For adults, the benefit will replace the existing provision with two elements to reflect the extra costs of longer durations on Universal Credit. These elements will be based on limited capability for work and on limited capability for work-related activity, reflecting the current ESA components. The differential existing in current benefits between the two components is much larger in Universal Credit. For disabled children, the policy is to mirror the two elements for adults. The higher rate will be based on the child being eligible for the highest rate of the DLA or PIP care component (and widened to include children who are registered blind). The lower rate will be based on the child being eligible for the other rates of DLA and will be less than the current amount in Child Tax Credit. The Government is also removing the current rule which allows an individual to simultaneously claim both a disability and a carer premium for themselves. This overlap will not occur in Universal Credit as the individual would receive only one element even if they are eligible for both the carer element and one of the limited capability for work elements. The lack of any equivalent to the current Severe Disability Premium will be a serious loss to the most severely disabled who receive little care. Carers Element In Universal Credit there will be a wider qualification for Carers Element than in current benefits where receipt, or underlying entitlement, to Carers Allowance is needed. The new requirement is that there must be regular and substantial unpaid caring responsibilities for a severely disabled person. The qualifying condition includes the receipt of Carers Allowance but extends entitlement further to those who are currently excluded because of earnings.

24 23 Benefits After The Act The Future of Means-Tested Benefits after the Welfare Reform Act 2012 Childcare Universal Credit will extend the current childcare support system in benefits to those working below 16 hours a week as well as those working more hours who can currently receive support. Support will be available for 70 per cent of approved childcare costs up to a maximum figure of: a week for one child 210 a week for two or more children Parents will be expected to report their childcare costs each month. Housing support Rent The amount of the housing cost element for private-sector claimants will be the lower of the actual rent or a standard amount provided by rent officers based on the current Local Housing Allowance approach. The LHA figures for each area will have the link to market rents broken and be uprated annually based on the 2012 figures. Social tenants will receive benefit based on their actual rents with some limitations relating to the number of bedrooms in the property. Service charges Part of the rent may include an amount in respect of more limited service charges than current benefits include. A consultation is now underway following concern about the original very limited proposals. Social Tenants Size limits for social tenants will be implemented by imposing a percentage cut, linked to the number of additional bedrooms, rather than by the equivalent bedroom limits of a Local Housing Allowance used for private tenants. There will be a 14% reduction in eligible rent for one extra bedroom and 25% for two or more. The size rule mirrors those in the private rented sector so that households are allowed one bedroom for each person or couple living as part of the household, except that: 2 Children under 16 of the same gender are expected to share 2 Children under 10 are expected to share regardless of gender A disabled tenant or partner who needs a non-permanent resident overnight carer will be allowed an extra bedroom. Boarders and sub-tenants will not qualify as relevant occupants but any income from them will be disregarded. Mortgages Mortgage interest support for home owners will not be available to all; instead it is being limited to those with no earnings. The current scheme provides support to single people working under 16 hours a week and couples working under 24 hours.

25 24 Benefits After The Act The Future of Means-Tested Benefits after the Welfare Reform Act 2012 This will have the effect of creating a poverty trap for many of those homeowners in low paid or part-time work. Some examples are shown later. There will be a two year limit on payment of mortgage support for those without disabilities. Other Housing Other housing types, including non-mainstream types of accommodation such as houseboat mooring charges, site-rents, hostels, temporary accommodation and supported accommodation will be supported with Universal Credit. Non-dependants A non-dependant is someone who lives in the claimant s home, but is not a partner or dependent child. The person lives in the home on a non-commercial basis and will normally be a close relative (parent, brother, sister,) or a son or daughter who is no longer a child or young person. On the basis that the non-dependant should make some contribution to housing costs a deduction is made from the maximum rent eligible for housing benefit, and eligible council tax. This deduction in the current scheme depends on the income and circumstances of the non-dependant but has been substantially increased over the last two years. The non-dependant rules are being simplified in Universal Credit to a single flat rate of Housing Cost Contribution (HCC) of about a week but payable by each member of a couple. Those over 21 on benefits will be expected to contribute instead of those over 25 as at present. The list of those in Universal Credit who, as tenants, will not be liable to have a non-dependant deduction applied includes a single person (or a lone parent with a child under 5) or a member of a couple where each member of the couple is a person who is: a person who is blind or registered as blind a person in receipt of the care component of disability living allowance at the middle or highest rate a person in receipt of attendance allowance a person in receipt of the daily living component of a personal independence payment No non-dependant deduction will be made where the non-dependant is a single person (or a lone parent with a child under 5) or a member of a couple where each member of the couple is a person who is: a person who is under 21 years old a person in receipt of state pension credit a person in receipt of the care component of disability living allowance at the middle or highest rate a person in receipt of attendance allowance a person in receipt of the daily living component of a personal independence payment a person in receipt of carer s allowance a person who is a prisoner

26 25 Benefits After The Act The Future of Means-Tested Benefits after the Welfare Reform Act 2012 Universal Credit Rates from April Table 3 Each monthly assessment period Weekly equivalent Element Standard allowance single claimant aged under single claimant aged 25 or over joint claimants both aged under joint claimants where either is aged 25 or over Child element first child or qualifying young person second and each subsequent child or qualifying young person (may be considered as the standard amount plus per week or per month for 1st child) Additional amount for disabled child or qualifying young person lower rate higher rate LCW and LCWRA elements limited capability for work limited capability for work and work-related activity Carer element Childcare costs element - 70% of eligible costs up to a maximum amount for one child maximum amount for two or more children Benefits Cap Net Earnings Threshold

27 26 Benefits After The Act The Future of Means-Tested Benefits after the Welfare Reform Act 2012 Assessment of resources The calculation of income for Universal Credit is very similar to current benefits schemes. There is some simplification in areas such as income from boarders and sub-tenants and a more complex, in many ways more generous, system of earnings disregards. There are substantial differences in effects between Universal Credit income assessment and that used in Tax Credits which creates some groups of substantial losers. Income may be conveniently split into three groups: Earnings Other Income Notional income from capital Income Earnings Actual net earnings from employment are intended to be automatically taken into account using HMRC s new real time information system (RTI) system. Although this was intended to be real time on a monthly basis and UC was to be amended automatically to reflect changes in earnings, it is now acknowledged that there may be some lag. As in the current means-tested benefits, earnings will be taken into account as net earnings - after deducting tax, National Insurance and 100 per cent, instead of the current 50 per cent, of pension contributions. This differs from Tax Credits where gross earnings are used in the assessment and makes direct comparison between the two schemes difficult. Self-Employed assumed to earn at least minimum wage Self-employed people will be assumed to be in gainful employment where they work more than half the expected number of hours for their circumstances. Where their earnings fall below a set level, they will be assumed to have that level of earnings. There will be a start-up period rule, for 12 months, which applies without this condition. Self-employed people will be expected to submit monthly earnings figures. Earnings Disregards The disregard the amount of earnings which people are allowed to keep before it affects their benefits will be made much larger for some groups in Universal Credit. During the course of the bill the proposed disregards were increased, and a disregard introduced for single people, to compensate for potential Council Tax Support changes. This disregard will however be reduced sharply, with a much lower level for those who need help with their housing costs. The disregard only applies to earnings not to other income types. Only one disregard is applied to couples who both have earnings. There is a substantial increase for many groups over the current earnings disregard in means-tested benefits although this is, at least partially, consequential on the move from the very different Tax Credits schemes.