It was meant to “make work pay,” but new research from the University of Bath Institute for Policy Research (IPR) shows that Universal Credit (UC) can make working households' incomes more volatile, less secure, and less predictable. In some cases, working families are worse off and stripped of vital means-tested help like council tax support, free school meals and free prescriptions.

Knowing that the amounts you (and/or your partner) receive through earnings and/or benefits will cover your basic living expenses is one of the fundamental building blocks of income security and financial well-being.

For people in low-paid work and moving in and out of insecure forms of employment, earnings top-ups can be a lifeline, making the difference between having enough money to live on and having to borrow, between taking a job or remaining on benefits. Replacing six means-tested benefits and tax credits1 with a single monthly household payment, Universal Credit is the UK’s main, means tested, working-age benefit for supplementing low household income for people both with and without earnings. It has been designed to respond swiftly to changes in income, earnings and circumstances, monthly, in real time, with the intention of helping claimants to budget, reducing errors and overpayments, and incentivising work and higher earnings.

As of December 2023, 6,352,771 people were claiming Universal Credit, approximately 39 per cent of whom were in paid work, or living with a partner who was working2. When the remaining three million or so claimants of legacy benefits and tax credits have all been moved onto UC, an estimated nine million adults, just under a quarter of the working-age population, will be claiming it, approaching half of whom are likely to be employed or self-employed.

To date, policy interest and research about Universal Credit has focussed on the impacts on and experiences of the poorest, mainly out-of-work, households. There has been much less focus on working households and no systematic research into how working claimants experience UC. In particular, little is known about how changes in monthly earnings affect the UC payment, how stable or volatile this makes household income, nor the effects on household budgeting. Based on the lived experience of 61 Universal Credit claimants in 42 households, this is what our research set out to discover. A particular focus was the monthly means test in which the benefit payment is automatically adjusted upwards or downwards based on a household’s reported income and earnings in the previous month. We were also keen to explore whether and how the system of monthly assessment shapes work-related decisions. 

Policy Recommendations

Allow working claimants to keep more of their earnings.

The relative costs and benefits of reducing the taper rate, increasing the work allowance and extending it to a wider group of claimants should be assessed. Further research is also needed into UC claimants who are self-employed and subject to the minimum income floor.

Increase the level of UC allowances and elements.
Findings here support calls from the Joseph Rowntree Foundation (JRF) and the Trussell Trust for an ‘essentials guarantee’ . Working-age benefits should also be annually uprated in line with earnings, as suggested by the Resolution Foundation . Restoring benefits to previous historical levels would help claimants to generate a savings buffer – essential for managing dips in monthly household income when earnings and/or UC payments may fall.

Reform monthly assessment to increase income security for working claimants.
Reform monthly assessment to increase income security for working claimants: Monthly-paid claimants adversely affected by the multiple counting of wages can now have one wage treated as though paid in a different assessment period. The feasibility of extending these rules to those paid fortnightly and four-weekly should be explored. Another option which could potentially encourage claimants to increase their working hours would be to provide longer-term fixed UC awards of three or six months. More upfront information and advice should also be communicated to new UC applicants about the significance of the date a claim is made, giving them the option to defer the start date. Claimants already in work, or who move to a job with a different pay frequency or pay date, should similarly be given the option of changing their assessment period.

Revise the rules and earnings thresholds governing other means-tested and discretionary help.
If the policy intent of UC to always make work pay is to be achieved, the loss of passported benefits and other means-tested help as earnings rise and UC entitlement falls – including council tax support, free school meals and free prescriptions – is in need of urgent review. Cliff edges should be removed, earnings thresholds increased and greater standardisation introduced to reduce inconsistency and geographic variability in entitlement.

Minimise deductions for debt and other reductions in entitlement.
The maximum amount of deductions should be further reduced and historical overpayments and social fund debts written off. Higher and variable deductions for households with earnings should also end. We would also endorse calls for the two-child limit, benefit cap, spare room subsidy and nondependent adult deduction to be abolished. The lower standard allowance paid to the under 25s should also be reviewed.

Reform the childcare element of UC.
Notwithstanding recent changes to the Government’s childcare offer, to reduce the financial difficulties caused by upfront childcare payments for working claimants and the uncertainty of variations in fees refunded in arrears, and to prevent the undermining of incentives to work or earn more, particularly among ‘second earners’ in couples, the UC childcare element requires further reform.

Reform eligibility criteria for Budgeting and Change of Circumstance
Advances and the Help to Save scheme. Eligibility criteria for budgeting advances should be revised to allow those with earnings above the current threshold (£2,600 for a single claimant and £3,600 for a couple) to apply. Eligibility criteria for change of circumstances advances should also be reviewed. The minimum net monthly earnings of £722.45 needed to open a ‘Help to Save’ account should also be reduced to allow lower-earning claimants to benefit.

Increase employer engagement to minimise adverse financial effects for employees in receipt of UC.
The Department for Work and Pensions (DWP) should make efforts to raise awareness among employers about the way in which pay(roll) systems, RTI submissions and remuneration policies and practices can affect UC entitlement. Their engagement should be sought as to the best way of mitigating the adverse financial effects that can arise for employees on UC.

Ensure UC claimants receive all the elements and exceptions to which they are entitled.
Data matching technologies which underpin UC’s automated processes operate highly efficiently in the recovery of benefit overpayments and collection of third-party debts. A similar zeal should drive efforts to ensure that claimants receive all the financial support to which they are legally entitled.