Making work pay

Fixing Universal Credit to ensure work always pays

When Universal Credit was created it was in part to solve a large issue with the benefits system, the benefits trap. The benefits trap was the issue that sometimes earning more money at work could actually mean making less money overall. It occurred when benefits were withdraw too fast so whilst you could be, for instance, earning £30 more a week in work you might lose £31 in benefits.

Universal Credit involved a taper rate which means that as you earn more, your Universal Credit payments reduce. At the moment for every £1 you earn through work, 55p is withdrawn from Universal Credit payments. The idea behind that you always earn more under Universal credit is therefore at the very heart of why this system was created.

Unfortunately Universal Credit doesn’t always achieve this goal and work doesn’t always pay under this system. We need to reform Universal Credit so work always pays.

Making self employment pay.

At the moment Universal Credit requires “If you are self-employed you must report your earnings from self-employment every month“. This monthly reporting means “…if you make an extra £200 one month, Universal Credit falls by £90. But you make £200 LESS the next month, the benefit only rises by £5″. To fix this we need to look at average earnings over the course of a year rather than monthly.

Something I found during the pandemic was how urgently the PAYE system needed to be updated and expanded. One of the reasons so many people were excluded from the income support schemes was the lack of information collected by the PAYE system. Fixing this system for the self-employed and Limited Company Directors means ensuring all types of income are included in the system such as dividends Directors use to pay themselves a wage and collecting more information using the system.

Waiting for Universal Credit.

In order to make work pay there must actually be an incentive to work and perhaps more importantly a safety net if someone is made unemployed again. Effectively people need to be able to gradually get back onto Universal Credit in the same way it currently reduces as people earn more. With the current system it actually involves waiting weeks to get back onto the system removing some or all of the earnings the person built up in work. Doing this suddenly means that its cheaper for someone to stay on Universal Credit than to get a job and to lose it.

To fix this it will simply require allowing people onto universal credit if their income drops below a certain amount or they are made redundant from their only substantial form of employment.

The cost of work.

Whilst the Flexible support fund can support people with travel costs this only lasts a few months and for those trying to get off of Universal Credit travel costs can add up. To solve this the taper rate should be more generous and it may even be worth expanding the Flexible support fund to help anyone who sees their earning substantially reduced by travel costs.

These changes should be the start of a wider overhaul of our benefits system so it becomes a Guaranteed Minimum Income. It would use what has been created with the Universal credit system but it would turn it into real safety net. It would automatically support people when they earn below a certain amount and it would very gradually taper away as people earn more.

About the author

Torrin Wilkins

Director and Founder

Torrin founded Centre in 2020. In the role has written numerous papers including one backed by the Gaps in Support APPG which contained 260 MPs. He has also written policies for political parties and appeared on a wide range of media including TV and radio. He has a Political Studies degree from Aberystwyth University.