Universal Credit & the July 2015 Budget: practical advice to help you prepare

Transcription

1 Universal Credit & the July 2015 Budget: practical advice to help you prepare Phil Agulnik 15 July 2015 Our partner:

2 About entitledto We have supplied a free public benefits calculator since 2000, performing over 4 million calculations a year. White-labelled to local councils and housing associations Since 2012 we have provided a bespoke calculator for welfare-to-work advisers. We are the approved supplier of benefit calculators to ERSA We supply two-thirds of Work Programme prime providers, including Ingeus, Maximus, Seetec, Remploy Our calculators cover the full range of means tested benefits, tax credits and Universal Credit. We offer unrivalled accuracy and ease of use 2

3 About me Originally, an economist specialising in labour markets, tax and social security Before entitledto I worked for HM Treasury, DWP and other central govt. departments PhD from the London School of Economics Pension reform in the UK: Evaluating retirement income policy Published various papers on welfare reform and Council Tax Support in particular Contributor to various publications and to Radios 5 and 4 3

4 Structure of today s seminar Part 1: The July 2015 Budget Part 2: Overview of Universal Credit Part 3: Better-off Budgeting 4

5 PART 1 The effect of the July 2015 Budget on work incentives 5

6 Background - more benefits go to inwork claimants 35% Housing Benefit 30% 25% 20% 15% 10% 5% 0%

7 Background - more benefits go to inwork claimants 5,000,000 Housing Benefit 4,500,000 4,000,000 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000, ,000 0

8 The Chancellor s strategy Save money by reducing payments to in-work tax credit recipients - protects poorest (who are out of work) - reduces in-work incomes, decreasing work incentives Save money by freezing benefit and tax credit rates - most affects out of work claimants (as a % of income) - reduces out of work incomes, (slowly) improving work incentives Increase minimum (living) wage - boosts in-work incomes, improving work incentives - but poorly targeted in terms of who benefits and may affect employment growth 8

9 Budget reforms 4 categories Cuts to tax credits/uc for people in work Cuts affecting new claims/children Other benefits changes Non-welfare reforms - higher pay and lower rents 9

10 Cuts to tax credits/uc for people in work Tax credits income threshold of 6,420 reduced to 3,850 Tax credits taper rate increased from 41% to 48% Universal Credit work allowances reduced/abolished Income disregard in tax credits cut to 2,500 These reforms reduce tax credits/uc for people in work. All start from April

11 Cuts affecting new claims/children Child Tax Credit no new claims for 3rd or subsequent children from April 2017 Child Tax Credit family element abolished for new claims from April 2017 Housing Benefit family premium abolished for new claims from April 2016 ESA work-related activity component abolished for new claims from April These reforms only affect new claims so create an incentive to have a continuous claim

12 Other benefit changes Freeze in working-age benefits for four years Benefit Cap cut to 23,000 inside London and 20,000 outside London Help with mortgage interest to become a loan No automatic entitlement to Housing Benefit\UC housing costs for year olds Youth Obligation for year olds Work conditionality where children aged 3+ These reforms reduce welfare dependency 12

13 Non-welfare reforms Minimum wage rises from 6.70 (in October) to 7.20 in April 2016 and 9 an hour by 2020 Tax allowance increased to 11,000 in April 2016 and to 12,500 by 2020 LHA rates frozen and social housing rents down 1% a year for next 4 years Increase in free childcare for 3 and 4 year olds from 15 hours to 30 hours in These reforms increase net pay and reduce costs for workers

14 April 2016 tax credit income threshold and taper rate cut Easiest to see effect using hypothetical example of lone parent with 1 child and earnings of 7.50 hour (above minimum 16 hours = 120 per week or 6,240 per 30 hours = 225 per week or 11,700 per 40 hours = 300 per week or 15,600 per year Ignore 2,500 tax credit income disregard (and effect of Council Tax Support schemes) No equivalent changes to Housing Benefit so, where relevant, HB compensates for reductions in tax credits. Hence need to distinguish between tenants on high rents and tenants on low rents/non-tenants 14

15 Example of April 2016 tax credit income threshold and taper rate cut Weekly amounts, lone parent with 1 child, excluding reduction in income disregard to 2, Current tax credit New tax credit Tax credit decrease Tax allowance increase HB increase (for some)

16 April 2016 tax credit disregard cut At present tax credit calculation disregards the first 5,000 of extra income. And only income over 6,420 counted, so in first year can still get maximum tax credits on earnings of 11,420 From April 2016 tax credit calculation disregards the first 2,500 of extra income, and income over 3,850 counted in means test So in future any job with earnings over 6,350 (17 hours at 7.20 per hour) will reduce maximum tax credits, even in first year 16

17 Example of April 2016 tax credit disregard cut Weekly amounts, lone parent with 1 child, including reduction in income disregard to 2, Maximun tax credit Tax credit in work with no disregard Tax credit in work with 5K taper Tax credit in work with 2.5K taper Difference due to reduced tax credit income disregard

18 April 2016 Housing Benefit family premium cut At present Housing Benefit includes a family premium of that is awarded to all households with children Family premium only affects amount of in-work HB, as out-of-work families get full HB (excl. bedroom tax & benefit cap). In effect the premium increases in-work benefit income by (65% of 17.45) From April 2016 new claims to HB will not get family element. As with all changes affecting new claims, makes financial risk of going back to work much worse 18

19 Example of April 2016 tax credit & Housing Benefit cuts Weekly amounts, lone parent with 1 child born after 6 April 2016, including reduction in income disregard to 2, hours 30 hours Tax credit income threshold & taper cut Tax credit disregard cut Tax allowance increase HB increase when no family premium Total change when no family premium

20 20 Effect of April 2016 reforms Gap between in-work and out-of-work income ( replacement rate ) reduced because tax credits less generous: lower income threshold taper rate up from 41% to 48% disregard down from 5,000 to 2,500 Substantial effect on better off calculation, particularly where no Housing Benefit increase to compensate. And when family premium change takes effect will worsen problem Gain to extra earned (marginal effective tax rate) also reduced. If include standard CTS taper of 20% then effect of tax, NICs, tax credits and housing benefit is that 97p is lost per extra

21 UC work allowance for tenants: comparison with HB before April 16 Current system Per Per month week Universal Credit Per month Per week Increase Single Couple Lone parent Couple with children Disabled, single or couple

22 UC work allowance for tenants: comparison with HB after April 16 Current system Per Per month week Universal Credit Per month Per week Change Single Couple Lone parent Couple with children Disabled, single or couple

23 PART 2 Universal Credit how it works, its effect and timetable 23

24 What the Government says about Universal Credit Universal Credit is the Government s key reform to tackle the two key problems of poor work incentives and complexity. It will enable the system to help people to move into and progress in work, while supporting the most vulnerable. It will be simple to understand and administer and it will protect both the welfare of those most in need and the public purse 24

25 Before Universal Credit 25

26 Before Universal Credit 26

27 After Universal Credit 27

28 The scope of Universal Credit In scope Income-based Jobseeker s Allowance Income-related Employment and Support Allowance Income Support Child Tax Credit Working Tax Credit Housing Benefit [Support for Mortgage Interest] Out of scope Council Tax Support Disability Living Allowance/Personal Independence Payment Contributory Benefits State pension Child Benefit Pension Credit Carer s Allowance 28

29 Winners and losers from Universal Credit 29

30 DWP estimates of winners and losers (Impact Assessment Dec 2012, per month) 30

31 DWP estimates of winners and losers (Impact Assessment Dec 2012, per month) 31

32 Some affected groups Winners: low hours workers, under 25s, etc Main losing groups: severely disabled adults, disabled-but-not-severely children, couples where one nearing pension age Other losing or difficult groups: mortgagees & shared ownership, high savings, high childcare costs, etc 32

33 Winners: single jobseekers If you are a single jobseeker under 25 then UC can only increase your income: Out of work: receive the same amount In work: receive more in benefits because do not qualify for Working Tax Credit at the moment If you are a single jobseeker over 25 then UC will almost always increase your income if you are in work Conclusion broadly holds true for couples where both non-disabled, no children etc 33

34 Losers: severely disabled adults Current disability premiums will be replaced with just two disability elements: limited capability for work element limited capability for work related activity element Entitlement based on the Work Capability Assessment, rather than DLA/PIP assessment In couple can only get one disability element - whichever is highest. Cannot get two elements even if both disabled Big winners and losers! 34

35 Losers: disabled children Rates of disabled child additions in Child Tax Credit: Higher rate when child severely disabled: on highest rate of DLA (care) or registered blind. Worth per week Lower rate when child on other rates of either component of DLA (mobility or care). Worth per week Rates of disabled child additions in Universal Credit: Higher rate (child severely disabled): per week Lower rate (child not severely disabled): per week Loss of over 30 per week if getting standard child disability element in Child Tax Credit Note: no change in assessment criteria under UC 35

36 Losers: Couples where one person over/near Pension Credit age Under existing rules the age of the oldest person in a couple determine whether they claim Pension Credit Under UC the age of the youngest person in a couple will determine whether they claim Pension Credit or UC As well as existing gap in benefit rates, working age also have under-occupation rules, work conditionality, lower Council Tax Support, etc If age gap large potentially massive difference in income between a natural transition onto UC and managed migration 36

37 Transitional Protection Three kinds of claim for UC: 1. New claim, e.g. if lose job and claim benefit 2. Change of circumstance (natural migration) e.g. when an extra child is born 3. Managed migration, when DWP initiates the transfer onto UC DWP s claim that no one will be worse off under UC only applies to managed migration Transitional protection for managed migration group means an extra amount is added to their UC award to bring it up to previous benefit level 37

38 Implications of transitional protection UC losers have an incentive to be part of managed migration and get transitional protection For some losers entering work under tax credit system best strategy, e.g. if subject to full conditionality and work likely to last several years For other losers doing nothing may be best option to maximise income, e.g. if lower level of conditionality, or impermanent work, or nearing pension age Triage of losing customers possible but fraught with problems due to uncertainty about rollout Once get transitional protection: 38 the amount received goes down as earnings go up losing job is a change of circumstances

39 39 Work incentives

40 Incentives for winners & unchanged Winners have an incentive to transfer to UC via a change of circumstance Winners and unchanged have much better incentives to work 1-16 hours and on a casual basis Earnings over work allowance have taper of 65% for UC plus?20%? for Council Tax Support Above tax & NI threshold effective taper of 76% for UC (effective taper for tax credits is [73 %] 80%) Incentives to work improved for some, worse for others and it all depends for many. And Council Tax Support adds extra layer of complexity! 40

41 Work incentive DWP evidence from pilots 90 days after making an initial claim, 60% of Universal Credit claimants would have left Jobseeker s Allowance compared with 54% of Jobseeker s Allowance claimants 69% of Universal Credit claimants reported working at any point in the six months after their claim, compared to 65% of Jobseeker s Allowance claimants 41

42 Work incentives entitledto survey Survey of people working <16 hours. Q = What are the reasons why you are only working a relatively few number of hours each week? 42

43 43 Self-employed

44 Summary of UC & self-employed Main changes are: Minimum Income Floor New entitlement calculation rules Monthly reporting 44

45 Minimum income floor Minimum income floor replaces work conditions for self-employed DWP state that policy intention is to: encourage self-employed claimants to increase their earnings; 45 reduce fraud, including fraudulent claims of selfemployment and fraudulent under-declaration of earnings from self-employment; prevent long-term subsidy of activities which do not make the self-employed claimant financially selfsufficient.

46 UC entitlement for self-employed Detailed rules for calculating profit No carry forward from previous month Surplus earnings rule (potentially) Permitted reductions Flat rate deductions for mileage/use of home Detailed rules on expenses, e.g. deduction for use of own property as office Changes in calculations Higher work allowance than HB 65% earnings taper; 41% for tax credits 100% taper on other income, incl: dividends No easy guide for whether self-employed win or lose from UC 46

47 Monthly reporting Draft online monthly reporting form requests information on: Money earned: All income from self-employment. Money spent: Regular business costs Stock Expenses New equipment Tax. National Insurance Pension contributions. 47

48 UC Timetable 48

49 DWP s original implementation timescale Feb 11 Design & build Apr 13 Oct 13 Apr 14 Oct 14 Oct 15 Oct 16 Oct 17 Pilot New claims from out of work customers New claims from in work customers Natural transitions due to change of circs Managed transitions 2.5m 4.5m Legacy load JSA, ESA, IS, HB, WTC, CTC 6m 8m UC load 49

50 UC timetable announcement Oct 14 From 24th November 2014, six areas in North-West England will start taking claims from people with children From February 2015 national rollout will start, so that further pilot areas outside North-West England will be included in the scheme During 2015 and into early 2016, UC will be rolled out across the whole of GB for new benefit claims from single jobseekers From some point in 2016 all new claims by single jobseekers will be for Universal Credit not existing benefits and tax credits 50

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52 Caseload estimates Universal Credit at work published estimates based on Budget 2014 assumptions

53 Claims by gender

54 DWP on future rollout The last new claims to legacy benefits will be accepted during Following this, those on the remaining legacy claims will progressively decline, and the Department will migrate the remaining claims to Universal Credit. We expect the bulk of this exercise will be complete by 2019.

55 Migration can take time.. 55

56 PART 3 Better-off budgeting 56

57 Why you will have to help your clients with personal budgeting Clients are used to budgeting fortnightly. UC will be monthly Sanctions regime is much harder than previously. Regular blip in UC receipts may trigger eviction process. Direct payment of rent means clients have to manage much larger sums than before Support via DHPs will often require a budget

58 Support tools available from entitledto Better off calculator allows clients to easily assess financial impact of working, including doing quick what ifs Personal budgeting tool enables clients to assess all their finances to understand impact of returning to work. Simple and intuitive nature of tools encourages clients to manage budgets effectively Clear budget advice lets clients focus on looking for work, without worrying about impact

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63 Contact details: For enquiries please use: Phone: Phone: Web:

64 After UC seminar I m going to talk to Roland about entitledto s brilliant tools to help with UC 64