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What does Universal Credit mean for London?

Author: Adam Tinson, New Policy Institute

Universal Credit is intended to improve work incentives but its design created a set of winners and losers - and the picture looks different in London.

Universal Credit is a benefit designed to replace several means-tested benefits (Jobseekers Allowance, Employment and Support Allowance, Income Support) as well as Working and Child Tax Credits. Its rationale is to improve work incentives by removing overlapping deductions in benefits, make the system simpler through the reduction in the number of benefits, and drive ‘cultural change’ through changes such as monthly rather than fortnightly payment of benefits, and largely ending direct payment of housing elements to landlords. The benefit has been heavily criticised for the lengthy six-week waits to receive money (falling to five weeks from February) and its high rates of sanctioning among other things. 

Even aside from these substantial problems, its design created a set of winners and losers relative to the old set of benefits. London’s demography, including of its benefit and tax credit recipients, makes it look different from the rest of the country in ways that have implications for how it will be affected by UC. This blog discusses the UC rollout in London, and then the importance of London’s high levels of self-employment, housing costs, and in-work support in relation to the new benefit.

As of November 2017, there were around 110,000 people receiving Universal Credit (UC) in London. This is still a figure dwarfed by the legacy benefits that UC is to replace, for example, the 780,000 people still receiving legacy housing benefits in August 2017. But Universal Credit is growing quickly, up from only 12,000 in January 2016, and will be fully rolled out across the country in the next five or so years.

The new benefit is still at a reasonably early stage in London and the country as a whole, due to it being rolled out to only the simplest of new claims at first (single adults with no dependents). ‘Full service’ areas take claims from almost any type of claimant, and won’t be fully rolled out until 2018. As a result, 72% of households receiving UC by June 2017 in London were single adults without dependents, compared to 81% for Great Britain, with the difference explained by the higher number of lone parent claimants in London. More households in London were also receiving housing support (45% to 41%), though the uneven nature of the rollout makes meaningful comparison difficult.

One area that has implications for London is self-employment. Under Universal Credit, in an effort to deter non-viable self-employment, those claimants who are self-employed are assumed to have an income equivalent to 35 hours at the National Minimum Wage (after a grace period of a year for newly created self-employed businesses). This is £262.50 a week from April 2017. If a claimant has an income below this, they are still assessed as this was their income. In the year to September 2016, there were 800,000 working-age self-employed adults in London, the highest of any region of the UK. This is 18% of all of those in work, four percentage points higher than the average for Great Britain. Changes for the self-employed therefore have the potential to disproportionately affect Londoners. Recent work from the SMF estimates that 190,000 families in GB will be adversely affected by this minimum income floor. Given that a higher share of London’s self-employment is in ‘low pay’ sectors such as construction and retail, it is plausible that there will be a disproportionate impact on the city.

One of UC’s main objectives was improving work incentives. Instead of multiple overlapping deduction rates for benefits with multiple cliff edges (such as having tax credits and housing benefit removed simultaneously as earnings increased), these would become one benefit removed at a constant rate of 65% (and now 63%). To facilitate people’s engagement with the labour market, there were also generous work allowances to encourage people to take on ‘mini jobs’ with only a few hours a week so people kept close to the labour market. These have now been reduced substantially, including to zero for families without either dependent children or a limited capability to work. This means that many families in work will be worse off, both relative to the legacy system of benefits, but also to what had been planned for UC. For work incentives, the marginal reduction rate has been reduced (from 65% to 63%), but the range over which people lose money now starts at a low level of earnings or immediately. A mitigating measure is that people moving onto UC from existing benefits will receive “transitional protection”, which means no cash losses until there are a change in circumstances [1].

London tax credit claimants are less likely to be in work (65% of families have a working adult, compared to 71% in GB as a whole), though housing benefit claimants are more likely to be a working family (36% compared to 20%).

Policy in Practice calculated that the reduction in work allowances meant 2.5 million UK households would lose an average of £14 per week. In London, there were 275,000 families in-work receiving housing benefit who would be potential losers under UC, in addition to 380,000 in-work tax credit claimants, though these two groups are likely to overlap considerably.  

With its high housing costs and large private rented sector, it is unsurprising that a higher proportion of Londoners receive support for their housing costs than those in the rest of GB, at around 17% compared to 14%. UC improves some of the marginal work incentives for those receiving housing support relative to the legacy system, as there is now only one taper of 65%, rather than a 65% housing benefit taper, plus the tapers for tax credits and taxes.

The difficulty for London is of a slightly different nature, and stems from the city’s large private rented sector. Landlords are generally reluctant to rent properties to those receiving housing benefit for a variety of reasons including concerns around the administration and payments to tenants instead of landlords. The introduction of UC sweeps claimants of other benefits in with housing benefit claimants. If landlords then treat all UC claimants the same, as the Residential Landlords Association suggests, then this will further restrict housing choice for those on benefits. Housing choice is already very limited given the range of local caps placed on housing benefit, particularly in London.

[1] Transitional protection ends if a partner joins or leaves the household, earnings drop below a certain level for three months, or one or both adults stop working.