Benefits after the White Paper

Benefits in the Future
Welfare after the White Paper

Gareth Morgan
Examining the effects of the changes to the UK benefits
system following the Emergency Budget, the
Comprehensive Spending Review and the White Paper -
Universal Credit- Welfare That Works.

Ferret Information Systems

December 2010

1.4

1 Benefits in the Future – Welfare after the White Paper

Contents
Benefits in the Future ............................................................................................................................. 3
The Impact of the Changes to the Benefits System ............................................................................ 3
Consolidated Cuts and Increases from the Budget and CSR............................................................... 4
Universal Credit: welfare that works ...................................................................................................... 6
Some notes on changes ...................................................................................................................... 7
Abolition of unemployment ............................................................................................................ 7
Disregards ....................................................................................................................................... 7
Mortgage Support in work .............................................................................................................. 7
Capping of total benefits................................................................................................................. 7
Self-Employed assumed to earn at least minimum wage............................................................... 7
Transitional Protection ................................................................................................................... 7
Two systems from 2013 - ? ............................................................................................................. 7
One standard deduction rate of 65% .............................................................................................. 7
Housing support goes local ............................................................................................................. 7
Sanctions and penalties .................................................................................................................. 8
On-Line benefit claims and automatic operation ........................................................................... 8
Contributory benefits time limited and means-tested ................................................................... 8
Modelling and Examples ......................................................................................................................... 9
Methodology....................................................................................................................................... 9
Examples and notes. ............................................................................................................................. 10
Steady state examples ...................................................................................................................... 11
Example 1. Steady State Employment – Tenant ..................................................................... 11
Example 2. Steady State Employment – Owner ..................................................................... 12
Example 3. Steady State Employment - Tenant 4 children .................................................... 13
Example 4. Steady State Unemployment - Owner 2 children ................................................ 14
Example 5. Steady State Unemployment - Owner 4 children ................................................ 15
Example 6. Steady State Unemployment - Tenant 2 Children ............................................... 16
December 6, 2010

Example 7. Steady State Unemployment - Tenant 4 Children ............................................... 17
Example 8. Single, childless owner ......................................................................................... 18
Example 9. Single Childless Tenant.......................................................................................... 19
Examples following changes of circumstance .................................................................................. 20
Example 10. Recent Unemployment - Owner 2 Children ........................................................ 20
Example 11. Recent Unemployment - Owner 4 Children ......................................................... 21

© Ferret Information Systems 2010 1.4


Example 12. Single Childless Owner - Recently Unemployed Early 2010................................. 22
Example 13. New Employment - Home Owner 2 Children....................................................... 23
Example 14. New Employment - Tenant 2 children ................................................................ 24
Example 15. Lost Job Home - Owner 2 Children....................................................................... 25
Example 16. Lost Job - Tenant 2 children ................................................................................. 26
The Effect of Children on Benefits. ................................................................................................... 27
Example 17. Couple – Tenants, Working, £15,000 pa – Varied by Children ............................ 27
Example 18. Couple – Tenants, Unemployed – Varied by Children ......................................... 28
Example 19. Couple – Owners, Working £15,000pa – Varied by Children ............................... 29
Example 20. Couple – Owners, Unemployed – Varied by Children .......................................... 30
Example 21. Owner Employed at £20,000 by Children ............................................................ 31
Anomalies caused by Capping .......................................................................................................... 32
Example 22. 9 Children, £86.54pw Rent ................................................................................... 32
Example 23. 9 Children £200pw Rent ....................................................................................... 34
Example 24. 9 Children Mortgage £100,000, 4.5% Interest £86.54 interest pw ...................... 36
Example 25a. High Rent capping............................................................................................... 38
Example 25b. High Rent capping .............................................................................................. 40
Changes in Tax Credit Hours Rules.................................................................................................... 42
Example 26. 20 Hours Work – Owner....................................................................................... 42
Example 27. 20 Hours Work Tenant ......................................................................................... 43
Some comparisons of Universal Credit and the current system. ......................................................... 44
Couple, 2 Children, £86.54 Rent, £1250pa Council Tax ................................................................ 45
Couple, 2 Children, £86.54 Mortgage Interest, £1250pa Council Tax .......................................... 46
Couple, 2 children, No Rent or Mortgage Interest, 1250 Council Tax .......................................... 47
Disposable income after rental housing costs .............................................................................. 48
Disposable income after mortgage interest costs ........................................................................ 49
Disposable income after housing costs – No Rent or Mortgage .................................................. 50
Universal Credit Disposable Income after Housing Costs ................................................................. 51
December 6, 2010

Conclusion ............................................................................................................................................. 52
Main Benefits Related Measures in the Emergency Budget ................................................................ 53
Financial Results of the Budget Measures ........................................................................................ 55
The Comprehensive Spending Review .................................................................................................. 57
Main Benefits Related Changes in the Comprehensive Spending Review ....................................... 57
Ferret Information Systems .................................................................................................................. 61



Benefits in the Future
Not for publication without written permission. December 2010

The Impact of the Changes to the Benefits System

We now have a clearer view, albeit incomplete in details, of the government’s intentions towards
the future of welfare support in the UK.

Three 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 22nd introduced net cuts to the welfare system of £11bn a
year by 2015.
 The Comprehensive Spending Review of October 20th added another £7bn to that.
 The White Paper Universal Credit: welfare that works published on November 11th is
intended to look forward to the system which will replace the current mix of benefits for
those of working age.

It is important to recognise that the development of the Universal Credit has overlapped the
introduction of the cuts in welfare and that there are some contradictions between the targeting of
the cuts and the structure of the new benefit. In particular, some of the changes to Tax Credits seem
at odds with the ‘seamless’ approach of Universal Credit.

In this paper we have used a real present value approach, as described in the methodology on page
9 and carried this forward into Universal Credit.

The cuts and additions made in the Budget are described in more detail on page 55 and those made
in the CSR can be found on page 57.

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, and
December 6, 2010

the Rossi Index, to uprating by the, usually lower, CPI.

It is for this reason that we have used present values in the modelling.



Consolidated Cuts and Increases from the Budget and CSR

Total Welfare Cuts
25.00

20.00 2.70

0.49
1.23

2.01
15.00 Other
CTB
2.02
Disability benefits
ESA
2.42 Housing Benefits
Child Benefit
10.00 Tax Credits
CPI Indexing
4.51

5.00

5.80
December 6, 2010

0.00
Billions

Figure 1



Total Additional Spending and
Savings
25.00

20.00

15.00

Net Savings
17.59 Cold Weather Payments
Pension reforms
Child Tax Credit
10.00

5.00

1.00

2.55

0.00
Billions
December 6, 2010

Figure 2



Universal Credit: welfare that works

The White Paper owes much to the work of the Centre for Social Justice and its publication of
Dynamic Benefits: Towards Welfare That Works in 2009. It describes the core elements of the new
benefit but much detail is yet to be described, or decided. The White Paper is less definitive than is
usual and, we suspect, the scheme more susceptible to change than is normally the case.

It is clear that, initially at least, the benefit will share much with the existing structure of benefits and
credits. The way in which the ‘needs’ section of the means-test is determined will be an amalgam of
existing benefits. So will much of the ‘means’ section mirror the way in which existing schemes look
at income and capital. The major change occurs in the way in which the use of these elements to
determine the amount payable will be carried out.

Instead of several separate benefits carrying out their own assessments with complex interlinking,
passporting and overlapping, there will be one single method of withdrawal of benefit from a
maximum figure.

If this can be made to work, simply and efficiently, it will be welcomed. If it can do this and meet the
needs of those it helps, it will be a breakthrough.

Launching the White Paper Iain Duncan Smith, the Secretary of State, said:

"At its heart, the Universal Credit has a simple ambition – to make work pay, even for the poorest.
This will finally make it easier for people to see they will be consistently and transparently better off
for each hour they work and every pound they earn.

"It will cut a swathe through the massive complexity of the existing benefit system and make it less
bureaucratic to run.”

However, even with the limited information given in the White Paper about the mechanics of the
scheme, it is already clear that there are numbers of technical anomalies appearing, as will be seen
in some of the examples.

As always in areas of social support, simplicity of approach collides with the reality that people live in
complex ways. Any scheme, unless it is astoundingly generous, must balance the needs of
administrative and financial rigour against the special circumstances of small numbers of those
within it. It is at that point that the ‘tweaking’ begins and simplicity starts to unravel.

Nonetheless, there are numerous changes, some radical, many welcome, to the structure of support
December 6, 2010

that has been in place for over 20 years and it is worth noting some of these, from the White Paper
and from announcements in the Budget and CSR.



Some notes on changes

Abolition of unemployment
There will be no clear division between unemployment and employment. People will remain on the
same benefit 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 will largely disappear except for some areas such as
conditionality and childcare support. How this will affect some things which are passported by
unemployment is unclear, even concessionary rates for tickets often use unemployment as a test.

Disregards
The ‘disregard’ – the amount of earnings which people are allowed to keep before it affects their
benefits – will be abolished for single people but made much larger for some other groups. It will
however be reduced sharply for those who need help with their housing costs. There is a clear
policy intention to reward those who lower their housing costs.

Mortgage Support in work
Help with mortgage interest for home owners will be available to all instead of, with the current
system, being limited to those ‘not in full-time work’.

Capping of total benefits
Total amounts of benefit, for those not in receipt of DLA, war widows or receiving Working Tax
Credit, will be limited to the median level of earnings of working families. It will be seen later that,
applied in the way announced, this can cause extremely large poverty traps.

Self-Employed assumed to earn at least minimum wage
Self-employed people will be assumed to have a minimum level of earnings under a rule being
considered.

Transitional Protection
Transitional protection, possibly for a long period, will make sure that nobody getting benefits will
move onto a lower amount when transferring to Universal Credit.

Two systems from 2013 - ?
The old and new systems will run in parallel for some years from 2013. 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.

One standard deduction rate of 65%
December 6, 2010

There will be one single, standard rate of deduction from net earnings, ensuring that people will
keep some of the increase in earnings as they earn more. The real marginal deduction rate will be
higher after tax and national insurance.

Housing support goes local
Housing support for tenants and Council Tax Benefit will become much more localised and variable
from place to place. Councils will be able to operate their own Council Tax support schemes while
rent limits for Housing Benefit will become embedded at different levels in different areas.



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.

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 place for contacting the benefits system.

Universal Credit will automatically, month by month, reflect changes in earnings from employment
using a new, yet to be introduced, HMRC PAYE computer system.

Contributory benefits time limited and means-tested
The White Paper says “Under the new system, contributory benefits would retain an insurance
element, but in most circumstances would only be paid for a fixed period, only to facilitate a
transition back to work”.

Employment and Support Allowance will be limited to one year.

The White Paper says “Contributory Jobseeker’s Allowance will continue in its current form but with
the same earnings rules (such as disregards and tapered withdrawal) as Universal Credit”. How this
means-testing will operate is unclear.
December 6, 2010



Modelling and Examples

This set of modelling compares the effects, for some common circumstances, of the changes to tax
and benefits rules announced in the Emergency Budget of June 2010 and the Comprehensive
Spending Review October 2010. It also includes assessments using the proposals for a Universal
Credit as given in the White Paper, Universal Credit: welfare that works published in November
2010.

Methodology

The examples in this document consolidate the changes to tax and benefits rules announced in the
Emergency Budget of June 2010 and the Comprehensive Spending Review October 2010. This
document includes modelling for the effects of reductions in real values of benefits caused by
government changes to up-rating methods.

Assessments start with the current values, rules and rates in force at the time of the 2010 general
election and progress from those.

Values used are based on starting figures and then adjusted in 3 ways:

 Earnings, other incomes, tax bands etc. use current values.
 Benefits which are to be up-rated by CPI in future have their current values reduced by the
cumulative year by year difference between RPI and CPI
 Benefits, and elements of benefits, which have been frozen have their current values
reduced by the cumulative RPI.

This, crudely, allows comparison of the real future values of income to be compared with starting
values.

The CPI and RPI forecast figures used are those produced by the Office for Budget Responsibility.

Universal Credit assessment has been modelled by using forecast benefit values together with the
tapers and disregards proposed in the White Paper, Universal Credit: welfare that works Cm 7957.

For LHA, the VOA current and 30th percentile national figures have been averaged and the reduction
applied to rental figures. Those figures have then been treated in the same way using the CPI
reduction in following years when the LHA figures will be up-rated by CPI.

Examples for cases with carers, elderly or disabled claimants are not included as all are expressly
December 6, 2010

excluded from the White Paper proposals as they are awaiting decisions on their future structure.

Changes in Council Tax Benefit, outlined in the CSR and white paper have not been included as no
detail is yet available, instead the current rules are used with a 10% reduction from the proposed
date.



Examples and notes.
Most of these examples are based on the situation of a couple with two children.

They are both aged 45 and have 2 children aged 8 and 10. They do not have any childcare costs and
make no pension contributions.

They pay rent of £86.54 per week which is exactly the Local Housing Allowance (LHA) for their home
(the figure is chosen to match the mortgage interest payable in the examples for home owners with
a mortgage of £100,000 at an interest rate of 4.5%)

They pay council tax of £1250 per annum.
December 6, 2010



Steady state examples

In these examples we are considering circumstances which have persisted for some time and which
are likely to continue in the same way. The variations in the examples are largely caused by changes
in the real value of benefits, because of the method of indexation, and by announced changes to
some benefit rates and rules.

Example 1. Steady State Employment – Tenant

In the first example, we look at a ‘steady-state’ situation where one member of a couple works 35
hours a week for annual earnings of £10,000, £20,000, £30,000, £40,000 and £50,000.

Gross Earnings Net Weekly Income
2010/2011 2011/2012 2012/2013 2013/2014 2014/2015
£10,000.00 £416.78 £415.84 £405.33 £398.84 £394.71
£20,000.00 £426.57 £425.68 £423.24 £418.19 £433.48
£30,000.00 £479.33 £480.35 £479.10 £477.77 £479.25
£40,000.00 £611.95 £611.12 £609.87 £608.54 £597.15
£50,000.00 £732.84 £717.05 £684.43 £684.43 £684.43

£86.54pw Rent - Couple 2 Children
£10,000pa - £50,000pa Earnings
£800.00

£700.00
£10,000.00
Net Income

£600.00 £20,000.00
£500.00 £30,000.00
£40,000.00
£400.00
£50,000.00
£300.00
2010/2011 2011/2012 2012/2013 2013/2014 2014/2015
December 6, 2010

Year 2014 / 2015 uses the Universal Credit in place of current benefits.

The drop in income for the £50,000 a year earner from 2012 onwards is caused by the loss of Child
Benefit.

Note that these values are adjusted for the effect of CPI up-rating and the freezing of some elements
and benefits. Headline, unadjusted figures can be presented as an increase in income for some of
these assessments.



Example 2. Steady State Employment – Owner

The circumstances are identical but the housing costs, of the same amount, are mortgage interest on
a mortgage of £100,000 at 4.5% per annum.

2010/2011 2011/2012 2012/2013 2013/2014 2014/2015
£10,000.00 £374.35 £380.13 £378.89 £373.17 £386.65
£20,000.00 £421.64 £423.72 £423.24 £418.19 £425.42
£30,000.00 £479.33 £480.35 £479.10 £477.77 £471.19
£40,000.00 £611.95 £611.12 £609.87 £608.54 £597.15
£50,000.00 £732.84 £717.05 £684.43 £684.43 £684.43

£100,000 Mortgage - Couple 2 Children
£800.00
£700.00
£600.00 £10,000.00
Net Income

£500.00
£20,000.00
£400.00
£300.00 £30,000.00
£200.00 £40,000.00
£100.00 £50,000.00
£0.00
2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

The chart and table above include mortgage interest, at the SMI level, in the UC calculation where it
is used in the same way as rent in the requirement figure and in the calculation of earnings
disregards. It should be noted that the recently announced benefits cap, as we understand it,
applies to the amount of benefit compared to the average income not, as some commentators have
interpreted it to be, a cap on any benefits for those above average income.
December 6, 2010



Example 3. Steady State Employment - Tenant 4 children

2010/2011 2011/2012 2012/2013 2013/2014 2014/2015
£10,000.00 £554.72 £553.26 £540.99 £531.66 £518.38
£20,000.00 £563.37 £561.05 £548.78 £540.48 £554.80
£30,000.00 £594.60 £596.22 £597.84 £590.48 £600.26
£40,000.00 £652.29 £648.14 £649.76 £642.40 £646.03
£50,000.00 £759.64 £742.99 £684.43 £684.43 £684.43

£800.00
£750.00
£700.00 £10,000.00
Net Income

£650.00
£20,000.00
£600.00
£550.00 £30,000.00
£500.00 £40,000.00
£450.00 £50,000.00
£400.00
2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

Note the larger effect of the loss of Child Benefit for the highest earner and the real drop in benefits
of the lowest paid under Universal Credit.
December 6, 2010



Example 4. Steady State Unemployment - Owner 2 children

2010/2011 2011/2012 2012/2013 2013/2014 2014/2015
Unemployed £376.35 £334.42 £334.76 £328.20 £323.51

Unemployed - Owner 2 Children
£390.00
£380.00
£370.00
£360.00
£350.00
£340.00
£330.00 Unemployed
£320.00
£310.00
£300.00
£290.00
2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

For unemployed owners, the October 2010 reduction in the interest rate for mortgage support,
which is now in force, creates the initial large drop in income.
December 6, 2010



Example 5. Steady State Unemployment - Owner 4 children

2010/2011 2011/2012 2012/2013 2013/2014 2014/2015
Unemployed £491.62 £455.00 £457.44 £448.56 £441.28

£500.00
£490.00
£480.00
£470.00
£460.00
£450.00 Unemployed
£440.00
£430.00
£420.00
£410.00
2010/2011 2011/2012 2012/2013 2013/2014 2014/2015
December 6, 2010



Example 6. Steady State Unemployment - Tenant 2 Children

2010/2011 2011/2012 2012/2013 2013/2014 2014/2015
Unemployed £345.97 £350.38 £343.94 £328.39 £331.57

Unemployed - Tenant
£355.00
£350.00
£345.00
£340.00
£335.00
Unemployed
£330.00
£325.00
£320.00
£315.00
2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

In this case Universal Credit seems likely to provide a small real increase in net income.
December 6, 2010



Example 7. Steady State Unemployment - Tenant 4 Children

2010/2011 2011/2012 2012/2013 2013/2014 2014/2015
Unemployed £461.23 £470.96 £466.61 £448.76 £448.24

Unemployed - Tenant
£475.00
£470.00
£465.00
£460.00
£455.00
Unemployed
£450.00
£445.00
£440.00
£435.00
2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

In this case the changes in the Child Tax Credit rates of children’s elements provides a real increase
in the short term but this is eroded by up-rating policies and other changes to the housing benefit
scheme.
December 6, 2010



Example 8. Single, childless owner

2010/2011 2011/2012 2012/2013 2013/2014 2014/2015
Unemployed £206.41 £158.90 £158.02 £154.68 £153.63

Unemployed - Owner
£250.00

£200.00

£150.00

£100.00 Unemployed

£50.00

£0.00
2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

The chart shows the situation from the date of the General Election 2010. The large drop shown
from 2010 to 2011 is caused by the change in Mortgage Interest Rate which took place in October
2010. The current benefit entitlement is therefore already at the lower figure.
December 6, 2010



Example 9. Single Childless Tenant

2010/2011 2011/2012 2012/2013 2013/2014 2014/2015
Unemployed £176.03 £175.64 £167.97 £155.65 £161.36

Unemployed - Tenant
£180.00
£175.00
£170.00
£165.00
£160.00 Unemployed
£155.00
£150.00
£145.00
2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

The chart demonstrates the effect of the reduction in Housing Benefit by 90% from 2013 for those
on JSA for more than 12 months. The increase in 2014 /2015 reflects the absence of an equivalent in
Universal Credit as it is not known how, or whether, this would be implemented.

It does not show the effect of increasing the age threshold for the Shared Room Rate in Housing
Benefit from 25 to 35 nor the capping of LHA levels. The changes in LHA percentiles are averaged.
These are all locally variable so would need to be assessed within individual areas.
December 6, 2010



Examples following changes of circumstance

Example 10. Recent Unemployment - Owner 2 Children

2010/2011 2011/2012 2012/2013 2013/2014 2014/2015
Unemployed £376.35 £334.42 £264.18 £260.02 £255.17

Recently Unemployed - Owner
2 children
£400.00
£350.00
£300.00
£250.00
£200.00
£150.00 Unemployed
£100.00
£50.00
£0.00
2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

Complete loss of mortgage interest support due to 2 year limit of support in Job Seekers Allowance,
this is carried forward into Universal Credit by assumption.
December 6, 2010



Example 11. Recent Unemployment - Owner 4 Children

2010/2011 2011/2012 2012/2013 2013/2014 2014/2015
Unemployed £491.62 £455.00 £386.86 £377.98 £370.70

£600.00

£500.00

£400.00

£300.00
Unemployed
£200.00

£100.00

£0.00
2010/2011 2011/2012 2012/2013 2013/2014 2014/2015
December 6, 2010



Example 12. Single Childless Owner - Recently Unemployed Early 2010

2010/2011 2011/2012 2012/2013 2013/2014 2014/2015
Unemployed £206.41 £158.90 £88.21 £84.87 £83.82

Unemployed - Owner
£250.00

£200.00

£150.00

£100.00 Unemployed

£50.00

£0.00
2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

The chart shows the situation from the date of the General Election 2010. The large drop shown
from 2010 to 2011 is caused by the change in Mortgage Interest Rate which took place in October
2010. The current benefit entitlement is therefore already at the lower figure.

The further drop is caused by the two year limit in JSA for new claimants which came into force in
January 2009 and which will affect the first claimant in January 2011.

The income of this person will consist solely of JSA Personal Allowance and passported Council Tax
Benefit.
December 6, 2010



Example 13. New Employment - Home Owner 2 Children

2010/2011 2011/2012 2012/2013 2013/2014 2014/2015
£10,000.00 £406.68 £402.71 £378.89 £373.17 £386.65
£20,000.00 £561.95 £502.57 £423.24 £418.19 £425.42
£30,000.00 £713.88 £554.49 £479.10 £477.77 £471.19
£40,000.00 £865.80 £611.12 £609.87 £608.54 £597.15
£50,000.00 £1,029.48 £727.47 £715.94 £684.43 £684.43

Effect on Net Income of a New Job
£1,200.00

£1,000.00

£800.00 £10,000.00
Net Income

£20,000.00
£600.00
£30,000.00
£400.00
£40,000.00
£200.00 £50,000.00
£0.00
2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

Taking a new job, in September 2010, after a lengthy period of unemployment.

The effects of the changes to the system, and the existing rules, mean that the immediate income on
taking a new job is unlikely to be constant. It may take up to two tax years before the income settles
and, even then, the effect of the new proposals will make the real value variable.

Typically a job taken part way through a year will offer a higher immediate income, when in-work
benefits are considered than will be the long term income, because of the large disregard applied to
the immediate increase in earnings. The short term increase will often be considerably larger at
higher earnings levels.
December 6, 2010



Example 14. New Employment - Tenant 2 children

2010/2011 2011/2012 2012/2013 2013/2014 2014/2015
£10,000.00 £422.84 £420.08 £405.33 £398.84 £393.61
£20,000.00 £561.95 £502.57 £423.24 £418.19 £432.38
£30,000.00 £713.88 £554.49 £479.10 £477.77 £478.15
£40,000.00 £865.80 £611.12 £609.87 £608.54 £597.15
£50,000.00 £1,029.48 £727.47 £715.94 £684.43 £684.43

Effect on Net Income of a New Job
£1,200.00

£1,000.00

£800.00 £10,000.00
Net Income

£20,000.00
£600.00
£30,000.00
£400.00
£40,000.00
£200.00 £50,000.00

£0.00
2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

The same comments apply as in example 13.
December 6, 2010



Example 15. Lost Job Home - Owner 2 Children

In this example, we look at a situation where one member of a couple was working 35 hours a week
for annual earnings of £10,000, £20,000, £30,000, £40,000 and £50,000. Their partner has been, and
remains in full time employment at £10,000pa. The first member stops work half way through the
tax year, in September 2010. Their situation otherwise is as in set 1.

They are both aged 45 and have 2 children aged 8 and 10.

They do not have any childcare costs and make no pension contributions.

They have a £100,000 mortgage at 4.5% which means £86.54 a week interest.

They pay council tax of £1250 per annum.

2010/2011 2011/2012 2012/2013 2013/2014 2014/2015
£10,000.00 £344.35 £380.13 £378.89 £373.17 £386.65
£20,000.00 £312.92 £380.13 £378.89 £373.17 £386.65
£30,000.00 £275.42 £380.13 £378.89 £373.17 £386.65
£40,000.00 £237.92 £380.13 £378.89 £373.17 £386.65
£50,000.00 £237.85 £380.13 £378.89 £373.17 £386.65

1 of a Couple Loses Job - Owner
£400.00
£380.00
£360.00
£340.00 £10,000.00
Net Income

£320.00
£20,000.00
£300.00
£280.00 £30,000.00
£260.00 £40,000.00
£240.00
£50,000.00
£220.00
£200.00
2010/2011 2011/2012 2012/2013 2013/2014 2014/2015
December 6, 2010

The effects of one partner losing a job in a couple where both are working can mean a greater
immediate drop in income than will be the long term situation.

In this example, where one partner remains in full time work earning £10,000 a year, it can be seen
that the immediate drop is greater, the higher the previous earnings.

The increase in Universal Credit is due to the inclusion of mortgage interest support while in full time
work



Example 16. Lost Job - Tenant 2 children

In this example, we look at a situation where one member of a couple was working 35 hours a week
for annual earnings of £10,000, £20,000, £30,000, £40,000 and £50,000. Their partner has been, and
remains in full time employment at £10,000pa. The first member stops work half way through the
tax year, in September 2010.

They are both aged 45 and have 2 children aged 8 and 10.

2010/2011 2011/2012 2012/2013 2013/2014 2014/2015
£10,000.00 £411.16 £415.84 £405.33 £398.84 £393.61
£20,000.00 £399.46 £415.84 £405.33 £398.84 £393.61
£30,000.00 £361.96 £415.84 £405.33 £398.84 £393.61
£40,000.00 £324.46 £415.84 £405.33 £398.84 £393.61
£50,000.00 £324.39 £415.84 £405.33 £398.84 £393.61

1 of a Couple Loses Job - Tenant
£440.00
£420.00
£400.00 £10,000.00
Net Income

£380.00 £20,000.00
£360.00 £30,000.00
£340.00 £40,000.00
£320.00 £50,000.00

£300.00
2010/2011 2011/2012 2012/2013 2013/2014 2014/2015
December 6, 2010



The Effect of Children on Benefits.

One of the dangers in the proposed changes appears to be the effect on families who are outliers,
exceptions to the norm. In particular this seems to affect those with high housing costs or large
numbers of children. It may, in future also affect some of those with disabilities but we do not yet
know the detailed proposals for those cases.

We will look later at some other effects of the capping proposals but we will start with the clear
effects on families with children.

Example 17. Couple – Tenants, Working, £15,000 pa – Varied by Children

Children Employed Net Weekly Income
2010/2011 2011/2012 2012/2013 2013/2014 2014/2015
0 £262.00 £261.57 £257.87 £255.53 £266.07
1 £352.14 £351.03 £341.40 £336.84 £348.36
2 £421.11 £419.74 £409.23 £403.25 £411.82
3 £490.08 £488.45 £477.06 £469.66 £475.28
4 £559.05 £557.16 £544.88 £536.07 £535.49
5 £628.02 £625.86 £612.71 £602.48 £595.70
6 £696.98 £694.57 £680.54 £668.89 £655.91
7 £765.95 £763.28 £748.37 £735.30 £716.12
8 £834.92 £831.99 £816.20 £801.70 £776.33
9 £903.89 £900.70 £884.03 £868.11 £836.54
10 £964.35 £969.41 £951.86 £934.52 £896.74

Net Income by Number of Children - £15,000pa Earnings
£1,200.00
0
£1,000.00 1
2
£800.00
3
Net Income

4
£600.00
5

£400.00 6
7
December 6, 2010

£200.00 8
9
£0.00
10
2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

As might be expected, each child attracts a higher level of support, principally from Child Tax Credit
and the equivalent factor in Universal Credit.



Example 18. Couple – Tenants, Unemployed – Varied by Children

Children Unemployed Net Weekly Income
2010/2011 2011/2012 2012/2013 2013/2014 2014/2015
0 £213.33 £212.71 £204.54 £191.69 £196.80
1 £288.34 £290.10 £282.60 £268.21 £271.59
2 £345.97 £350.38 £343.94 £328.39 £330.47
3 £403.60 £410.67 £405.28 £388.58 £389.35
4 £461.23 £470.96 £466.61 £448.76 £448.24
5 £518.86 £531.25 £500.00 £500.00 £500.00
6 £576.49 £591.53 £500.00 £500.00 £500.00
7 £634.12 £651.82 £500.00 £500.00 £500.00
8 £691.76 £712.11 £500.00 £500.00 £500.00
9 £749.39 £772.40 £500.00 £500.00 £500.00
10 £807.02 £832.68 £500.00 £500.00 £500.00

Net Income by Number of Children - Unemployed
£900.00
0
£800.00
1
£700.00
2
£600.00
3
Net Income

£500.00 4
£400.00 5

£300.00 6
7
£200.00
8
£100.00
9
£0.00
10
2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

If they become unemployed however, the effect of the proposed benefits capping becomes clear.
Capping, in this example, starts with 5 children. With 10 children the benefit will be capped by over
£330 a week in 2012 in today’s values. Universal Credit figures are shown as capped on the same
basis.
December 6, 2010



Example 19. Couple – Owners, Working £15,000pa – Varied by Children

2010/2011 2011/2012 2012/2013 2013/2014 2014/2015
0 £260.15 £260.09 £257.87 £255.53 £259.11
1 £337.13 £338.63 £336.79 £332.93 £341.40
2 £397.43 £400.90 £399.65 £394.46 £404.86
3 £457.73 £463.17 £462.52 £455.99 £468.32
4 £518.02 £525.44 £525.38 £517.53 £528.53
5 £578.32 £587.71 £588.25 £579.06 £588.74
6 £638.62 £649.98 £651.11 £640.60 £648.95
7 £698.92 £712.24 £713.98 £702.13 £709.16
8 £759.22 £774.51 £776.84 £763.66 £769.37
9 £819.52 £836.78 £839.71 £825.20 £829.57
10 £877.81 £899.05 £902.57 £886.73 £889.78

Net Income by Number of Children - Employed Owner
£1,000.00
£900.00 0
1
£800.00
2
£700.00
3
Net Income

£600.00
4
£500.00
5
£400.00
6
£300.00
7
£200.00
8
£100.00
9
£0.00
10
2010/2011 2011/2012 2012/2013 2013/2014 2014/2015
December 6, 2010



Example 20. Couple – Owners, Unemployed – Varied by Children

2010/2011 2011/2012 2012/2013 2013/2014 2014/2015
0 £243.71 £196.75 £195.36 £191.49 £189.84
1 £318.72 £274.13 £273.42 £268.01 £264.63
2 £376.35 £334.42 £334.76 £328.20 £323.51
3 £433.98 £394.71 £396.10 £388.38 £382.39
4 £491.62 £455.00 £457.44 £448.56 £441.28
5 £549.25 £515.28 £500.00 £500.00 £500.00
6 £606.88 £575.57 £500.00 £500.00 £500.00
7 £664.51 £635.86 £500.00 £500.00 £500.00
8 £722.14 £696.14 £500.00 £500.00 £500.00
9 £779.77 £756.43 £500.00 £500.00 £500.00
10 £837.40 £816.72 £500.00 £500.00 £500.00

Net Income by Number of Children - Unemployed
£900.00
0
£800.00
1
£700.00
2
£600.00
3
Net Income

£500.00 4
£400.00 5

£300.00 6
7
£200.00
8
£100.00
9
£0.00
10
2010/2011 2011/2012 2012/2013 2013/2014 2014/2015
December 6, 2010



Example 21. Owner Employed at £20,000 by Children

2010/2011 2011/2012 2012/2013 2013/2014 2014/2015
0 £302.39 £306.55 £306.55 £306.55 £306.55
1 £364.01 £363.43 £361.90 £358.01 £363.29
2 £421.64 £423.72 £423.24 £418.19 £425.42
3 £480.80 £484.01 £484.58 £478.37 £487.55
4 £541.10 £546.21 £546.15 £538.82 £546.74
5 £601.40 £608.48 £609.02 £600.35 £606.95
6 £661.70 £670.75 £671.88 £661.88 £667.16
7 £722.00 £733.01 £734.75 £723.42 £727.37
8 £782.30 £795.28 £797.61 £784.95 £787.58
9 £842.59 £857.55 £806.55 £806.55 £806.55
10 £902.89 £919.82 £806.55 £806.55 £806.55

In this example, the benefits amount is capped when Working Tax Credit runs out even though they
are in, what is currently termed, full time work. The amount of capping that is applied is

2012 2013 2014
9 £53.93 £39.64 £41.24
Children
10 £116.79 £101.47 £101.45
Children

Net Income by Number of Children - Employed, £20,000pa
£1,000.00
£900.00 0
1
£800.00
2
£700.00
3
Net Income

£600.00
4
£500.00
5
£400.00
6
£300.00
7
£200.00
8
December 6, 2010

£100.00
9
£0.00
10
2010/2011 2011/2012 2012/2013 2013/2014 2014/2015



Anomalies caused by Capping
Example 22. 9 Children, £86.54pw Rent
Capping for families in work will be applied, we are told, only when Working Tax Credit is not in
payment. It limits the maximum amount of most benefits to the median earnings level, about
£500pw currently. For Universal Credit we have assessed whether WTC would be payable at the real
levels in 2014 / 2015 and not considered capping if it would be.

2010/2011 2011/2012 2012/2013 2013/2014 2014/2015
£15,000.00 £903.89 £900.70 £884.03 £868.11 £836.54
£20,000.00 £908.22 £904.60 £806.55 £806.55 £806.55
£25,000.00 £912.55 £908.49 £871.93 £871.93 £871.93
£30,000.00 £916.87 £912.39 £904.52 £891.40 £893.57
£35,000.00 £921.20 £923.62 £930.48 £917.36 £916.45

£940.00
£920.00
£900.00 £15,000.00
Net Income

£880.00 £20,000.00
£860.00 £25,000.00
£840.00 £30,000.00
£820.00
£35,000.00
£800.00
2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

The tables and charts below show some of the effects that can be caused by this policy.

At £15,000pa WTC is in payment so no capping applies although benefits exceed £500pw by:

2012/ 2013 £126.15

2013 / 2014 £112.59
December 6, 2010

2014 / 2015 £95.37

At £20,000pa capping is applied of:

2012/ 2013 £81.38

2013 / 2014 £65.98



2014 / 2015 £48.20


2012/ 2013 £19.89

2013 / 2014 £5.01

2014 / 2015 £1.03

At £30,000pa benefits have fallen below £500pw and no capping takes place.

The combination of the cap and net earnings creates a poverty trap where someone, in these
circumstances, earning £20,000 a year will be over £75 a week worse off in net income than if they
earned £5,000 a year less.
December 6, 2010



Example 23. 9 Children £200pw Rent
2010/2011 2011/2012 2012/2013 2013/2014 2014/2015
£15,000.00 £1,017.35 £1,014.16 £988.59 £971.21 £938.19
£20,000.00 £1,021.68 £1,018.06 £806.55 £806.55 £806.55
£25,000.00 £1,026.01 £1,021.95 £871.93 £871.93 £871.93
£30,000.00 £1,030.33 £1,025.85 £937.32 £937.32 £937.32
£35,000.00 £1,034.66 £1,033.50 £1,002.70 £995.88 £1,002.70
£40,000.00 £1,044.53 £1,042.58 £1,020.96 £1,004.96 £1,041.00

£200pw Rent - Couple 9 Children
£1,050.00

£1,000.00
£15,000.00
Net Income

£950.00 £20,000.00
£900.00 £25,000.00
£30,000.00
£850.00
£35,000.00
£800.00
2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

If the rent is increased to £200pw, a more realistic level for the large house needed for the family
size, the effect is even clearer.


2012/ 2013 £230.72

2013 / 2014 £215.69

2014 / 2015 £197.03
December 6, 2010


2012/ 2013 £185.94

2013 / 2014 £169.08

2014 / 2015 £149.86




2012/ 2013 £124.45

2013 / 2014 £108.11

2014 / 2015 £102.69


2012/ 2013 £65.47

2013 / 2014 £49.48

2014 / 2015 £57.91


2012/ 2013 £9.17

2013 / 2014 No Capping

2014 / 2015 £15.41


In 2012 /2013 this couple, with one person earning £15,000pa, will be over £180pw net better off
than if they earned £20,000 a year. If they were to become better off in real terms they would need
to earn almost £35,000 a year.

These examples may be outliers but they will need to be taken account of, which will introduce more
complexity into a move to a simpler system.
December 6, 2010



Example 24. 9 Children Mortgage £100,000, 4.5% Interest £86.54 interest pw

2010/2011 2011/2012 2012/2013 2013/2014 2014/2015
£15,000.00 £819.52 £836.78 £839.71 £825.20 £829.57
£20,000.00 £842.59 £857.55 £806.55 £806.55 £806.55
£25,000.00 £865.67 £878.32 £871.93 £867.77 £866.00
£30,000.00 £888.75 £899.09 £904.52 £891.40 £886.61
£35,000.00 £911.83 £923.62 £930.48 £917.36 £909.49
£40,000.00 £940.44 £949.58 £956.44 £943.32 £932.38

£86.54pw Mortgage Interest- Couple 9 Children
£950.00

£900.00
£15,000.00
Net Income

£850.00 £20,000.00
£800.00 £25,000.00
£30,000.00
£750.00
£35,000.00
£700.00
2010/2011 2011/2012 2012/2013 2013/2014 2014/2015


2012/ 2013 £81.83

2013 / 2014 £69.67

2014 / 2015 £88.41

December 6, 2010

2012/ 2013 £53.93

2013 / 2014 £39.04

2014 / 2015 £41.24




2012/ 2013 £9.31

2013 / 2014 Not Capped

2014 / 2015 Not Capped


Once again there is a clear poverty trap between £15,000 and £20,000 of earnings. The model is
simpler than for that of tenants as no mortgage interest support is payable to those in full time work
under the current rules.

It is somewhat surprising that the introduction of mortgage support in Universal Credit has a
relatively small apparent impact on income levels but it typically offsets what would otherwise be a
deduction and the higher earnings disregard in Universal Credit is reduced by a multiplier of the
interest support.
December 6, 2010


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