Self-employed workers will be far worse off under universal credit, research suggests

13 Apr 2018 By Miriam Kenner

Government must rethink changes to benefits system to avoid financial risk for ‘insecure’ workforce, says Citizens Advice

The government’s universal credit benefit scheme could have a devastating impact on the rising number of non-traditional, self-employed and low-paid workers, with many left far worse off financially each year, according to major new evidence from Citizens Advice.

Two key reports by the charity, published this week, found that the new universal credit (UC) system would lead to severe financial hardship and losses for many workers.

The charity said the labour market had changed significantly since UC was designed almost a decade ago. Despite high employment levels, today many workers do not have a ‘traditional’ full-time, permanent jobs. 

Around 4.5 million people in the UK are in some form of insecure work – defined as jobs with some variability in hours or earnings – and 8.5 million work part-time, while 4.8 million are self-employed. 

The number of self-employed people has increased by 40 per cent since 2000, compared to a 10 per cent rise in regular employment.

“Many of these people’s hours and earnings vary throughout the year – and UC could make life more difficult for them,” the charity found.

Citizens Advice analysed how changes to the design and delivery of UC could lessen some people’s incentive to work or increase their hours. 

The calculation method for UC could “make things more difficult for people whose incomes change month by month, or for those not paid monthly”.

Under the changed design of UC, compared to the old benefit system, a self-employed worker receiving UC who earned £9,750 a year would be £630 worse off each year compared to an employee on the benefit, even though their annual earnings are identical. 

As the first report outlines, this is because of UC’s minimum income floor, which presumes that all those who claim UC and have been self-employed for one of more years earn the national minimum wage (NMW).

However, UC payment will not make up the shortfall if those workers earn below the NMW in an individual month. And if their monthly earnings exceed the NMW, their benefit payment will be reduced.

Because of the nature of being self-employed, such workers frequently have varying earnings each month, making the UC design “unfair” and financially unviable for the self-employed, the report stated. 

Workers not paid on a monthly basis would also face “unexpected income shocks” because of the “inflexible” UC monthly assessment period. They will face reduced incomes and some will have to reclaim UC multiple times during the year.

The second report suggested that those moving onto UC could be left significantly worse off because of the ‘work allowance’ – one of many changes to the system. This reduction in the hours that can be worked before the benefit is cut will result in significant benefit losses for millions. 

One in four workers in receipt of in-work benefits believed they would be unable to increase their income through employment, even though they might need to – in particular, 33 per cent of that group said they worked full time already. 

Of the 877 people receiving in-work benefits who were asked how they would handle the £100 per week shortfall, 23 per cent said they could not work more because of caring responsibilities and 18 per cent were unable to work more because of disability. 

Citizens Advice said the government must reconsider the lowered work allowance, the minimum income floor for the self-employed, the flexibility of UC’s monthly assessment period and the budgeting support available to UC claimants.

As more and more working people move onto UC, these issues need to be addressed as a matter of urgency, it said.

By 2022, there will be an estimated 7.2 million families in the UK in receipt of UC, 3.9 million of which will be in work, the charity found. It revealed that 2.1 million low-income families would also lose an average of £1,600 per year when they move to UC from the old benefit system.   

Dalia Ben-Galim, Gingerbread’s director of policy, told People Management: “Yet another report [...] highlights the government’s flagship UC programme is not meeting its aim of ‘making work pay’.”

Ben-Galim found the “rise of self-employment” highlighted by Citizens Advice “of particular concern” as Gingerbread’s own findings were that while the 58 per cent increase in self-employed single parents in the past decade could reflect positive choices for some, “for many it’s down to a lack of flexible alternatives. 

“UC fails to respond to this way of working and many self-employed workers will be worse off as they move onto UC. Reversing cuts to the work allowance would be an effective measure to make a real difference.

“Without this change and with the cost of living set to rise, spiralling debt, rent arrears and increasing levels of poverty will continue to be the reality for most single parent families moving onto UC. Most single parents are in work but many are living in poverty. Work is simply not paying.” 

Citizens Advice has advised on more than 200,000 UC issues since the rollout of the new benefit began in 2013. It cited evidence of some workers having to use food banks because of financial difficulties. 

The government this week responded to concerns about UC by issuing a statement that said: “UC is a flexible benefit that supports people in and out of work, those on low incomes and the self-employed, and it’s succeeding. We know that people on UC are moving into work quicker and staying in work longer than under the old system.”

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