A couple of weeks ago there was a lot of media attention on analysis which found that many claimants paid weekly were at risk of receiving a reduced award of Universal Credit in December because of receiving 5 pay packets rather than the usual four.
Calculating how the time at which payments of earnings are made affect Universal Credit is complicated – this blog has a look at this issue in a little more detail.
How does means testing work in Universal Credit?
Well, the first thing to note is that pay is not calculated by the calendar month, it is calculated based on an assessment period of a month which may start and end at any point in the month (so, for example, an assessment period may start on the 12th November and run to the 11th December).
Any earnings (after tax) paid to the claimant during this period count towards the assessment of their Universal Credit entitlement at the end of the assessment period.
To calculate their actual Universal Credit entitlement, an amount of their earnings equivalent to their work allowance is ignored, then 63% of the remaining earnings are deducted from their Universal Credit entitlement. So, for example:
Simon has an assessment period running from 12th November to 11th December. On the 29th November he receives his net monthly earnings of £600. After 11th December, his earnings in the assessment period are totalled (simple in his case as he only received one pay packet).
He has a maximum Universal Credit entitlement of £450 and a work allowance of £192. 63% of £408 (£600-£192)is deducted from his maximum Universal Credit entitlement, leaving him with £193 Universal Credit.
The decision to make all earnings count towards the single payment period in which they are paid, creates problems for a number of different groups:
- People who do not get a regular monthly pay packet
Let us suppose that instead of receiving £600 per month, Simon receives £150 per week paid every Friday. Well, in some assessment periods Simon will receive four pay packets (£600), and in other periods he will receive five (£750)
In the months where he is paid £600 his Universal Credit entitlement is £193. In months where he earns £750 this reduces to about £98.
In some respects this isn’t a huge problem – overall some people will be a bit better off, others a bit worse off (depending on whether the reduction in earnings means they don’t use up all of their work allowance in some months, or whether they are pushed out of entitlement altogether in months where they receive five payments.) However, it does create instability and uncertainty of income. For many people on a low income – who, despite much of the rhetoric, are often extremely good at budgeting (because they have to be) changes in income from one month to the next can cause huge problems.
The problem is likely to be greater for claimants paid four weekly, where in one month each year they will be treated as having eight weeks of pay in a single month (there are thirteen periods of 4 weeks in one year). This is likely to substantially reduce their entitlement in those months – causing substantial irregularities in their overall income. If they aren’t expecting it, the substantial reduction of income in those months could cause them real problems with effective budgeting.
- People with irregularities in their pay
A second problem can result from irregularities in pay. For example – last year I was paid on the 29th November and the 21st December (it is common for December earnings to be paid before Christmas). If my assessment period ran from the 27th November to 26th December and my pay dates were recorded as 29th and 21st – then I would receive two monthly payments of earnings in a single assessment period.
Were this to be the case, I would be treated as having double pay for one month’s Universal Credit, and then no pay the following month.
This clearly causes a great deal of income instability (I may get no Universal Credit just after Christmas, and then more than usual the next – despite my actual earnings not changing).
It could also cause a claimant to lose out heavily because in the second month when they are treated as having no income they gain nothing from the work allowance so they only use one work allowance over 2 months.
For example let’s suppose I have a maximum Universal Credit of £800, and a work allowance of £397 and my net earnings are £600 per month.
If I was treated as earning £600 per month, then I am £203 over my work allowance and see a £127 deduction from my maximum Universal Credit entitlement. Overall my income (including pay plus UC) is £1273 per month – or £2546 over the two month period.
However, if I am treated as earning £1200 in one month and nothing the following month – then my overall income is £894 in the first month and £1400 in the second. Over the two month period this leaves me around £250 worse off, simply on account of having two pay checks in one assessment period (though perhaps the bigger problem is the huge instability in income this causes me).
And for some it will be even worse because if their maximum entitlement to UC is higher than the benefit cap the UC they receive may be subject to the benefit cap in the second month (because they will be seen as having earned nothing). This is despite them having been in regular fulltime employment and their earnings from a month’s work – if counted for that month – being such that they would exclude them from the cap. (Claimants may not be affected by this if they were in work – and earning enough to be exempted from the benefit cap – for each of the previous 12 months.)
- People leaving employment and claiming Universal Credit – removal of the waiting days will mean some people wait 9 weeks instead of 5
Another problem caused by the way pay is treated in Universal Credit can be caused when claiming Universal Credit as a result of having left employment. In such a case, if your final pay packet from employment is paid after the start of your first assessment period then these earnings will count towards your entitlement at the end of the first month.
If the claimant had been paid monthly, the result of this is that they are likely to be pushed out of entitlement altogether for the first month of their claim – and, instead of waiting five weeks for their first Universal Credit payment, will have to wait nine weeks instead.
Somewhat ironically the Government’s decision to scrap the Universal Credit waiting days will make this problem much worse Currently if the employer pays the final wages in the 7 days after leaving employment and claiming UC their final earnings wont usually decrease their UC unless they are very high as they wont fall into their first Assessment Period.
Once the waiting days have gone any income they receive after their claim will reduce their UC payment that will be made 5 weeks later. If someone claims UC as soon as they finish work they are quite likely not to have received their final wages. If their final wages are paid after they make their claim then they will use their final wages to live on during their first Assessment Period and be expecting full UC five weeks later. However they will find that they are entitled to nothing or very little and will have to wait a further month with no income at all before they get their first full UC payment
- Self employed people
For self-employed people, the problem of earnings counting towards the single assessment period at the point they happen to be paid is particularly serious. This is due to the application of a ‘Minimum Income Floor’ (MIF), which means that they are treated as earning no less than a certain amount (normally the equivalent of 35 hours per week at their relevant rate of minimum wage – around £1050 per month for a someone over 25).
It is common for self-employed people to have fluctuating earnings – often simply on account of variations in when they get payments come in for work they have done. The application of the MIF means that if a claimant receives two months of earnings in a single assessment period, and then none the next month, they would have their full actual earnings taken into account for the first assessment period, but the MIF would be applied in the second, meaning they are treated as earning £1050.
The intention of the MIF was to prevent the State providing long term support for failing businesses – the way earnings are treated instead means that it will penalize successful small business people purely on account of their fluctuating income.
From those claiming Universal Credit after leaving a job, through to self-employed claimants with variable earnings, the way in which earnings are treated in Universal Credit causes serious problems for a number of different groups.
The first thing that needs to be done is that when someone is paid after leaving employment, their earnings should be treated as being paid on their final day of work – not on the date they are actually paid out. This would ensure they do not count towards their first Universal Credit assessment period.
The second is that people should be able to average their earnings over multiple assessment periods if this best reflects the way in which they are paid. This would help to enable claimants to “smooth” fluctuating incomes which can cause irregularities in entitlements. This is particularly important for self-employed claimants who may otherwise be affected by the Minimum Income Floor.