Universal Credit could risk adding to the financial instability of low-income workers, with those who are self-employed likely to come under the most pressure, according to new research from Citizens Advice.
The charity has released two new reports on Universal Credit, examining the impact of work allowance cuts on people’s budgets and why UC’s design can leave self-employed workers at a financial disadvantage.
Citizens Advice says a self-employed worker who receives Universal Credit could be worse off by £630 a year compared to an employee on the benefit, even if their year-end earnings are identical.
The first report highlights issues with the Minimum Income Floor, a rule that assumes everyone claiming Universal Credit who has been self-employed for a year or more is earning the National Minimum Wage (NMW).
If they earn less than the NMW one month, their Universal Credit payment won’t make up the difference. But if their monthly earnings go over the NMW, their benefit payment will be reduced accordingly.
The charity says this design flaw is unfair and risks causing financial hardship as self-employed workers often earn different amounts from one month to the next.
The second report finds that employees could also be at risk of financial insecurity when they move to Universal Credit. In 2015, the Government announced a series of cuts to the benefit which will result in 2.1m working households receiving less money under Universal Credit compared to the old benefit system.
One of the biggest cuts was to the work allowance, resulting in workers seeing a reduction in the amount of hours they can work before their Universal Credit payment starts to decrease.
Citizens Advice asked 877 people receiving in-work benefits how they would cope with a £100 drop in their monthly income, roughly the average amount affected households stand to lose from the reduced work allowance.
One in four workers (26%) said they would not be able to top up their income through employment even though they might need to, with 33% of those saying this is because they work full time already.
Caring responsibilities (23%) and having a disability (18%) were other reasons workers gave for not being able to make up the £100 shortfall through work.
Universal Credit is currently being rolled out and set to be completed by 2022, at which point an estimated 7.2 million households will be claiming Universal Credit – 3.9 million of them in work.
The charity is calling for the Government to review both the lowered work allowance and the Minimum Income Floor to give workers better financial security and ensure they are incentivised to progress in work.
Gillian Guy, Chief Executive of Citizens Advice, said: “Despite the labour market changing significantly in the last decade, including a rapid rise in self-employment, Universal Credit is still better suited to those with regular jobs.
“The Government has shown it is prepared to act to improve Universal Credit as new facts come to light – an approach we strongly support. It now needs to look again at the design of the benefit to ensure self-employed and agency workers aren’t left at a financial disadvantage.
“It should also reassess the work allowance reductions to ensure workers who can’t increase their income through employment aren’t left struggling to make ends meet, while better incentivising those who can.
“A failure to do this risks undermining two of the core purposes of Universal Credit – to incentivise people to move into and progress in work, and provide low-income families with financial security.”