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Government plans to replace most means-tested benefits and tax credits for working-age adults with a single benefit will weaken incentives for higher earners and dual-earning couples to work, according to an analysis by the Institiute for Fiscal Studies.
The introduction of the Universal Credit, which will be enshrined in the Welfare Reform Bill to be published later this month, is regarded as the largest reform to the welfare system since at least 1988.
It will bring Income Support, income-related Jobseeker’s Allowance and Employment and Support Allowance, Working Tax Credit, Child Tax Credit and Housing Benefit into one Universal credit and so simplify the benefits system.
The IFS says the credit will strengthen financial work incentives for some, but weaken them for others. It states: “In general, incentives to work will be strengthened for the main earner in a family who works part-time or has low earnings, and will be weakened for those with higher earnings and for second earners in couples.
Marginal effective tax rates will tend to fall for those on lower earnings, and rise for those on higher earnings, although this pattern also depends on how many earners there are in the family.”
It says there will be winners and losers with the credit and says couples with children will gain more than single parent families, who will lose out on average.
In general, however, it states that the impact on incomes is “progressive”, with the lowest earners gaining the most as a proportion of their income.
In the long run, it estimates that the Universal Credit could lead to entitlements to benefits of £1.7 billion a year greater than the current system, although details are still unclear and several areas are still unclear, such as whether the Carer’s Allowance will be included within the Universal Credit and how the childcare element of Working Tax Credit will be replaced.