Universal credit: What is it and why does the £20 cut matter?

The controversial universal credit system has been under a microscope throughout the pandemic after redundancies, the furlough scheme and income losses pushed thousands of families into poverty.

Around 5.2 million people claim universal credit as of September 2021, a decrease on the record-high six million recorded at the beginning of the year but still a marked increase compared to pre-Covid levels, which were around three million.

Anti-poverty experts welcomed a £20 weekly increase in payments for those claiming universal credit (UC) and working tax credits, introduced by the government at the start of lockdown last year. But the government cut payments back to pre-Covid levels at the beginning of October, despite widespread condemnation.

Anti-poverty campaigners and MPs warned the cut could be devastating for millions of families facing a financial cliff-edge, especially with the furlough scheme ending. Even former Conservative welfare ministers wrote to the chancellor urging him to make the £20 increase permanent to avoid sending families into financial crisis.

In August, the prime minister told broadcasters: “My strong preference is for people to see their wages rise through their efforts rather than through taxation of other people put into their pay packets.”

But universal credit claimants who have jobs are falling into poverty too, research has shown. One in six working households were living below the breadline just before the pandemic and in-work poverty is at a record high.

So why is the universal credit system controversial and the cut so damaging? Who is likely to be affected? We answer your questions.

What is universal credit?

Universal credit was introduced by the Conservative government in 2013, designed to streamline the benefits system. Instead of a patchwork of means-tested benefits like housing benefit and income-based job seeker’s allowance, it wrapped them up into one single monthly payment. It can be applied for online.

It is paid to people on low incomes, both in and out of work. People receiving benefits have been gradually migrated onto the UC system since its introduction. The government aims to have everyone on the newer system by 2024.

In England and Wales, those who get help to pay their rent will receive it in their monthly UC payment which they must then use to pay their landlord themselves. In Scotland and Northern Ireland, claimants have the option of having the rent paid directly to their landlord.

People who live as a couple and both claim UC will get a joint payment paid into one bank account.

Claimants can be sanctioned, which means having their payments cut for a period of time, if they miss a meeting with their work coach or refuse to go for an interview for a job signposted to them. Sanctions can last for a couple of weeks or for months, depending on the reason.

Who is eligible to claim universal credit?

People aged 18 or over who are on a low income or are out of work can apply for UC. A person or their partner must be under state pension age and have £16,000 or less in savings.

In some cases, exceptions are made to pay universal credit to 16-17 year-olds and students.

People under 25 are paid less in universal credit than those over 25, but the public supports increasing the amount they are paid to match older adults, Fabian Society research has shown.

There is no limit on the number of hours people can work if they are employed and claiming universal credit. However payments will reduce depending on how much is earned.

Around five million households claimed universal credit between the beginning of the pandemic and April 2021 – more than two fifths (42 per cent) of the total 12 million claims made since the controversial benefit system was introduced in 2013.

Since February 2018, more women than men have started on universal credit each month. But the four weeks up to April 8 2021 bucked the trend, with men accounting for a higher proportion (51 per cent) of people starting on the benefit. The government observed a similar pattern in the first month of lockdown last year, when 56 per cent of universal credit starts were men.

Why is universal credit controversial?

The system has been long criticised as not fit for purpose. 

One problem is the five-week wait most claimants face between applying for the benefit and receiving their first payment. It has been blamed for pushing people further into debt.

Claimants can receive an advance payment to cover the wait, but in effect it acts as a loan which must be paid back. Their payments for the next year are spread out over 13 weeks instead of 12. 

The government has refused MPs’ recommendations to investigate the impact this has on people and to introduce a non-repayable starter grant.

The UC system is complicated, making it difficult for people to calculate how much they might receive. Many families who faced income cuts during the Covid-19 crisis found they were not eligible for UC, despite struggling to make ends meet. Applying for UC payments could also end any tax credits a person receives.

Last year a Lords Economic Committee report said universal credit “punishes the poorest”.

The UK hit its highest in-work poverty rate of the century just before the pandemic, according to research by the Institute for Public Policy Research, and the chance of households with two people in full-time work being pulled into hardship has doubled since the millennium.

Researchers cited a failing benefits system as one of the four main drivers of in-work hardship, as well as soaring housing costs, low-paying jobs and costly childcare.

“The government’s response to the crisis of in-work poverty is a cut [to] universal credit, taking £1,000 from five million families already struggling,” said Jonathan Reynolds MP, Labour’s shadow work and pensions secretary.

Around half of households on universal credit were still facing food insecurity after the government increased payments by £80 per month, sparking concerns among food banks that the post-cut demand for help would far exceed anything seen during the pandemic thus far.

Find out how much you would be entitled to on universal credit here.

What is the benefit cap?

Restrictions on the total amount of money people can receive in benefits including universal credit have also been blamed for pushing people into poverty.

The benefit cap is applied based on where a person lives, if a person has a partner and if they have children living with them. The government said it is designed to ensure no one on benefits can receive more than the minimum wage equivalent through the welfare system.

It means a household can be assessed by the DWP to need a certain amount of money to live, but receive less than that if that is more than the limit set by the law.

Anti-poverty campaigners have long called for the cap to be scrapped. The number of households that had their incomes limited by the benefit cap soared by more than 137 per cent during the pandemic, according to government figures.

Up to 76,000 households were affected by the cap in February 2020, before Covid-19 hit the UK. By November 2020, the number impacted had soared to 180,000. 

Around 3,800 households had their incomes capped by £200 or more per week. Roughly 39,000 people – 26 per cent of all households impacted by the policy – were capped by between £50-£100 per week.

The benefit cap “breaks the link between what you need and what you get,” a Child Poverty Action Group spokesperson said.

What is the £20 universal credit cut?

At the start of the Covid-19 lockdown in 2020, the government introduced a temporary £20 weekly increase for people receiving universal credit and working tax credits.

It was designed to support those already struggling through what was a tough time for the economy.

It was initially expected to end in April 2021, but at the spring Budget chancellor Rishi Sunak extended the increase until September. The increase was officially pulled on October 6, confirmed by Rishi Sunak at the Conservative party conference – during a speech in which he said Brits should be “grateful” for a decade of austerity.

The prime minister insisted ministers would instead focus on helping people into work – despite huge numbers of workers having to rely on universal credit while already in work.

Around half a million people could be pushed into poverty by the cut, according to JRF, including 200,000 children. It disproportionately affects single parents, BAME families and households including a person who is disabled.

​​The cut left families facing what devolved government leaders called a “cost of living crisis” as fuel and food bills soared, furlough ended and wages failed to keep up with daily expenses.

The reduction will “push children into poverty and leave out of work support is at its lowest level in decades at a time when unemployment is set to peak,” Jonathan Reynolds – Labour’s work and pensions secretary – said, calling for the chancellor Rishi Sunak to cancel the “economically illiterate” cut.

Conservative MPs joined calls to make the increase permanent. In a report on the UK’s route out of the pandemic, the Tory Reform Group and One Nation caucus said cutting the benefit would be a “mistake” which would impact the country’s poorest families most.

“Although we have all made sacrifices, it is undeniable that younger people and children, lower income essential workers, and people in developing nations, are more disadvantaged than those of us who have been able to shield and maintain our incomes,” said Damien Green, Tory MP and One Nation chair.

The Covid-19 crisis had an “unequal effect” across society, the MPs said, urging the government to target support at disadvantaged families.

Meanwhile six former Conservative welfare secretaries wrote to Rishi Sunak calling on him to make the £20 increase permanent, protecting families on low incomes and boosting the economy.

The decreased payments amounted to the “biggest overnight cut to the basic rate of social security since the Second World War”, according to Katie Schmuecker, deputy director of policy and partnerships for JRF.

In an open letter to the prime minister coordinated by JRF, 100 organisations including The Big Issue warned the cut would “repeat the mistakes of the last economic crisis”.

The letter was sent to Boris Johnson on September 1, a month before the benefit was slashed.

Backing the letter to the PM, The Big Issue called on the government to make the increase permanent as part of the Stop Mass Homelessness campaign to prevent thousands of people losing their home in the months ahead.

Thérèse Coffey was criticised for singing ‘(I’ve Had) The Time of my Life’ at karaoke just an hour before she cut the benefit by £1,040 a year.

Coffey, the UK’s work and pensions secretary, was seen dancing and singing the Dirty Dancing-associated hit at a party during the Conservative Party conference with children’s minister Will Quince.

Opposition MPs and poverty activists expressed anger at Coffey’s seemingly celebratory mood – and song choice – despite having just overseen the biggest cut to social security since the second world war.

Does the public support keeping the £20 universal credit increase?

Nearly 60 per cent of the public back making the increase permanent, according to polling from the Health Foundation and Ipsos MORI.

A separate study by the Fabian Society found that a majority of the British public wants the increase made permanent for particularly vulnerable people including young adults, carers and disabled people.

Politicians must “catch up with public thinking” around the social security system according to Mubin Haq, chief executive of Standard Life Foundation, to give people “a fair chance to get back on their feet”.

“The cost to government spending is significant, but the human cost of inaction is even greater,” Haq added.

Did people on other benefits get the £20 increase?

As well as campaigning to keep the £20 increase, campaigners say disabled people and those on so-called “legacy benefits” were forgotten in Covid-19 support packages. 

People on employment and support allowance, child tax credits and income support, primarily people with disabilities and health conditions which prevent them working, did not receive any increase in their payments last year. Anti-poverty experts want the weekly £20 to be extended to them as well as reinstating it for universal credit claimants.

This November, the High Court will decide if the government acted unlawfully by not giving the two million legacy benefit claimants the increase.

Two people on employment and support allowance – one of the six so-called legacy benefits – won the right to challenge the government in court.

The disabled claimants applied for a judicial review over the Department for Work and Pensions’ failure to give them the same increase as other people on benefits, which they called “discriminatory and unjustified”.

The High Court accepted the case, submitted in March 2020, that only giving the increase to those on Universal Credit discriminated against disabled people was in breach of the European Convention on Human Rights.

Lawyers argued disabled people claiming legacy benefits faced higher living costs during the pandemic but had to get by on less money than those on universal credit. The DWP should have to justify their “unfair” decision, they said.

Thérèse Coffey told MPs she did not believe the 2.2 million legacy benefit claimants had been treated badly during the pandemic.

This article is regularly updated by The Big Issue to give readers the latest information.