Credit crunched – Working longer hours won’t pay for single parents under universal credit
Almost all of the UK’s 2 million single parent families receive some form of benefit, whether they are in or out of work. As a group, they are significantly affected by the introduction of universal credit – the government’s flagship scheme to combine six current benefits into one – with all single parents due to be moved over by the end of 2017.
No one would argue that the current system of tax credits and benefits is perfect – in fact it makes it difficult for many single parents to make work pay. Taking on extra hours or even getting a pay rise can leave single parents with little more to show for it at the end of the month, and any changes in circumstances can become an administrative nightmare, with families ending up out of pocket while benefits are recalculated. As their family’s sole earner and main carer, for single parents this is a significant handicap.
Alongside the difficulty in making work pay, single parents also have to negotiate finding that elusive family-friendly job and securing the right childcare to go with it. Given these challenges, it’s perhaps not surprising that single parent employment lags behind the employment of mothers from couple families by 11 percentage points (single parents have a 60% employment rate, compared to 71% of mothers in couples).
But in spite of the barriers, more than half of single parents do work – they are highly motivated to do so, not only to provide for their families but also to be role models for their children.
Universal credit, billed as a new system that promises to always make work pay, therefore, would seem like good news for single parents. In fact, the principles of universal credit are laudable: the restructuring of in and out-of-work financial support designed to simplify a complex system, to make it easier for households to move in and out of work, and, crucially, to make work pay – including, specifically, a commitment that “Universal credit will make work pay – at each and every hour”.
But our report out today, Credit crunched: Single parents, universal credit and the struggle to make work pay finds that the government must make crucial changes to the way that universal credit payments are calculated if the it is to meet its objective of always making work pay.
The report authors, Professor Mike Brewer and Dr Paola De Agostini at the Institute for Social and Economic Research (ISER), have found that working single parents – whether working at or above the minimum wage – will lose a higher proportion of their weekly income under universal credit than any other household type.
Moreover, overall universal credit will make very little difference to the ability of single parents to gain from progressing in work. Single parents will lose out in cash terms under universal credit compared to the current system.
However, ISER did find that single parents looking to enter work part-time, in particular up to 20 hours per week, will see an increased financial return from work compared to the current system. But as their hours of work increase towards full-time, these gains will decrease significantly.
It’s crucial to remember that, for single parents constantly juggling finances and childcare, small theoretical financial gains have to be balanced against the time and effort – and additional cost – of going out to work or working more. That’s why getting the financial support right – meaning decent financial incentives to work – is so vital.
Getting the right support in place
We asked ISER to look at different possible solutions that would increase the likelihood of making work pay for single parents under universal credit.
They found that increasing the personal tax allowance had very little benefit for low-income single parents, but came at a big cost to the government.
And while increasing the standard allowance that universal credit recipients get would mitigate some of the worst effects of poverty for out-of-work single parents, it would have limited ability to improve the incentives for single parents to work longer hours.
The research shows that by far the most effective change would be to decrease the rate at which universal credit is withdrawn as earnings increase. The original designers of universal credit envisaged that for every pound earned, benefits would be tapered away at a rate of 55%, but under current plans, this rate is actually set at a far steeper 65%. This makes a huge difference to financial gains from working longer hours or an increase in wages.
Brewer and De Agostini also found that increasing the amount that claimants can earn before support from universal credit begins to be withdrawn is worth serious consideration by DWP. It would trigger a gain for most working single parents, and would also increase the financial incentives for almost all (93 per cent) single parents who aren’t currently working to move into work.
Not too late
While a limited rollout of universal credit has already begun, it is not too late to make changes to the system.
The government has the power to ensure that work always pays, and to lift many families out of poverty, and this research highlights a series of clear actions for the government to consider, that would improve the lives of millions of families. It’s up to ministers to make that happen.