The Bare Minimum: How Universal Credit Must Change to Support Low Income Workers

Almost everyone agrees that work should be a way out of poverty and a route towards greater prosperity. But a report published today by the Joseph Rowntree Foundation (JRF) shows that simply isn’t the case for many. It found that 2.6 million households, or 60% of those where the total income is below the charity’s minimum income standard (MIS), included at least one working adult. About 600,000 households with every adult being in full-time employment were still living below the MIS.

The MIS is calculated by asking members of the public to define what is needed to “live to an adequate level”. In other words, it’s about as good an account as we have of what the public believes is the bare minimum necessary for a dignified standard of living. According to the JRF this amounts to £16,850 for a single person, £25,600 for a lone parent with one child and £36,060 for a single breadwinner with two children.

Clearly, we’re not talking about vast sums of money, but we are talking about an amount of money that is still beyond the reach of many households. This is a worrying development in modern Britain – the prevalence of in work poverty, or at the very least, in work precariousness. It also points to a wider problem; the failure of our politicians to support an economy where work really does pay.

This is most evident in the bungling of our tax and social security systems. Raising the personal tax allowance is a flagship Government policy, and was hailed as a measure to help low income families. But it seems to have had remarkably little success in doing so. Instead the policy has disproportinately benefitted better-off households, with those most in need of support, and the struggling low income ‘strivers’ we often hear about, being left with relatively little. Those on the very lowest incomes, who already pay no tax, have seen no benefit whatsoever from the policy. As the allowance continues to rise, so too will the disproportionate gains for the better-off.

Further changes to the social security system may make matters even worse. As our recent report, The Aspiration Tax, showed, the introduction of Universal Credit (UC) is likely to hit the working poor hard. This was a policy specifically designed to incentivise work, and yet recipients looking to move out of poverty will now see 76p of every extra pound they earn taken through UC withdrawal and taxation. That’s an astonishingly high tax rate, and is in stark contrast to the 47p tax rate someone in the richest 1 per cent faces. It’s little wonder our polling found 70% of people believe those receiving UC payments should get to keep more of the money they earn.

The JRF has suggested that increasing UC’s work allowance would help to lift more households to the level of the MIS. We believe that an even more effective measure would be to reduce its withdrawal rate from 65p to 55p of every additional pound. In other words, return UC to its original proposals. This is partly because recent research suggests that reducing withdrawal rates provides a more effective incentive to workers than reducing tax on their incomes, as would be the case with an increased work allowance.

A low skill, low pay economy, where people are locked out of decent standard of living, is not most people’s idea of a modern and successful country. We can do much more to support those on low incomes build towards a more secure future; and we should start with a simple change to Universal Credit.

John Hood

Media and Communications Manager