The way that a tax or a benefit is increased each year can have dramatic long term effects on its value. This is one of the sneakier ways that a government can reduce spending or increase tax rates e.g. freezing tax credits to reduce their costs over the last parliament saved billions of pounds for the government by reducing the incomes of the poorest. However for some things deemed too important to play such games with, the government creates what is called a ‘triple lock’ to make sure that they retain their value. This means that the item increases in value with whichever is highest out of average pay (mean), inflation or 2.5%. The government currently does this for pensions, and a new report from the Resolution Foundation highlights why they should do this for Universal Credit’s Work Allowance.

The Work Allowance is the amount of money that a person can make whilst receiving benefits before those benefits begin to be withdrawn from them. It acts in a similar way to the personal allowance for income tax, but it sets when social security begins to be withdrawn and it is much lower. This has two important primary effects. The first is that it increases the incentive to get a job. If you keep more of the money that you earn then you are more likely to take up a job. The second is that it also helps tackle in-work poverty. The work allowance means that more money is supporting people in low paid work. However the work allowance can also have an important in-direct effect – helping to prevent rising inequality.

If the work allowance increases in value with average pay then it prevents people at the very bottom of the income spectrum from falling behind if average wages increase. Before the financial crisis we saw a long period of wage growth that was well above the rate of inflation. Part of the reason that inequality slightly increased in this period despite the expansion of the tax credit system, which reduced inequality, was that the incomes of the poorest (through social security) failed to keep up with this wage increase. If the work allowance keeps pace with average wages then in the good times it ensures that those on the lowest wages aren’t left as far behind.

Linking the work allowance to inflation ensures that during the bad times the safety net can cushion some of the fall. Directly after the recession inequality fell slightly because tax credits and the rest of the social security safety net acted as a cushion against falling incomes. Keeping the work allowance linked to inflation would help provide a similar effect in future recessions.

This would not be without cost, however all political parties should be reminded that increasing support for parents in low paid work is extremely popular and they would be the beneficiaries (along with the disabled) to implementing the Resolution Foundation’s recommendations. The government should therefore support people on low incomes, increase work incentives and help prevent inequality from increasing by introducing a triple lock for Universal Credit’s work allowance.

Tim Stacey, Senior Policy and Research Advisor