Universal Credit Cuts Will Wipe Out National Living Wage Pay Increases for Many Parents

Single parents receiving Universal Credit and working for the minimum wage will be worse off even after receiving the new, higher minimum wage today (the ‘National Living Wage’).

Cuts to Universal Credit’s Work Allowance will mean a single parent working full time on the new minimum wage (just under 36 hours a week) and looking after two children will be £312 a year worse off, even after receiving a higher wage and an increase in their income tax personal allowance (the amount of income they can keep tax free). As a result, they will have to:

·          Work an extra 16 hours a month, just to earn the same as they did before cuts to Universal Credit. 

·          Effectively work for an hourly rate of just £1.71 – or 24 per cent of the so-called ‘National Living Wage’. 

In contrast, the threshold for the higher rate of Income Tax will be raised to £43,000 on April 1st, and will mean those in the richest 15% will be better off by £61.50 a year. The threshold will rise to £45,000 next year, resulting in an extra £200 for the richest 15%. 

Under original plans, Universal Credit allowed single parents to earn £263 a year before their Universal Credit entitlement was withdrawn as they earned more. Couples with children were entitled to earn £222 before UC was withdrawn. However next month, this amount will be reduced to a paltry £192 for people who receive support with their housing costs. The consequences of this are significant.

According to polling conducted for us by Ipsos MORI, 70 per cent of people believe those receiving UC should get to keep more of the money they earn.

In our recent report, The Aspiration Tax, we found that if Universal Credit’s withdrawal rate was reduced from 65 per cent to 55 per cent, these working families would not have to work extra hours at pitiful rates of pay; and would keep more of each hard-earned pound. 

John Hood, Acting Director of the Equality Trust, said:

“It’s clear that for all the fanfare around the new, higher minimum wage, cuts to Universal Credit will wipe out any pay gains from this for many of the poorest paid. At the same time, the Government’s decision to increase the 40p tax threshold will see the richest 15% better off, with the promise of further gains as the threshold is raised again next year.

“If the aim is to widen the gap between the richest and the rest, and increase inequality, this is an excellent way to do it. If not, we urgently need politicians to think again and reverse these tax giveaways to the well off and cuts to the incomes of the poorest working families. 

“A good place to start would be to stop the increase in the personal tax allowance, which disproportionately benefits the richest households, and instead reduce the rate of Universal Credit withdrawal from 65p to 55p.”