Most of the attention in post-budget analysis of social security announcements rightly went to the government’s decision to extend the £20 uplift to universal credit (UC) by just six months. However, the budget also outlined changes to how the government reclaims advance payments made to UC claimants. From April, advances will be repaid over up to 24 months (as opposed to up to 12 months), while the maximum combined deduction rate (for most deductions, not just those for advance payments) will be reduced from 30 per cent to 25 per cent of the standard allowance. These changes were going to be introduced in October 2021 but have been brought forward.
While the changes announced in the budget are welcome, they do not substantially change the fact that millions of households are receiving deductions from their social security entitlement during their time of need. While many richer households have been able to save during COVID-19 as their expenditure has fallen, costs have actually risen for low-income families due to higher spending on food, energy and home-schooling. Deductions will continue to have a big effect on family finances.
What are deductions?
The most common reason for debt deductions is because a person has received an advance payment of universal credit. This is generally because claimants of universal credit have to wait five weeks before they receive their first payment and they need an advance in order to survive. Other reasons for deductions include the person paying back a historical tax credit overpayment, social fund loans and housing benefit overpayments.
Parents and carers living on a low income have told us the negative impact deductions can have on their household finances. Angie, a participant in the Covid Realities project, explained the impact of repaying advance payments during the pandemic:
“Not only am I paying back the first ever advance payment I was given when I applied and was waiting for my first universal credit to kick in last year of £100, I am also repaying the £200 advance payment I had to borrow as a result of the first lockdown taking my budgeting to a £0 balance because people were stockpiling. This meant, in order to succeed to get those low cost items desperately needed for our food cupboard, after five supermarket visits in less than two days unsuccessfully, the expensive alternatives started to add up.”
How widespread are deductions?
The latest data (August 2020) indicated that 41 percent (1.85 million) of UC claimants had some form of deduction. This consisted of 1.17 million claimants just repaying advances, 230,000 only repaying other forms of deduction (eg, tax credit overpayments), and 450,000 repaying both advance repayments and other form of deductions.
How do deductions work now?
If a claimant receives a month’s UC entitlement as an advance to cover the five-week wait, they see 8 per cent of their monthly entitlement deducted from their award for the following 12 months to repay the advance (the advance is recouped evenly over 12 months).
It is worth noting that CPAG believes that the level of monthly recovery of advance payments is unlawful in some circumstances, and is considering how best to challenge the unlawful (in CPAG’s view) recovery of advances from claimants.
When other deductions are involved it gets harder to calculate, but the DWP's current policy is that the maximum that can be recouped is capped at 30 per cent of the standard allowance. In money terms, the usual maximum overall level of monthly deductions is £180 for a couple and £125 for a single person (regardless of overall entitlement) per month.
What do these changes do to deductions and what will this mean for household finances?
From April, new claimants who receive a month’s universal credit entitlement as an advance to cover the five-week wait will now have the option of having 4 per cent of their monthly entitlement deducted from their award for the next 24 months. It appears that this 24-month advance repayment schedule will only be available to new claimants. Existing claimants will still be on the 12-month schedule, meaning there will be no change to their monthly deductions.
The usual maximum monthly amount that will be deducted under the new policy is £150 for couples and £100 for a single person. The reduction in the maximum amount will mean that the hardest-hit households will have lower monthly deductions. But these are still sizable amounts.
As Danni, reflecting on her own experiences of debt deductions, puts it:
“The government need to understand the effect a deduction has on a person’s ability to survive on UC. Until you have been in that position you will never understand it.”
To address the negative impact of debt deductions, and help people like Angie and Danni, the government should convert payments of UC to non-repayable grants and write off historic benefit overpayments after a period of two years.
Find out more: Advance to Debt
Note: The project on which the above draws has been funded by the Nuffield Foundation, but the views expressed are those of the authors and not necessarily the Foundation.
This blog was updated on 19 March 2021.