The transitional element in practice

Introduction

DWP guidance setting out an unexpected approach to calculating the UC transitional element, combined with repeated case examples of unexpected outcomes to the transitional element calculation, had prompted concerns that large numbers of claimants may have been being overpaid, potentially by a very large amount, or underpaid.1 The DWP has since held a meeting for stakeholders to explain its approach to the calculation, answering some questions and taking others away to be answered later – information shared at that meeting has informed this article.

Transitional protection – the intent

The DWP has consistently stated that people financially worse off at the point of managed migration will be transitionally protected. For example:

• ‘No-one will experience a reduction in the benefit they are receiving as a result of the introduction of universal credit. At the point of transition onto the new system, those households whose circumstances remain unchanged and who would otherwise experience a reduction in income will receive cash protection.’2
• ‘Whilst many households will be better off financially on UC, for those with a lower calculated award in UC than in their legacy benefits, transitional protection will be provided for eligible households. This means they will see no difference in their entitlement at the point they are moved to UC, provided there is no change in their circumstances during the migration process.’3

Transitional element – the legislation

Primary legislation provides for a UC award to be not less than the amount to which the claimant would have been entitled in their legacy benefits, or not less than that amount by more than a prescribed amount (Schedule 6 of the Welfare Reform Act 2012).

The calculation of the managed migration transitional element is set out in regulations 52 to 55 of the Universal Credit (Transitional Provisions) Regulations 2014 No.1230 (‘the TP Regulations’). The transitional element process could be described as having four stages:

• calculate the ‘total legacy amount’;
• calculate the ‘indicative UC amount’;
• compare the total legacy amount with the indicative UC amount, determine the amount of the transitional element in accordance with regulation 55 of the TP Regulations;
• include the transitional element in the calculation of the actual UC award to the claimant.

The total legacy amount is the sum of the legacy benefits to which the claimant is entitled on the migration day, the day before they transferred to UC (regulation 53 of the TP Regulations). The representative monthly rate of each legacy benefit is based on the information held by HMRC and/or DWP on the day before their UC claim.

The indicative UC amount is ‘the amount to which a claimant would be entitled if an award of universal credit were calculated in accordance with section 8 of the Welfare Reform Act 2012 by reference to the claimant’s circumstances on the migration day’, subject to various assumptions. The indicative UC amount is ‘to be based on the information that is used for the purposes of calculating the total legacy amount, supplemented as necessary by such further information or evidence as [DWP] requires’ (regulation 54(1) and (7) of the TP Regulations).

Assumptions built into the calculation of the indicative UC amount can mean that the resulting transitional element may be either higher or lower than might otherwise be expected. These assumptions broadly relate to the following:

• responsibility for a child or qualifying young person (regulation 54(2)(a));
• the amount of childcare costs (regulation 54(2)(b));
• the amount of earned income (regulation 54(2)(c));
• the application of the UC financial conditions (regulation 54(3) and (4));
• the benefit cap (regulation 54(5) and (6)).

A curveball from the DWP

Guidance, obtained through freedom of information (FOI),4 appears to suggest that the DWP is calculating the transitional element in ways that CPAG and others had not anticipated. CPAG and others had been concerned that the DWP’s unanticipated approach may have been leading to large overpayments. However, the DWP has told stakeholders that it has sought legal advice and that the approach set out in guidance is correct, and overpayments are not arising. The department has not yet made any public comment on this issue and it must remain possible that the DWP could change its position in future. The DWP also stated that it is considering amendments to regulations to clarify their meaning, without changing the intent – although no decision had been made at that time.

The DWP told stakeholders that:

• the DWP only includes a housing costs element in the indicative UC amount if the claimant is receiving housing benefit (HB) (even if the person has housing costs and will have a housing costs element included in their actual UC award); and
• the DWP will not include a carer element in the indicative UC amount if the claimant is not receiving carer’s allowance (CA) (even if the person has caring responsibilities and will have a carer element included in their actual UC award). However, it should be noted that the DWP was unwilling to say, at the recent meeting, that a tax credit-only claimant receiving CA would have a carer element in their indicative UC amount. The DWP has said that it will take this question away to be answered at a later date.

The consequence of this is that claimants being managed migrated to UC and not receiving HB or CA in the circumstances above will have an indicative UC amount which underestimates – sometimes by a large amount – the eventual UC award they will actually receive. These people are therefore much more likely to get a transitional element or to get a higher transitional element – even if they would be better off on UC without a transitional element.

This principle may also apply in other situations. For example, someone receiving a legacy benefit (eg, working tax credit), but not – for whatever reason – receiving child tax credit (CTC) on the day before they claim UC (despite their circumstances suggesting that they would receive CTC if they were to claim it) may not have child elements included in the indicative UC amount even though they would expect to have child elements included in the actual UC award. This may also work in the favour of some people that could expect to have a limited capability for work (LCW)5 or limited capability for work-related activity (LCWRA) element included in the calculation of their UC award – for example, someone with national insurance credits on the basis of LCW or someone who would be treated as having LCW or LCWRA and would receive an appropriate element from their first assessment period. Although the DWP’s position works in the favour of some claimants it also appears to:

• fairly arbitrarily mean that certain groups of claimants receive windfalls in the form of a transitional element, or higher transitional element, even if they are better off on UC. Those windfalls are likely to be directed mostly towards claimants with capital over £16,000 – as this would presumably be the group most likely to have rent costs but not be receiving HB on migration day (because the capital limits will exclude them from entitlement to HB). The managed migration transitional capital disregard6 will mean that once they managed migrated, their capital above £16,000 will be disregarded for up to 12 assessment periods, enabling entitlement to UC;
• possibly create perverse, and potentially risky, incentives for claimants;
• be inconsistent.

Example

Alfie is receiving CTC. He pays rent but, as he has £50,000 in savings, he does not receive HB. He receives a migration notice. His savings above £16,000 will be disregarded due to the transitional capital disregard and so he will not be excluded from receiving UC due to his savings. When the DWP works out Alfie’s transitional element, his indicative UC amount does not include a housing costs element, because he was not receiving HB on his migration day. This means that his indicative UC amount is an underestimate of the amount of UC he is actually likely to be awarded, because his actual UC award will include a housing costs element. As a result of his indicative UC amount being lower than his total legacy amount, Alfie will receive a transitional element. Alfie would be better off on UC even if he weren’t to receive a transitional element – because he will start to receive help with his rent, which he did not previously receive – but he will receive a transitional element in the calculation of his UC award anyway.

Failures to include unearned income

CPAG has seen a number of cases in which unearned income had been missed out of the calculation of the indicative UC amount. This has especially been the case for unearned income which does not count as income for tax credits. This has the effect of inflating the indicative UC amount so that it is an overestimate of the actual UC award likely to result from the claim – making the claimant much less likely to receive a transitional element, or to receive less of a transitional element than should be the case.

CPAG had been concerned that may have been caused by the DWP misreading the regulations, but the DWP has told stakeholders that income which is not counted as income for tax credits but would count as income for UC should be counted as income for the purposes of the indicative UC amount – so it seems that any failures are the result of mistakes. Advisers should pay particularly careful attention to the transitional element calculation in cases involving income which does not count as income for tax credits but does count as income for UC.

Examples of income which are not counted as income for tax credits but which do count as income for UC include Industrial Injuries disablement benefit, maternity allowance, severe disablement allowance, assumed yield from capital (often known as tariff income), most student income,7 and some kinds of maintenance from an ex-partner.

Example

Bobbie receives CTC and has student income. Bobbie receives a migration notice in the summer term of the academic year. Bobbie claims UC immediately as she is aware that if she claimed closer to the deadline she would be claiming during her university’s long vacation. Because she claimed earlier, she should have her student income counted as unearned income in the calculation of her indicative UC amount. If she had claimed during the long vacation, then the student income would not have been included as unearned income in the calculation of her indicative UC amount. When Bobbie receives her UC award notification, she realises that she is worse off as a result of managed migration and has a much lower transitional element than expected. It is unclear why this is. As she has not been provided with an explanation of the calculation, she asks the DWP for a breakdown of the transitional element calculation. Once Bobbie receives the breakdown, she realises that the DWP has mistakenly omitted her student income from the calculation of her indicative UC amount – this meant that her indicative UC amount was an overestimate of the UC she would eventually be awarded. She asks for a revision of her UC award on the basis that her transitional element was incorrectly calculated. The DWP subsequently revises the award.

People worse off and without a transitional element

Some people will be worse off in cash terms at the point of their managed migration to UC, despite the policy intent that this would not happen.

Parents of children who are absent from their household is one group likely to be affected. Parents in specified circumstances are able to receive CTC in respect of these children, but would not receive a child element in respect of the same child in the calculation of their UC award – for example, the parent of a disabled child who, due to their disability, cannot be educated locally and so attends a residential school equipped with the appropriate facilities to enable the child’s education. In this example, the parent would have a child element included in the calculation of their indicative UC amount,8 making the indicative UC amount an overestimate of the actual UC award likely to result from the claim – this makes the parent much less likely to receive a transitional element.

People newly benefit capped, or capped to a greater extent, as a result of being managed migrated to UC will be immediately worse off at the point of migration – even if they have a transitional element included in the calculation of their UC award.9

It appears that a person doing employment and support allowance (ESA) permitted work would not have any earned income taken into account for their ESA and so should presumably expect not to have any earned income factored into their indicative UC amount calculation – this could potentially mean that the indicative UC amount is an overestimate of the UC award likely to result from the claim, making the claimant less likely to receive a transitional element.10

Note: This article has been edited to make clear that reg.54 of the TP Regs refers to s.8 of the WRA 2012, rather than to s.8 of the SSA 1998.