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Universal Credit explained

25 May 2012


Posted by Jayne Knights

In my last blog, I referred to a new benefit called Universal Credit (UC), which is going to revolutionise the benefits system, and replace many of the existing benefits for working-age people.

The Welfare Reform Act 2011

Universal Credit’s main job is to ensure that ‘work always pays’."

This recently became law after an embattled progress through Parliament, and sets in motion some of the most significant changes to the social security system since the beginning of the welfare state.

David Cameron said recently, on the day that the Welfare Reform Act received Royal Assent,

"Today marks an historic step in the biggest welfare revolution in over 60 years. My government has taken bold action to make work pay, while protecting the vulnerable.  Key elements of this include:

  • The 'benefits cap' which ensures no one can get more that £26,000 in benefits (that’s the equivalent of a taxed income of £35,000).
  • The 'universal credit' which will ensure that work always pays more than being on benefit.

These reforms will change lives for the better, giving people the help they need, while backing individual responsibility so that they can escape poverty, not be trapped in it."

A new regime

I’ve been working in the welfare rights field since the early ‘80s, and have been both a claimant and an advocate. My children, now expensive teenagers, have had a childhood with a family income supplemented by child benefit and tax credits, and we have all benefited as a result. Things will be very different for all working age people, including me and mine, starting next year.

Universal Credit’s main job is to ensure that ‘work always pays’, and to remove the distinction between full time and part time work. The current rules about working hours are so complicated that even DWP decision makers find it hard to be consistent, especially when people’s patterns of work can fluctuate from month to month. There is too much unnecessary complication, and many people feel that when they start work they can actually lose more than they gain.

Universal Credit to the rescue!

The aim of Universal Credit is to increase simplicity and fairness in the delivery of benefits for working age people, and to provide more substantial incentives to work in terms of allowing people to keep more of their net pay before their benefits are adversely affected.

Crucial principles of Universal Credit

These benefits will be replaced by UC: income support; income based jobseekers allowance; income-related employment and support allowance; working tax credit; child tax credit; housing benefit.

All other benefits will remain, including child benefit, which may or may not be removed from higher rate tax payers, depending on which newspaper you read. The Social Fund and Council Tax Benefit will largely be replaced by local schemes, to be run by local authorities.

Everyone of working age will be eligible to claim, working or not, EXCEPT those who have more than £16,000 in savings (existing TC claimants with more than £16k will be protected) and those who are ineligible due to their immigration or residency status.

People in couples will claim as a unit, as they do now, and the ‘unit’ will include dependent children. The calculation will basically involve working out the maximum amount of UC that could be claimed, by adding up different amounts for:

  • A single person or a couple
  • Each qualifying child or young person
  • Childcare costs
  • Illness or disability meaning that the person cannot work
  • Carers
  • Housing costs, including rent and mortgage payments

The calculation

It will be paid monthly in arrears using 'real time information' provided by the Revenue on their swanky new computers."

The idea will be to add up all the amounts which apply to make a maximum.

Then all your income will be added together, such as earnings, some benefits, interest on your savings and so on. A portion of your earnings will be ignored, and this is called the ‘disregard’. The ‘disregard’ will not be the same for everyone, and will depend on different factors, such as the number of children you have and how much you pay for rent or mortgage costs. You will keep 35p for every pound earned above your disregard.

The maximum Universal Credit you can receive will be reduced as your income increases, until it is tapered away altogether. 

It will be paid monthly in arrears, using ‘real time information’ provided by the Revenue on their swanky new computer systems, which will mean people on PAYE should no longer have to notify changes in income. The self-employed will have a different set of rules and requirements (oh dear, déjà vu).

The devil's in the detail

There are many muddy areas still needing clarification and these are the ones which will probably determine the long term success or failure of UC. We all need to know:

1. Who will be eligible for help with childcare costs – and how much?
2. Will it be possible to get help with childcare costs even if you only work a few hours a week?
3. Who will be able to get help with their mortgage interest?
4. Exactly how will the income disregards be worked out?
5. How will the transitional arrangements work to prevent people transferring onto UC being worse off?

The legislation will now start to be written, and as soon as I have answers to these vital questions, I will let you know. A future blog will deal with the thorny and controversial ‘benefits capping’, which is already causing movement out of central London of some of the poorest and most vulnerable families.


Note: Whilst we take every care to ensure the accuracy of the content, the opinions expressed within this blog are those of the author and not necessarily those of Family Investments.


  1. 04 April 2013

    mrs anonymous

    carers cannot work much I will have to put my mother in a home as now we get tax credits but with universal credit we wont because we have savings it is not worth saving as you always get penalised for it carers of working age with savings will have to give up caring