Universal credit - what impact does it have?

Which households lose or gain the most under universal credit? And are the effects short-lived or persistent? 

The working-age benefits system is undergoing radical reform, with six means-tested benefits and tax credits being replaced by a single payment called universal credit (UC). Under current plans, UC is expected to be fully rolled out by mid-2024.

11 million adults (and a third of working-age ones) will be in households entitled to some universal credit (UC). Around 4.2 million of these will be at least £100 per year better off than under the current system and 4.6 million will – after transitional protection expires – be at least £100 per year worse off. New analysis by the Institute for Fiscal Studies using Understanding Society digs deeper to examine those households that will lose or gain the most under universal credit, and whether these effects are short-lived or persist over time. 

Large gains and losses from UC are common: 1.6 million adults will gain by more than £1,000 per year and 1.9 million will lose at least that much. The IFS found that UC disproportionately reduces incomes among poorer adults. Those in the lowest income 10% of the population on average lose the most from universal credit, a 1.9% fall in their income, equivalent to £150 per year per adult. But the averages mask the fact that many people win and lose from UC – some quite substantially. 76% (8.7 million adults) of those entitled to means-tested benefits – and 84% (7.2 million) of those in working households – see a change in their entitlement of at least £100 per annum (p.a.). 17% (1.9 million) see a loss of at least £1,000 p.a., while 14% (1.6 million) see a gain of at least that much.

Among the 1.9 million losing £1,000 per year or more, three-quarters are affected by UC’s harsher treatment of the following groups:

  • Those with financial assets greater than £6,000;
  • The self-employed reporting low levels of earnings;
  • Couples where one member is above state pension age and the other below;
  • Some claimants of disability benefits (though other claimants will gain).

Those in working rented households on means-tested benefits are most likely to gain large amounts – 29% see an increase in entitlement of at least £1,000 per year.

Seeing change over time

For the first time, this research also looks at the effects of UC on people’s incomes over the longer run (its effect over eight years of people’s lives). Many of those hit hardest in the short run, such as those listed above, are only temporarily poor. The self-employed, owner-occupiers and people with significant financial assets – all of whom tend to lose out from UC – are 1.5–2 times as likely as other low-income groups to find that a period of low income is temporary, rather than persistent.

Those who are disabled or live with a disabled person are especially likely to be persistently, rather than temporarily, poor. The effect of UC on those with disabilities is particularly significant and complex, with both large giveaways and takeaways depending on particular circumstances. After transitional protections have expired, those who would have been entitled to the ‘severe disability premium’ – paid to those who generally live alone and struggle with basic living activities such as preparing food – can receive as much as £2,230 per year less in UC than they would have under the previous system. Others, those whose health is not deemed to affect their basic living activities but is deemed to substantially constrain their ability to do paid work, can receive £1,120 per year more under UC.

Read the report 

The report has had media coverage, including: