Universal Credit: self-employed left teetering on a financial cliff-edge

Serious flaws in the design of the Government’s flagship Universal Credit programme threaten the financial stability of thousands of self employed and agency workers, according to two damning reports released today by the Citizens Advice Bureau (CAB).

An investigation into the the impact of work allowance cuts under the new benefits system on people’s income found that self-employed workers will be left at a significant “financial disadvantage”. Analysis shows that a self-employed worker who receives Universal Credit could be £630 worse off a year when compared to other workers claiming the same benefit, even if their annual earnings are identical.

CAB highlights issues with the Minimum Income Floor, an unfair and crude rule that assumes every self-employed person claiming Universal Credit is earning the minimum wage.

If they earn less than the minimum wage in any one month, their Universal Credit payment won’t make up the difference. But if their monthly earnings exceed the minimum wage, their benefit payment will be reduced accordingly.

The charity says this design flaw is unfair and risks causing financial hardship as self-employed workers often earn different amounts from one month to the next.

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One family helped by the charity were forced to visit a food bank as a result of not being able to pay bills because of the Minimum Income Floor. The father was pushed into the position of having to shut down his business and give up working altogether, while the mother cut short her maternity leave to return to work.

The charity also found that a number of cuts to Universal Credit in 2015 will leave over two million working households receiving less money under Universal Credit compared to the old benefit system (tax credits).

Citizens Advice asked 877 people receiving in-work benefits how they would cope with a £100 drop in their monthly income.

26 per cent said they would not be able to top up their income through employment even though they might need to, with 1 in 3 (33%) of those saying this is because they work full-time already.

Caring responsibilities (23%) and having a disability (18%) were other reasons workers gave for not being able to make up the £100 shortfall through work.

Related: Universal Credit – built to fail

Gillian Guy, Chief Executive of Citizens Advice, said: “Despite the labour market changing significantly in the last decade, including a rapid rise in self-employment, Universal Credit is still better suited to those with regular jobs.

“The Government has shown it is prepared to act to improve Universal Credit as new facts come to light – an approach we strongly support.

“It now needs to look again at the design of the benefit to ensure self-employed and agency workers aren’t left at a financial disadvantage.

“It should also reassess the work allowance reductions to ensure workers who can’t increase their income through employment aren’t left struggling to make ends meet, while better incentivising those who can.

“A failure to do this risks undermining two of the core purposes of Universal Credit – to incentivise people to move into and progress in work, and provide low-income families with financial security.”

Related: DWP errors threaten poverty and hardship for thousands on universal credit

The number of people claiming Universal Credit is forecast to double over the next. Eventually, around 7.2 million households are expected to be claiming Universal Credit once it it fully rolled, including 3.9 million people who are in work.

A DWP spokesperson said: “The minimum income floor encourages people who aren’t earning enough through self-employment to grow their business or take on more hours in other employment.

“Universal credit is a flexible benefit that supports people in and out of work, those on low incomes and the self-employed, and it’s succeeding. We know that people on universal credit are moving into work quicker and staying in work longer than under the old system.”