Tax Credit cuts bad – Universal Credit cuts worse!

Tax credits are very much in the news at the moment, not least because of the powerful appearance on BBC Question Time of Michelle Dorrell with her concern about the personal impact of these cuts.

I have recently completed a big exercise, using our Future Benefits Model, looking at the effect of all the announced changes on people over the next five years.

Like all of the other analyses, I found huge cuts in real income that will not be offset by increases in tax allowance or the new National Living Wage (a misleading label, as it has no relationship to any assessed living costs or needs).

I haven’t yet published anything covering my modelling around tax credits, as it seemed that it would be fairly repetitive, although I now have a very rich data set covering hundreds of thousands of scenarios.

The focus on tax credits cuts at the moment, although they will cause enormous suffering to many people with svag credit, may be diverting attention from something even more serious.

Tax credits, and their cuts, will not be with us for too many more years.  They will be replaced by Universal Credit in due course, albeit several years later than planned. It seems unlikely, but not impossible, that there will be tax credits in payment in 10 years’ time.

Well before then, Universal Credit will have become the standard way of delivering support to people in low-paid work, such as Michelle Dorrell.

On today’s rules, when she moves onto Universal Credit she will find herself much more worse off than under tax credits, even after the cuts come into effect.

As a self-employed person with four children, and extremely low earnings, several commentators have pointed out that she may not be affected by this round of tax credits cuts directly.

Her current earnings appear to be lower than the reduced threshold at which reductions will start to be applied and, as her children are already born, she will not be affected by the forthcoming tax credits limit on the number of children receiving support.

On the other hand, as she is self-employed, the National Living Wage won’t change her earnings either that it will have no direct impact on the prices asks for her services. She also doesn’t seem likely to gain from the rise in personal allowances she doesn’t earn enough to pay tax.

Universal Credit

She can move onto Universal Credit in one of two ways.

The first, and the best for her, will be if she is ‘migrated’. This means that she would be moved from the tax credits system to Universal Credit as part of a ‘managed move’. This will happen when the DWP are transferring people from the old benefits and tax credit systems en masse.  The old benefits system will be closed down and everybody moved onto Universal Credit.  This may not happen at the same time across the country but there will be no individual circumstances which force the move.

People who are migrated will be entitled to be ‘transitionally protected’. That means that, if their calculated entitlement to Universal Credit is less than they were getting previously, they will continue to receive the amount of money that they were getting under the old system. Their Universal Credit won’t however go up annually when benefits rates change. They will continue to get the same cash amount of benefit until their Universal Credit calculated entitlement passes that amount.

The other way she might move onto Universal Credit is because her own circumstances change. For example, if her earnings were to rise, so that she was no longer entitled to tax credits, and then drop later then she would have to claim Universal Credit and her entitlement would be whatever the rules in force at the time said. There are many possible ways in which she might have to move onto Universal Credit.

Transitional protection will be very important particularly for those people moving from tax credits where the rules about earnings and capital are very different from those applied by Universal Credit.

If she doesn’t have transitional protection, or if circumstances were to change in such a way that she lost the protection, she would face a very much less generous situation than the tax credits would offer, even after the cuts.


If you’re self-employed for Universal Credit then the way in which earnings are treated is very different than that for tax credits, which follows closely on from their treatment for tax.

Universal Credit needs the self-employed to provide, every month, a statement of the money in and out of their business. The difference is treated as their earnings.

If they earn less than, typically, 35 times the minimum wage each week then their benefit is calculated as if they were earning that amount. That level of notional earnings will, of course, reduce their entitlement to benefit. On today’s minimum wage figure that means that Michelle would be treated as having a net income of over £1000 a month when calculating her entitlement to Universal Credit. That’s a lot more than she appears to be actually earning, which is the figure used for tax credits.

Each notional £1 above her real earnings figure will reduce her real Universal Credit by 65p.


In 2017 the government are introducing stringent new rules about the number of children who will be entitled to benefit. Only the first two children in the family, where there are any born after that date, will count towards tax credits. All children born before April 2017 will continue to count for tax credit purposes.

That’s the case even where tax credits are claimed after that date.

It’s not the case for Universal Credit. Where there are more than two children born before April 2017 they will count where Universal Credit was being claimed at that date and continues to be claimed. If Universal Credit stops for some reason and then is reclaimed only two children will count regardless of when they were born.

So Michelle’s four children will continue to count for tax credits, as long as she continues to receive it or reclaims it, but they won’t count for Universal Credit if she was to stop getting it and then have to reclaim.

On today’s figures that means a drop in her benefit of £5,500 a year – £105.77 a week.

That’s on top of the equivalent changes that are being made to Universal Credit to match the cuts in tax credits.


The tax credit changes are indefensible, if this government is genuinely trying to support and help low-paid workers. They will make the worst paid of the hard-working worse off.

The cuts are being carried across into Universal Credit as well, removing much of the work incentives which were such a foundation of that benefit.

If you are self-employed with low earnings, or if you have more than two children, then you will find yourself hit worse under Universal Credit than under the tax credit cuts.

If you happen to be self-employed with low earnings and to have more than two children then you face a very bleak future.

There is always another option. If you are looking for a long-term loan, you can make use of resources from Investors Choice Lending.

Gareth Morgan

October 2015

This entry was posted in Welfare Reform. Bookmark the permalink.

18 Responses to Tax Credit cuts bad – Universal Credit cuts worse!

  1. Emma Reilly says:

    All true. Except for the first 12 months the Self Employed UC claimants are allowed a start up period. During this time, the minimum income floor will not apply.

    See UC5 (“UC self-employment guide”)

    • Gareth Morgan says:

      The start-up period only applies in the first 12 months after a business begins. An existing business, that has been running for over a year, will not get the help of this period even when transferring from tax credits to Universal Credit.

  2. Bill Irvine says:


    Another well crafted article; very clear and useful to anyone involved in providing advice & support, in these challenging times, to welfare benefit claimants.


  3. Sue says:

    Thank you for raising this – am beginning to think the Tax Credit cuts are a stalking horse for the cuts to in work Universal Credit claimants.
    If the Universal Credit Work Allowances are also taken into account (£111 for single claimants, £263 for single parent), the cuts could be even worse, particularly for self employed claimants.
    As far as I can see, the combination of the Work Allowances with the Minimum Income Floor (approx £1000) eliminates single claimants altogether & cuts parents’ entitlements even more (around 80%).
    At first I thought it was a DWP mistake, but not sure as the Work Allowances and the Minimum Income Floor are set in the Welfare Reform Act 2013.
    Worse again – Osborne announced the abolition of the Universal Credit Work Allowance for childless claimants and a further cut to £2,304 for parents also awarded the housing element:

    • Gareth Morgan says:

      The work allowances were reduced severely in the Summer Budget.

      There are none at all unless there are children or disabilities.

      For those who still qualify it’s now:

      £2,304pa or £44.30 a week where there are housing costs
      £4,764pa or £91.61 a week where there are no housing costs

      That translates into a cut in actual Universal Credit, for those who could have used the full previous allowance, of, per week:

      Couple with children – £20.63 with no housing costs or £4.41 with housing costs

      Couple with limited capability for work £37.24 with no housing costs or an increase of 11p with housing costs

      Couple with neither children or disabilities – £16.61 with no housing costs or with housing costs

      Single with children – £50.25 with no housing costs or £10.55 with housing costs

      Single with limited capability for work £37.24 with no housing costs or an increase of 11p with housing costs

      Single with neither children or disabilities – £16.61 with no housing costs or with housing costs

      • Geoff Beacon says:

        Thanks for beginning to clarify this (deliberately?) complicated subject. I’m looking forward to when you publish some scenarios – I always find examples helpful.

        I’ve also looked at Sue’s site and I’m still a bit confused but one thing struck me – the effect on the self-employed. Is she right in saying the following?

        Under Universal Credit, all self employed claimants will be treated as if they have earned a minimum income; the Minimum Income Floor …[which is] currently around £910/month…
        The Work Allowance, is the level of earnings allowed before benefits begin to be withdrawn….the Work Allowance … under Universal Credit, is £111/month. So these [single] claimants will not receive payments …

        Trap for the Self Employed

        Is this because above £111 benefits are withdrawn (at 65p in the pound ?) and if they are assumed to earn £910 it will remove all their benefits?

        When will this happen?

        I think your scenarios will be very helpful.

  4. Stephen McKay says:

    We don’t know her details, but we could speculate that a self-employed person could also have a mortgage, and perhaps some savings. Each may mean a worse outcome under Universal Credit than now, I think (having looked at your previous posting on mortgage interest, in particular).

  5. Cathy Ashley says:

    Hi Gareth
    I think you and your readers might be interested in my Facebook page, and also my Universal Credit and the Self-Employed Briefing Paper, which you can download by following the link in the pinned post. It leads to my original blog post from March 2013, which is a little out of date, but also has loads of interesting comments below from self-employed people who will be badly affected by Universal Credit.

  6. Cathy Ashley says:

    One thing, I can’t quite get my head around this:

    “Each notional £1 above her real earnings figure will reduce her real Universal Credit by 65p.”

    Is this derived from the actual calculation in this case study? Because my understanding is that the actual income, if below NMW, is irrelevant, because they will calculate the UC award on the basis of the deemed income. The 65p deduction is not a formula to be applied to other cases is it?

    • Gareth Morgan says:

      I was pointing out that quantifying the effects of the MIF takes a certain amount of understanding. As MIF is notional earnings, not income, then it’s treated as earnings in the assessment. That means that the work allowances and tapers apply.

      For example, with very rounded false figures just to demonstrate the process.

      A has a surplus of income over expenditure of earnings of £300 a month.
      A has a MIF of £1050 a month
      A has a work allowance of £100 a month

      Notional tax & NI for MIF is £50

      Real income for Universal Credit is £300 – £100 = £200
      MIF income for Universal Credit = £1000 – 100 = £900

      Real reduction in Universal Credit should be £200 * .65 = £130
      MIF reduction in Universal Credit is £900 * .65p = £585

      Each £1 in MIF that ‘counts’ – being above real net earnings after work allowances reduces Universal Credit payable by 65p.

  7. ruth lambert says:

    It was my understanding that the self-employed aren’t eligible for transitional protection. Has this changed?

    • Gareth Morgan says:

      What the government said, 3 years ago, was:

      Transitional Protection will also not be offered to self-employed claimants
      against the effects of the Minimum Income Floor. In these cases, the
      Transitional Protection calculation will be carried out prior to the Minimum
      Income Floor being applied. Once the Minimum Income Floor is applied the
      household will retain their Transitional Protection amount, but no further
      protection will be provided. This will ensure that claimants’ circumstances
      other than those related to earnings are protected.

  8. Nanos says:

    The self employed angle reminds me of the Enterprise Allowance Scheme from the 1980’s onwards, and its various incarnations, eg. it seems to be designed to encourage the more successful businesses, and disencourage those considered to not be very profitable.

  9. Chris Brown says:

    So blinking good with your information Mr Morgan, very impressed you award winning chappie you!

  10. maggie says:

    Hi Gareth

    Excellent piece. UC earnings thresholds reductions will remove many at low level of monthly earnings from UC who are single and in supported specified housing. UC gives entitlement to maximum HB. Transitional Provisions say you go on being treated as UC claimant for six month period if earnings too high- does this mean they retain Maximum HB entitlement during this period and what happens at the end of this period.?

    • Gareth Morgan says:

      People need to stop thinking about Universal Credit as different benefits joined together; it’s one benefit.

      You say “UC gives entitlement to maximum HB”. It doesn’t – Universal Credit includes help with rent; there’s no separate amount of payment. There is no HB for people getting UC.

  11. Dylan Williams says:

    Good afternoon. Thank you for your informative piece of work. I wonder if you can help me with something? I am a self-employed business advisor, working with various Work Programme providers. I have started receiving Universal Credit clients, and because my payments are linked to performance, I need to understand one thing about outcomes.

    I am fully aware of the income ‘floor’ following the start-up period, which is going to cause massive problems, but my question relates to the start-up period itself. Does a self-employed client need to have earnings over a certain amount, before they can be claimed as a Work Programme outcome/start?

    I know that clients who become employed on the Work Programme have to earn above the Work Programme Universal Credit earnings threshold (which is £338/month for the 25+) before they can be claimed as an outcome. Some people seem to think that the same figures apply to the self-employed, but surely this can’t be the case? I am unable to get an answer to this, or more importantly to be provided with a link to a document that explains this rule/process.

    Thank you.

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