Why employer cost-of-living help can fail universal credit claimants

CIPD invited the Low Incomes Tax Reform Group’s Meredith McCammond to highlight the risks of some cost-of-living support to employees receiving universal credit.

The cost-of-living crisis has prompted an explosion of suggestions for how employers can help. But some options can prove to be a cost rather than a bonus, particularly for employees who are receiving the UK government’s universal credit (UC).

This is a monthly UK government payment for those on low pay, as well as those seeking work. The amount received depends on certain factors, including net pay in a monthly assessment period.

When an employee is paid, the Department for Work and Pensions (DWP) receives Real Time Information payroll data via the HMRC to calculate the benefit rate for those in work and eligible. They receive a 55% withdrawal rate on net pay – so, for every £1 they earn they keep 45p. Some claimants are entitled to up to £631 per month before UC is progressively withdrawn.

Boosting income is an obvious way to help employees and can have the most immediate impact, but it can push up tax, National Insurance and pension contributions. It also affects UC, as the higher their wages the less UC they get.

Support that may affect universal credit payments

A one-off bonus: Employers who can’t afford a permanent increase in pay may prefer a one-off cost-of-living payment. But for some lower paid people who are near the edge of eligibility for UC, a one-off bonus could take their income in one UC assessment period high enough to leave a nil UC award. This would close their claim, and require another claim to cover the next assessment period. Our understanding is that there is a rapid re-claim process in such cases.

A very large bonus or earning much more than usual in one month may also affect UC payments in later months. This is known as surplus earnings.

Changing pay frequencies: Many employees are paid monthly, saving payroll administration costs. But this process might not match a person’s cash flow needs. Some employers may consider changing to weekly payments to let staff access their earnings more regularly.

This may affect UC claims. Monthly net payments should fall into each UC assessment period, so the benefit payment should not vary significantly if net pay is broadly similar and payday does not cross into another assessment period.

With weekly pay, some UC assessment periods will include four weeks net pay and others five weeks, and so the monthly UC payment will change according to the wage payments in the assessment period. In five-week periods, the extra amount of net pay may well mean they receive no UC payment. So, employees may need to budget for these peaks and troughs in the payment cycle.

Salary advance: An alternative to changing pay frequencies, some employers may prefer to offer a salary advance, for example, to help staff deal with an emergency without getting into debt.

When a person is advanced money (where easement doesn’t apply and it’s not structured as a loan), this could place a reporting obligation on the employer and in turn affect a person’s UC. Receiving employment income early can push into a different UC assessment period and can appear to the DWP that the employee has received more salary in that period than they really have, causing some of the same fluctuation/cessation issues.

Some employers use a third-party salary advance company, but the risks remain.

Support that is less likely to affect benefits payment

Beneficial loans and other benefits: A cheap or interest free loan could help low-waged workers buy season tickets or consolidate expensive debt – with no tax due if the loan doesn’t exceed £10,000 in a tax year. 

Non-taxable benefits in kind are not treated as income for UC. So, other useful benefits that an employer could provide without affecting UC awards include:

- welfare counselling
- goods at a discount (provided that the amount a person pays is at least the cost incurred by their employer in making the goods)- 
- free or subsidised meals

Salary sacrifice schemes: Implementing a salary sacrifice scheme to help employees with pension saving not only saves them their NI contribution, but the reduction in contractual pay can also increase their UC award. But staff at or near the minimum wage should not participate in salary sacrifice – some lower paid people may lose out in other ways which requires careful consideration.

None of these issues are arguments for employers not to help their people. If anything, they point to the need for tax and benefits rules for lower paid people to be rethought.

This blog is based on the Tax Adviser article ‘How employer attempts to address the cost of living crisis can fail to deliver’.

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