Minimum Income Guarantee early steps deliverability paper

Minimum Income Guarantee early steps deliverability paper

This paper was developed by the independent Minimum Income Guarantee Expert Group to support discussions at their meeting in June 2024.

The Scottish Government appointed an independent Expert Group^[1] to define what a Minimum Income Guarantee for Scotland should look like. The work outlined in this paper supported their considerations.

This paper will focus on the following reforms to the current Universal Credit (UC) system:

• Ending the five week wait
• Removal of third party deductions
• Ending the parenting penalty

Each of these reforms will be considered in turn and an analysis provided of how easy they would be to deliver, where appropriate.

Ending of the five week wait

The Expert Group have proposed ending the five week wait in Scotland currently experienced by new, eligible Universal Credit claimants awaiting their first payment as it is paid in arrears. They view it as a means of strengthening the financial certainty (the Guarantee) currently offered to families and this change would have a positive impact on the family types most at risk of poverty. The Expert Group will need to determine whether they wish to end the 5 week wait for all Universal Credit claimants or remove the debt for those who apply for an advance. There are wider fiscal risks for both options as the claimant would still receive their first Universal Credit payment in arrears and have their advance payment written off, it would effectively mean households receive two payments for the same period, which is prohibited by the UK Governments Managing Public Money guidance and the Scottish Public Finance Manual.

The UK Government currently allows Universal Credit claimants to apply for an advance of up to 100% of their first payment. The claimant would need to repay their advance from future Universal Credit payments or by other means if they no longer get Universal Credit, such as from wages or other benefits. These deductions impact a large number of claimants with almost half (48%) of UC claimants in Scotland experiencing deductions each month, amounting to over £12 million a month for the DWP. Nearly half of these deductions are to pay back advance payments, because households can’t wait five weeks for first payment.^[2]

The Scottish Government cannot end the five week wait at source but proposes in Social Security in an Independent Scotland that the loan could be replaced by a grant in an independent Scotland.

Delivery Options

To fully assess the most suitable delivery vehicle to remove the Universal Credit 5 week wait, further work needs to be undertaken to understand the Expert Group’s policy intent. Outstanding questions that will impact delivery options include:

• Is the policy intent to remove the 5 week wait for all new UC applicants or to remove the hardship caused to applicants through recovery of a UC advance when they have been unable to wait for their first UC payment?
• Should a payment be available to everyone who applies for Universal Credit irrespective of their financial circumstances or should it only be paid to applicants in financial need? DWP legislation states that a UC advance should be awarded based on financial need that results in a serious risk of damage to the health or safety of the applicant or any member of their family.
• Is the “five week wait” payment an entitlement based on simple eligibility conditions or a discretionary payment? This has a significant impact on the resource and cost to build and maintain the service as well as the legal and fiscal position.

Five potential delivery options have been identified for the Expert Group to consider. Delivery through Discretionary Housing Payments has been ruled out based on the understanding that current legislation does not allow a Discretionary Housing Payment award to be made if the applicant is not eligible for Housing Benefit or Universal Credit where the maximum amount includes a housing cost element. This means that applicants who are not liable to pay rent would not be eligible for a payment which would not meet the policy intent.

These five options are split across two potential delivery vehicles: Social Security Scotland and local authorities.

The five options are:

Option one: Applicant applies to DWP for a UC advance and can also apply to Social Security Scotland for a “5 week wait” payment.

Option two: Applicant can no longer apply to DWP for an advance and must apply to Social Security Scotland for a “5 week wait” payment.

Option three: Applicant applies to DWP for a UC advance can also apply to their local authority for a “5 week wait” crisis grant.

Option four: Applicant can no longer apply to DWP for a UC advance and must apply to their local authority for a “5 week wait” crisis grant.

Option five: Applicant applies to DWP for a UC advance and Scottish Ministers reimburse the value of the advance (or agreed proportion of the advance) to DWP directly.

The tables in Appendix A provide a high-level summary of the impact of each option on key areas.

The initial impacting detailed above is intended to inform Expert Group discussions and would require further work.

Removal of third party deductions

The Expert Group see removing third party deductions from Universal Credit as a critical part of building the Guarantee element of the MIG. As it stands deductions can increase financial insecurity as already low levels of payment are reduced further, increasing destitution. As it currently stands creditors can request deductions to be made from a Universal Credit Payment to pay court fines; Council Tax or Community Charge arrears; gas or electricity; water charges arrears; and mortgage interest arrears or owner-occupier services charge arrears.

There are two options available in terms of how this could potentially be implemented: request that the UK Government changes its policy on this type of deduction or reach agreements with the creditor organisations to not pursue the debt. There would of course be significant implications to public sector finances of doing so. Aberlour report on an incidence where COSLA created guidance for local authorities in terms of how they should address school meal debt, creating a precedent for this type of approach in more limited circumstances.^[3]

Delivery Options

As delivery of this option will require agreement from DWP and relevant creditors that leads to significant changes to their policies and procedures, no further delivery impacting has been undertaken at this time.

Ending the parenting penalty within Universal Credit

Universal Credit (UC) applicants can receive a payment covering 85% of their childcare costs up to a maximum limit. The maximum limit is currently £1,014.63 a month for one child and £1,739.37 a month for two or more children.

To be eligible for the childcare costs payment the applicant must be in paid work (there are no minimum hours) or have an offer of paid work that is due to start before the end of their next UC monthly assessment period.

If the applicant is part of a couple their partner must be in paid work or be unable to provide childcare because they have limited capability for work, care for a disabled person and get (or would be entitled to) Carer’s Allowance or Carer Support Payment or be temporarily absent from the applicant’s home.

In addition, the applicant must meet all the following conditions:

• have paid charges for ‘relevant childcare’ for the child for whom they are responsible. The applicant must have already paid the charges, rather than just being liable to pay them.
• the child is under 16 or has not reached 1 September following their 16th birthday.
• the childcare is to enable the applicant to do paid work.
• the applicant must report the charges to DWP no later than the end of the monthly UC assessment period that follows the assessment period in which the charges were paid. Late notification of change of circumstances rules apply.

Delivery Options

Mitigation at source by DWP would be by far the easiest and most cost-effective means of paying the remaining 15%. However, if this is not possible, Social Security Scotland could be a potential delivery vehicle to issue the additional payment.

Discretionary Housing Payments have been ruled out as a delivery vehicle as payment could not be made to anyone who doesn’t rent their home. The Scottish Welfare Fund has also been disregarded as an option as it is not intended to cover ongoing expenses.

Assumptions

The following eligibility assumptions have been made when considering how this option could be delivered:

• Universal Credit maximum limits on childcare costs will apply
• Universal Credit definition of ‘relevant’ childcare will apply
• Universal Credit rules on partner availability to provide childcare will apply
• Universal Credit on when childcare costs are payable will apply
• 100% rollout of Universal Credit has been completed

Delivery Vehicle

The existing Scottish Child Payment (SCP) service has been identified as a potential vehicle to pay the remaining 15% of relevant childcare cost to UC recipients.

Almost all applicants who would be eligible for the additional UC childcare payment will already be in receipt of SCP and will receive regular payments from Social Security Scotland. This means that Social Security Scotland has already verified their identity and has their bank details. Building on the existing SCP infrastructure will also present opportunities to reduce costs and timelines for delivery and would remove any need for applicants to interact with a further service.

Three options have been impacted. All options build on the existing SCP infrastructure and only differ in the level of dependency on DWP and the opportunities to automate processes and payments. These options are:

Option One

SCP recipients apply to Social Security Scotland for payment of the additional 15% of childcare costs. Applicants need to provide verification of the childcare charges paid by DWP.

Option Two

SCP recipients apply to Social Security Scotland for payment of the additional 15% of childcare costs. DWP shares data with Social Security Scotland confirming the verified childcare costs element of UC and Social Security Scotland use this data to award the additional 15%.

Option Three

DWP shares SCP recipient data on verified childcare costs with Social Security Scotland and Social Security Scotland use this figure to auto-award the additional 15%.

The tables in Appendix B provide a high-level summary of the impact of each option on key areas.

Based on current assumptions Option One - where no additional data is shared by DWP - is not the preferred option. Social Security Scotland’s fraud prevention strategy is to verify applications through data sharing with other government departments to enable independent verification. Option Two or Option Three (or a suitable variation) should be pursued in preference.

If any of these options are taken forward, it would require changes to current legislation, additional operational resource and changes to business processes within Social Security Scotland. It would also require significant changes to existing IT systems. It is almost certain that DWP data sharing agreements and processes would also be needed to assess eligibility, meaning that successful delivery would be dependent on close collaboration and joint working between DWP and the Scottish Government.

It should also be noted that if one of these options were to be implemented prior to the full rollout of UC, provision would need to be considered for people who are still in receipt of Tax Credits. The percentage of childcare costs payable and maximum amounts are different than those for UC; this would increase the complexity to build and administer the service. It would also require new data sharing with HMRC and close collaboration to agree new data sharing processes.

Costs and impacts (Parenting penalty)

This section briefly presents estimates of the costs and impacts of allowing recipients of UC to claim their full childcare costs through their UC awards. It was undertaken by Communities Analysis Division within Scottish Government.

Currently, UC recipients can claim up to 85% of their childcare costs, with a maximum amount of £1,014.63 per month for one child and £1,739.37 for two or more children. Removing these limits would allow UC recipients to claim 100% of their childcare costs with no maximum amounts.

The modelling is undertaken using UKMOD, a tax-benefit microsimulation model which is maintained, developed and managed by the Centre for Microsimulation and Policy Analysis at the Institute for Social and Economic Research (ISER), University of Essex. The model inputs 2021-22 and 2022-23 data from the Family Resources Survey (FRS) and projects this forward to 2024-25, the year on which the analysis in this paper is based. The modelling assumes full roll-out of UC and full take-up of all benefits, including UC and including the childcare element of UC. Childcare costs are taken directly from the FRS input data.

The model finds no measurable impact on child poverty of removing the 85% limit and the maximum amounts. The estimated expenditure in 2024-25 would be around £10 million, with an additional £2 million incurred through an increase in the caseload of devolved benefits tied to UC, particularly the Scottish Child Payment (SCP).