Universal Credit - mitigation of the two-child limit: consultation analysis

Disregarding Mitigation Payments as Income

Introduction

The consultation document indicated that provisions already exist in the Fiscal Framework between the UK and Scottish Governments to ensure that benefits provided in Scotland provide additional income. Those provisions have been relied upon with previous payments made in Scotland and delivered by Social Security Scotland. For example, the Scottish Child Payment is disregarded as income, and disregarded when applying for legal aid and council tax reductions. This helps ensure that receipt of Scottish Child Payment does not rule out recipients from receiving other forms of support which they may be entitled to.

It was therefore argued that the mitigation payments should also be disregarded by the UK Government as income for benefit and tax calculations, and that the benefit cap should be adjusted to accommodate them. Legislation will likely be required in both Scottish and UK Parliaments to achieve this.

Q3. Do you agree or disagree that payments to mitigate the two-child cap should be disregarded as income by the UK Government?

¹ Seven respondents did not answer this question, including two individuals and five organisations.

Of those who answered the question, slightly less than two thirds (61.5%, n=160) disagreed, while slightly less than one third (31.5%, n=82) agreed that payments to mitigate the two-child cap should be disregarded as income by the UK Government. Consistent with the earlier questions, there were polarised views between individuals and organisations. Nearly three quarters (71%, n=159) of the individuals who answered this question disagreed, while most organisations (92%, n=34) agreed.

Reasons for Disagreeing

Again, consistent with earlier results, most of the respondents who disagreed were individuals - of the 160 respondents that disagreed, 159 were individuals while only one organisation disagreed. Within the individual respondent cohort, 71% (n=159) disagreed, compared to 22% who agreed and 7% (n=16) who did not know.

Many individuals who disagreed simply cross-referenced their responses to earlier questions in the consultation. Many others simply reiterated that they did not agree with the mitigation payments policy in principle, and as such did not agree with this specific proposal either.

Among individuals who gave new substantive responses to this question, the main reasons given for not supporting the proposal included:

• that all pay/benefits should be treated as income and should be properly considered in means testing and other assessments; and
• that there were already too few people paying taxes and so disregarding this benefit as income would compound issues around lack of tax generation/ income/input to the system.

Several individuals again stressed that that all income received by working individuals was taxable. Therefore, making the mitigation payment taxable would be fair/equitable with the taxes imposed on others (i.e. that all people should contribute financially to the country where their income from any source falls within appropriate thresholds):

“Every penny I earn is classed as income, why on earth should that be different for people who don’t work!” (Individual)

“Every worker has to pay the appropriate tax on their income. Benefit income should be treated the same.” (Individual)

A small number specifically commented that as pensions were taxable, so too should the mitigation payment be.

Again, comments were made that people wishing to have more than two children should consider the financial impacts of doing so and find a means of meeting the associated costs themselves:

“Any payments to mitigate the two-child cap should be treated as income and taxed accordingly. Those who want more than two children should finance themselves.” (Individual)

Several others also used this question to highlight what they perceived to be political point scoring, i.e. that the Scottish Government was proposing this approach purely to be different to England and Wales.

It was also suggested that existing legal frameworks to determine assessment of tax were already well embedded and that this question required specific legal advice rather than being open to broad consultation.

The overriding objection from individual respondents, however, was that all income should be considered as income, irrespective of its source.

The one organisation that disagreed with this proposal (and who outlined responses from a wider survey) noted that 57% of their survey respondents had disagreed, generally because they perceived the two-child limit to be fair. As such, they felt that additional income should not be disregarded and, if payments were made, they should be counted as income to avoid families receiving more than they would have received through the standard Universal Credit calculation. Again, it was felt that this would ensure that families who have more children do not receive extra financial support, which may be perceived as inequitable to those with smaller families and those who work.

The same organisation again raised concerns that giving more support to families who do not work may discourage them from making efforts to improve their financial situation. Instead, they suggested that the government's priority should be to help those experiencing in-work poverty, rather than providing more support to those who do not work.

Reasons for Agreeing

As noted above, just under one third (31%, n=82) of all respondents agreed that that payments to mitigate the two-child cap should be disregarded as income by the UK Government. Nearly all organisations who answered the question agreed (92%, n=34 out of 37), while just under a quarter (22%, n=48) of individuals agreed. While still a minority, it should be noted that this question elicited the largest level of agreement among individuals across all proposals.

Not disregarding would make payments less effective

Individuals who agreed with the proposal did so mainly on the basis that if the mitigation payments were not disregarded, their impact would be diminished or diluted. Specifically, failing to disregard the payments as income would mean that families would not feel the full benefit of the support, making it counterproductive:

“Putting money in one hand to take it out of the other, albeit there might still be a gain, will be counterproductive in many cases and cause confusion around benefit awards and amounts. Any mitigation payments should be given to the benefit of the recipient to 100% value in order to maximise income and reduce poverty.” (Individual)

Organisations, almost all of whom agreed with the proposals, gave broadly similar reasons as individuals for their support, e.g. that not doing this would make the mitigation measure counterproductive and potentially penalise families already living in poverty:

“We strongly agree that mitigation payments should be disregarded as income by the UK Government for the purposes of benefit calculations, tax, and access to other entitlements…The purpose of these payments is to offset the financial harm caused by the two-child cap…To protect the value of the payments and ensure they genuinely alleviate hardship, we support a clear and consistent approach where the payments are fully disregarded…This will also support the principle of fairness and ensure families are not penalised for receiving support intended to reduce child poverty.” (Membership Body)

“The effect of not disregarding the mitigation top-up would be to undermine the purpose of the mitigation in the first place. The Scottish Government and UK Government must agree this to ensure families in Scotland who are eligible for the two-child limit mitigation feel the full benefit as intended.” (Third Sector Organisation, Aberlour Children’s Charity)

Not disregarding would impact other benefits/supports

There were also views that if payments were not disregarded, it would result in families being worse off by reducing their entitlement to Universal Credit, Council Tax Reduction and/or other benefits:

“Means-tested benefits are also by long-standing policy not taxable income in UK law. Taxing mitigating payments would add an unnecessary level of complexity and burden on an exceptionally vulnerable cohort of low-income families, and the prospective income generated by UK Government from this would make this a disproportionately unfair difference in treatment…Treating such payments as income would also plainly defeat their very purpose - ultimately, by giving with one hand, and taking with the other.” (National Representative Body, National Association of Welfare Rights Advisers (NAWRA))

A secondary consequence of people losing access to Universal Credit was that it would remove entitlement to other passported benefits such as free glasses, dental treatment, access to Discretionary Housing Payments (DHP), etc. This was also given as a reason to support the disregard.

Not disregarding means transferring funds from Scotland to England

Several individuals commented that if payments were not disregarded, money would subsequently be deducted from individuals’ other benefits such as Universal Credit. This would mean that the Scottish Government would be paying families, only for money to be claimed back by Westminster and the DWP:

“If this does not happen, families lose some of the benefit from the mitigation being given; also money flows back into the UK government purse from Scotland.” (Individual)

“It would be grossly unfair to have the extra income from the Scottish mitigation clawed back by the UK Government. It would defeat the purpose of reducing child poverty in Scotland.” (Individual)

Again, several organisations concurred with this view. They felt that failure to disregard the payment would essentially mean taking money from the Scottish Government and handing it to the DWP:

“The net result of this on a macroeconomic scale would appear to be a transfer of wealth from the Scottish budget to the UK budget. That would be clearly contrary to long-established constitutional principles including the Barnett formula, and hopefully contrary to the intentions of both Governments as well.” (National Representative Body, National Association of Welfare Rights Advisers (NAWRA))

“If the payments are not disregarded then this would mean that DWP would reduce the amount of Universal Credit payable and it would be the DWP that gained and not the citizen affected by the current two-child limit.” (Local Authority, Glasgow City Council)

Disregarding consistent with existing precedents and wider principles

Organisations urged that the payment be disregarded to make it consistent with other Scottish entitlements, such as the Scottish Child Payment. It was noted that a precedent had already been set to disregard the Scottish Child Payment as both income and capital in calculating entitlement to reserved means-tested benefits, and therefore the same approach should apply here:

“We see no justification in regarding payments to mitigate the two-child cap as income. Avoiding doing so would be consistent with the approach taken by Social Security Scotland for other forms of assistance, including the Scottish Child Payment, and would align with the policy objectives of the proposed mitigation measures. In contrast, classifying the proposed payments as income would undermine those policy objectives.” (Third Sector Organisation, The Mental Health Foundation)

The Scottish Child Payment, and the bedroom tax and DHP benefit cap mitigation were also cited by many as examples of where this approach was already in place. It was suggested that it would be generally inconsistent with the UK social security system as a whole for payments of a means-tested benefit to be treated as income.

An observation was also made that monies for this proposal had been calculated and set aside by the Scottish Government to help families, especially children, in line with the UNCRC, and that to make it taxable would undermine this principle:

“If this were to be counted as taxable income, the UK Government would in effect be opposing a democratic decision to appoint this money to people in need. The SG [Scottish Government] are considering the UNCRC in this proposal and have calculated the benefit amount in line with this, and to act to reduce this would be morally and socially unjust.” (Health/Mental Health Body)

Disregarding payments provides greatest support

Some organisations again used this question to stress the negative implications of the two-child cap and highlighted that this could have negative consequences for families in terms of financial insecurity/poverty, risk of homelessness, poor health/mental health and development opportunities. Allowing families to retain as much ‘cash’ as possible was seen as the best way of giving them the autonomy and independence required to find their way out of poverty:

“Through our work surrounding poverty in Scotland, we are aware that the most effective way to reduce the likelihood of deprivation is through the retention of personal finance. A cash-first approach has been vital in relation to the success of Social Security Scotland, enabling individuals to have more control and choice over their personal and professional lives.” (Third Sector Organisation)

Other reasons for support

Another reason given in support of disregarding the mitigation payment as income was that that earnings volatility was relatively common in in the UK and that for those experiencing unstable or erratic pay, having this as a stable and predictable non-taxed income would be welcomed (especially for low-income working larger families):

“There has to be some guarantee that this extra income will have a positive impact on reducing child poverty and allow families the comfort to know that they can provide all the basic and essential necessities for a healthy life.” (Health/Mental Health Body)

Several individuals simply noted that they perceived taxing benefits as wrong.

Practical considerations

Several respondents also discussed more strategic and practical considerations around decisions to either recognise or disregard this as income.

A few organisations commented that disregarding the mitigation payment would help to reduce complexity for frontline staff and advice providers working with families, who would otherwise have to navigate conflicting rules across benefit systems in different jurisdictions:

“If payments were not disregarded then this will result in further complications and administrative burden on other agencies benefits (such as LAs [local authorities] administering CTR [Council Tax Reduction], or DWP implementing Benefit Cap) and may ultimately reduce the impact of the mitigation payments. Again, if the Scottish Government are hoping to provide a quick and relatively straight forward payment scheme to mitigate the two-child limit (which matches the SSS ethos) then [we] agree that disregarding these payments as income would be the best option. This would also be simpler and fairer for recipients…” (Local Authority)

Similarly, one organisation urged clear communication of the disregard policy to creditors (if adopted). This should include making sure that information about disregarding mitigation payments was embedded within relevant guidance used across the debt advice sector to prevent any wider unintended negative consequences for families:

“Importantly, these payments should also be disregarded in all income and expenditure assessments used in the context of debt advice, including the Common Financial Tool (which is the tool used by the Accountant in Bankruptcy to assess a person’s ability to repay their debts). We know that accurate and fair budgeting is critical to supporting sustainable financial solutions. Including this payment as income in financial assessments could lead to unaffordable repayment plans, reduce access to debt relief options, or give a misleading picture of a household’s disposable income.” (Membership Body)

Some organisations also noted that clarification would need to be provided as to whether local authorities should include or disregard the top-up from the Council Tax Reduction scheme if the proposal went ahead:

“…for the migration process to be effective, the Scottish Government will also need to persuade the UK Government that these amounts will be disregarded as income by any other DWP benefits assessment and for the need for local authorities to have clarity on whether any two-child payments should be included or disregarded in other benefits/reliefs assessments administered by local authorities e.g. Council Tax Reduction.” (Local Authority, Moray Council Money Advice Moray)

One local authority also noted potential financial impacts for councils:

“The suggestion in the consultation is that the number of those eligible for two child payment will increase as some recipients may chose not to increase hours or actively come off Universal Credit, this will also impact on CTR [Council Tax Reduction] expenditure for Local Authorities if the payment is disregarded.” (Local Authority)

A handful of organisations commented that there would need to be assurances that assessment of the two-child cap had been correctly carried out by DWP, and that the applicant/child did not meet any existing exception criteria.

Another strategic and political concern noted by one local authority was that the UK Government would need to pass secondary legislation to formally exclude mitigation payments from UK benefit assessments and that there may be a risk that UK authorities would not cooperate. One membership body also posited that disregard of mitigation payments as income may raise issues which would impact in legislative competence terms, should the Scottish Ministers seek to legislate on that issue.

Overall, organisations who agreed did so on the basis that this policy would only be effective if it did not reduce other benefits or create further inequities. Many urged that reducing poverty (especially child poverty) should remain the main aim of policy development in this area:

“[Organisation’s] perspective is always guided by what will help children most. In this case, that means ensuring every pound of support reaches families in full, so that they can afford to buy food, clothing, and other essentials that support children’s wellbeing and development.” (Third Sector Organisation)

Other Issues

Among both the small number of individuals who gave ‘don’t know’ responses (and who also gave reasons for doing so), the main reasons for their indecision appeared to be that it may be better to consider the need for disregarding the mitigation payment on a case-by-case basis. This included, for example, one individual who indicated that it may be appropriate to tax this income for those with a total income above £15,000, but not for those below:

“There has to be a point where personal responsibility kicks in and that benefits are not considered an entitlement without putting something back i.e. tax.” (Individual)

A small number indicated that they were unsure how to answer this question as they either perceived that the question was unclear or felt that the implications and/or impacts of this proposal were not clearly set out.

The one organisation who indicated that they did not know how to answer this question, (and gave a reason for doing so), noted that this was because they lacked clarity around whether Scotland would need an additional system if the UK Government ended the two-child cap:

“The Scottish and UK Governments must ensure a system is in place which enables the Scottish Government to use its devolved powers to implement social security changes to the benefit of the people of Scotland. The current landscape of social security where some elements are administered by the UK and others by the Scottish Government means that we are not able to answer this question. If the UK Government ends the two-child cap, Scotland might not need to have an additional system. Whilst the UK has the two-child cap, Scotland must aim to ensure that families with more than two children are properly supported.” (Membership Body, Scottish Association of Social Work)

This same organisation also again stressed that they perceived that Scottish social security decisions must not negatively impact on any payment by the UK Government and noted that it was imperative that increased financial support was not negated by reduced payments elsewhere in the social security system.

Lived Experience Workshop Event

Again, attendees at the lived experience workshop were asked the same question about whether to disregard the mitigation payment as income. All attendees who commented on this agreed that the payments should not be treated as income. They stressed that treating the payment as income would result in deductions, either in tax or as a result of other benefits being reduced due to this perceived increase in their income levels. It was felt that such deductions would lower the value of the payments and reduce how impactful they were for families.

“It is good if it is not counted as income. Once it is added as income it would be taxed and the value of the payment would be brought down.” (Lived Experience Workshop Attendee)

“Agree it shouldn’t be counted as income as it’s money for children to get you out of poverty...What about debt, if it’s classes as income could this put them straight back into debt?” (Lived Experience Workshop Attendee)

Indeed, one attendee suggested that they would end up losing around half of the value of the mitigation payment as a result of adjustments in their Universal Credit payments if it were to be counted as income:

“If it was income I would lose about half of it, 55p for every £1 earned. I would only receive about half of it.” (Lived Experience Workshop Attendee)

One attendee also highlighted that treating the mitigation payments as income could create complex and punitive cyclical issues with the calculation of their Universal Credit payment, which could result in pushing them over the income threshold and result in Universal Credit and the mitigation payments being stopped:

“…if counted as income would affect people when get UC as may put [you] over the threshold” (Lived Experience Workshop Attendee)

Another was concerned that the requirement to consider the payments as taxable income would create another barrier to parents considering work/increasing their working hours. They suggested that understanding the interplay between work, benefits and tax was already confusing, and so having this as a taxable payment could stop people from exploring options to combine this with work:

“Don’t think it should be counted as income. People already nervous about going back to work, and tax is already confusing, so this could stop people from exploring this.” (Lived Experience Workshop Attendee)