Wages and the Universal Credit assessment period

Universal Credit (UC) is replacing means-tested social security benefits and tax credits for people of working age. It is assessed and paid monthly in arrears, as a single payment. The thinking behind this is that UC should mimic work and receiving a salary. How much a person or a family receives is calculated separately each month, by looking at their earnings and other income with reference to a fixed monthly period – the “assessment period.”

A household’s first assessment period starts from the day they are first entitled to UC, and each subsequent assessment period begins on the same day of the month. For claimants who are in work, the amount of UC they are entitled to is based on their earnings in each assessment period. This is set out in Regulation 54 of the Universal Credit Regulations 2013 as amended.

In this Insight we examine how the way UC claimants are paid can affect the benefit they receive, the DWP’s thinking behind this policy, and a recent High Court challenge to how the assessment period system operates.

How can the way employers pay claimants affect how much UC they get?

UC awards are made up of a standard allowance, plus additional amounts for children, housing, as well as other needs and circumstances. The actual amount a family receives, however, will depend on its income and savings. 

Earned income – from employment or self-employment – will reduce the amount of UC someone is paid at a constant rate (the ’single taper’). Some families will be able to keep some of their earned income each month (the ’work allowance’) before it begins to affect their UC. The taper rate is 63 pence for each additional pound of net earnings after the work allowance.

A rigid application of the assessment period rule in Regulation 54 can cause problems for working claimants if the way they are paid their wages is not completely in step with the UC system. For example, claimants who are paid weekly and may therefore be paid five times in one month, or those who receive their wages on the last working or banking day of the month sometimes receive two months’ wages during one assessment period.  As a consequence, UC awards can change suddenly from month-to-month in ways which are difficult to predict and budget for.

Furthermore, those who receive two months’ pay in one assessment period, but no payment of wages in the next, will only have one month’s work allowance deducted from their earnings. They could then be subject to the benefit cap in the second month, even though their earnings have not changed. Additionally, in some months, households can also lose their eligibility to passported benefits – such as free prescriptions— because their earnings appear to be more than they actually are.

How has this affected people?

Evidence suggests that a significant number of working UC claimants are experiencing fluctuations in their UC awards because of the assessment period rules.  In August 2018, the Child Poverty Action Group (CPAG) said that of more than 400 UC cases submitted to its ‘Early Warning System’ since 2017, one in 20 included a problem related to the assessment period.

CPAG reported that many of the claimants in its study found budgeting difficult because people were receiving “hugely variable UC awards even when their underlying earnings have not changed.”  In one case, a couple’s UC monthly payments had ranged from zero to almost £1,200.

CPAG argues that a “fundamental rethink of the strict system of monthly assessment of earnings would be sensible.” For some claimants, it believes weekly assessment would be more suitable, while for others (such as the self-employed with “lumpy” earnings and costs across a year), longer assessment periods might be more appropriate. It also recognises, however, that the monthly assessment process was central to the design of UC and could not be changed overnight.

What is the DWP’s position?

The Department for Work and Pensions has produced guidance on earning patterns for UC claimants: Universal Credit: different earning patterns and your payments (payment cycles).

This guidance states explicitly that the assessment period system is designed to provide flexibility for claimants to take on additional work so that if a claimant’s income changes every month, the UC award will change to reflect that.

For those who receive two or more salary payments within a single assessment period, the guidance notes that claimants are at risk of receiving too much income to qualify for UC for which they “will need to be prepared” and advises that claimants should “budget for a potential change in your monthly Universal Credit payments.”  

Additionally, the DWP has argued elsewhere that a key purpose of UC is to encourage changes in behaviour, and that employees could ask their employers to alter the date or method of paying salaries, thereby avoiding the problem of two salary payments being considered within the same assessment period.

What has the High Court said?

A recent High Court case, brought on behalf of four single parent UC claimants, challenged the rigidity of the assessment period system.

On 11 January 2019, the High Court delivered its judgment in R (Johnson, Woods, Barrett and Stewart) v SSWP; [2019] EWHC 23 (Admin), which ruled the DWP had wrongly interpreted Regulation 54 on how earned income should be calculated. It held that the amount of earned income “in respect” of an assessment period is based on, but not necessarily the same as, income actually received in that period. The DWP would have to make adjustments where the actual amounts received in an assessment period do not in fact reflect earnings payable in respect of that period.

A summary of the judgment is available to view online.

What might happen next?

The DWP has not made any public statement in response to the High Court judgment, but at a further hearing on 26 February, the High Court refused an application from the DWP for permission to appeal the decision of 11 January. The DWP has until Wednesday 20 March to apply directly to the Court of Appeal for permission to appeal.

If the judgment stands, it could have significant repercussions. From the start, the DWP has assumed that calculation of UC awards would be more or less an automated process, with employers reporting earnings to HMRC, which in turn sends this data to the DWP which calculates UC awards automatically. But this process will be complicated if manual intervention is required when it is clear that earned income received in an assessment period does not actually reflect the amount paid “in respect” of that period. 

The High Court acknowledged in its judgment that making such adjustments might incur cost and “administrative inconvenience”.  However, it also held that “the language of the regulations cannot be distorted to give effect to a design which may have proceeded on a basis which is wrong in law.”

Further reading

 “The Universal Credit assessment period and earned income”, House of Commons Library.