03rd Sep 2015

Giving universal credit where it’s due in divorce

Family Law in Partnership associate Carla Ditz discusses how the new benefit system works, where its failings lie, and how it affects spousal maintenance.

High on the political agenda is continuing major reform to the welfare system, which has been historically plagued by abuse, partly due to lack of incentive. The implementation of universal credit (UC) is said to bring the benefits system into the 21st century, and therefore revolutionise the way benefits and credits are distributed.

Policy reform

On 16 April 2013, the government published its policy paper ‘2010 to 2015 government policy: welfare reform.’ It was considered first that the current system was too complex and second that there were insufficient incentives to encourage people claiming benefits to enter employment or increase their working hours. The overall aims were to:

  1. Make the benefit system fairer and more affordable;
  2. Reduce poverty, worklessness and welfare dependency; and
  3. Reduce levels of fraud and error.

Key on the agenda was the rolling out of UC, described in the government’s October 2014 ‘Universal Credit at Work’ report as a ‘benefits system fit for the 21st century’. UC is a means-tested benefit available to people who are working and on low income or out of work completely. UC was first introduced in April 2013 under the coalition government and will ultimately unify six existing credits to make one single payment. The staged implementation is due to be completed by 2017.

How does UC work?

Under UC, there is no cap to the number of hours someone can work and still be in receipt of UC. The amount received will, however, go down as earnings increase. Further, from April 2013, a cap was introduced to ensure that the amount received by way of benefits for those of working age did not exceed the average wage for working families, so as to avoid the ‘benefit trap.’

Importantly, some capital assets will also be taken into account, such as second homes and savings, when calculating the entitlement to UC. The threshold is additional capital of £16,000, above which you will not be entitled to receive UC.

Those in receipt of income-based job seeker’s allowance, income-related employment and support allowance, income support, child tax credit, working tax credit, and housing benefit will soon receive a single monthly payment under the new regime. Figures suggest that 3.1 million households will be entitled to receive an increased level of benefits. The winners, so to speak, are likely to be poorer households with children. Second earners are likely to suffer adversely under the new regime, seeing a drop in their overall income.

Fundamental flaws

UC is presented by the government as a panacea. Its roll-out has, however, already presented some transitional issues and many more are foreseen. On 8 June 2015, the thinktank Resolution Foundation published its report highlighting some of the issues and suggesting that the start of a new parliament provides the ideal opportunity to address them. Some of the recommendations include:

  1. The policy focus in UC must shift from reducing worklessness to encouraging and supporting all members of a household into decent, sustainable work. Simply being in work is not enough; the objective must be to tackle endemic low pay;
  2. It is imperative that incentives to enter work are rebalanced; and
  3. UC must learn the lessons of the current tax credits regime, particularly in relation to simplicity.

Divorcing couples

Crucially, income derived from ‘unearned’ sources, such as spousal maintenance and pension receipts, will be taken into account on a pound-for-pound basis when calculating the amount of UC to be paid. This is in comparison to the existing tax credits regime which does not take spousal maintenance into account as ‘income’. The consequence of the new system is, therefore, that the receipt of spousal maintenance could severely affect the amount of global UC to be received.

Child maintenance will not be regarded in the same way and will not impact on the level of UC to be awarded.

It would seem, then, that calculations of spousal maintenance by practitioners may need to be adjusted to take into account any fall in credits or benefits to be received under the new regime, although this remains an academic point until such time as the regime has been extended to the area in which the parties live.

It may be that, in appropriate cases, the effect of spousal maintenance payments on UC receipts can be mitigated by:

  1. Increased child maintenance payments; or
  2. A higher negotiated figure to be received by way of spousal maintenance where a loss of benefits is to be expected.

Further, the receipt of capital under a financial settlement may result in wiping out the entitlement to UC in its entirety where the capital exceeds £16,000. Importantly, however, your main home is excluded from this capital calculation.

Practitioners can track where UC is currently in force on the www.gov.uk/universal-credit website.

This article first appeared in the Solicitors Journal, June 2015