Ministers are examining a £1bn-a-year increase in benefit payments to cushion the impact of the imminent £6bn-a-year cut in universal credit.
After growing pressure to reverse the £20-a-week cut, the Treasury is looking at a proposal from the Department for Work and Pensions (DWP) to let working people who receive the benefit keep more of their earnings, it is understood.
It would involve reducing the “taper rate” for universal credit (UC) from 63p to 60p, which would cost the government around £1bn a year, and could be announced in next month’s budget.
The mooted plan is a sign of the pressure felt by the DWP and the government more widely ahead of the end of a £20-a-week increase in universal credit, brought in during the pandemic but due to end on 6 October – the day Boris Johnson makes his leader’s speech to the Conservative conference.
Charities have warned it will push hundreds of thousands of families into poverty, exacerbated by rising energy costs. On Wednesday, the former prime minister Gordon Brown wrote in an article for the Guardian that the cut was the most “socially divisive and morally indefensible” he had witnessed in UK politics.
In a sign of the political pressure faced by Johnson, while defending the cut to reporters during his US trip this week, the prime minister refused repeatedly to say whether he could live on the basic UC payment of £118 a week.
Johnson said he had “every sympathy for people who are finding it tough”, but highlighted the cost of maintaining the £20 increase. Pressed on the fact this could be seen as saying no by default, he responded only: “Those are your words.”
Under current rules, if someone is paid more than a set allowance while receiving the benefit, then for every pound above that they earn, 63p is taken off their benefit payments. This had been reduced from 65p in 2017, and the DWP plan would see it fall again, to 60p.
In practice, tax and national insurance further increases the amount deducted by the taper. Labour says a single parent working 30 hours a week on the national living wage loses £573 a month of their universal credit entitlement – equivalent to a marginal tax rate of 75% – which it contrasts with the 47% marginal tax rate faced by high earners.
A reduction in the taper rate would mollify some Conservative MPs worried about the cut, not least as it would reinforce the notion of people gaining more by working extra hours. However, the budget is on 27 October, three weeks after the end of the UC uplift.
A cut to the taper would also only boost the incomes of the approximately 40% who are in work, and among those, only people whose jobs and circumstances allowed them to take on extra hours. Given this, among factors the Treasury will examine is whether the cost of cutting the taper would be the most efficient way to help people.
It would also by no means compensate most claimants for the £20 cut, an end to a boost to universal credit introduced to help families amid coronavirus.
The Resolution Foundation thinktank said reducing the taper rate by three percentage points was in itself a positive move but should not be seen as an alternative to retaining the uplift. A working family with kids and housing costs with a post-tax income of £15,000, for example, would be just £5.13 a week better off.
“The gains are far smaller than the £20-a-week cut, and would flow to better off families on universal credit while 3 million families would gain nothing at all. Virtually all households would still be significantly worse off overall,” said Karl Handscomb, senior economist at the Resolution Foundation.
Funding a reduced taper rate would not be insubstantial, although it is likely to be far less than the £6bn-a-year cost of extending the £20 uplift. Some estimates suggest every percentage point reduction in the taper rate would cost £350m.
Reducing the universal credit taper rate is one of the Labour party’s few solid commitments to so far emerge from its review of tax and welfare policy, though it has not specified a target reduction.