Benefits debt deductions trapping people in poverty and debt

DWP taking £1.6bn a year from low-income households for debt repayments

The erosion of our income safety net is no secret. Between 2010/​11 and 2019/​20, working-age social security was cut by £29bn. These cuts, targeted at the poorest in society, have left levels of income support at their lowest in 40 years, forcing destitution on almost 4 million households.

The inevitable result of people trying to get by on inadequate income is a growing reliance on debt. Almost 6 million low-income families have on average £2,500 of unsecured debt for loans from banks and payday lenders, as well as overdraft and credit-card debt. This leads to a staggering average of £680 in interest payments a year. Without a sustained increase in income, through the social security system or higher wages, people will remain stuck in a downward spiral of low income and debt. To begin with, the next government must urgently increase incomes with an ​“essentials guarantee” within the social security system. This would create an income floor below which no household can fall, enabling them to meet the cost of essentials (such as food, utilities, and vital household items).

What is less often discussed is the government’s role in creating and chasing household debt. Recent media coverage has started to unearth the scale of this issue. This includes the Department for Work and Pensions’ (DWP) ruthless treatment of Vivienne Groom, accused by the DWP of fraudulently claiming carer’s allowance while working part-time on minimum wage. In order to pay back this debt, the DWP has seized the £16,000 inheritance left to her by her mother, whom she was an unpaid carer for and is now serving a 12-month community order.

Where this case required several court hearings, it is more commonplace for the recovery of debt – whether owed to a landlord, utility company or the DWP – to occur automatically and with few opportunities to appeal. At NEF, we found that in May 2023, 50% of households (2.3 million people) in receipt of universal credit (UC) had a debt deduction automatically taken from their ​“standard allowance” – the portion of UC dedicated to adults’ basic living costs like food, utility bills and travel. On average, each household with a deduction lost £63 a month (calculated using parliamentary question 203044 and stat-xplore data on the number of households receiving a non-zero UC payment).

The social security system in its current threadbare form is already unable to prevent people from being pushed into poverty. Debt deductions undermine it further, intensifying the hardship that struggling families experience. More than half (57%) of people referred to a food bank and receiving UC had a deduction. By recovering arrears for past income shortfalls so aggressively, the government is pushing people into a vicious debt cycle.

Deductions are applied for various forms of debt accrued before and during the time someone receives UC, and more than one type of debt can be recovered at the same time. In February 2023, 730,000 families had money taken from their UC to pay for a loan from the DWP. These loans, commonly referred to as an ​“advance”, are designed to cover the five-week wait between applying for UC and receiving the first payment. UC recipients often have little choice but to take this money. And because the advance is a repayable loan, rather than a grant, they are then later punished for complying with the rules set out by their work coach.

Perhaps most clearly highlighting the cycle between inadequate income and debt, 910,000 families had their UC docked for a ​“budgetary advance”. This is a loan towards emergency outgoings, costs related to moving into employment, and funeral expenses. This loan is only necessary because of the weakness of our current social security system to adequately support people.

In February 2023, there were also 640,000 households with a deduction because HM Revenue and Customs (HMRC) had previously overpaid their tax credits. With tax credits now replaced by the UC system, this is a debt people are often not at fault for or aware of until they move onto UC from the old system. By March 2023, with most families having moved from tax credits to UC, £3.6bn of tax credit debt had been transferred from HMRC to the DWP, meaning it could be reclaimed through automatic UC deductions for the first time. 80% of households who were moved off tax credits to UC have brought debt owed to the government with them, worth £1,222 on average.

This average level of debt means a single working adult migrating from tax credits is receiving reduced UC for an entire year, diluting the ability of UC to support basic living costs by 25%. For a working couple, a debt like this implies eight months of reduced UC, but both scenarios assume the household has no other debt to DWP or third parties. This is a dubious assumption given the five-week wait and the debt often created in that period. As the move to UC continues to roll out, HMRC estimates up to £1bn of their remaining £2.1bn of tax credit debt is still to be deducted from UC payments.

The amount which central government can deduct from UC payment is normally capped at 25% of the standard allowance (previously set at 40% until October 2019). However, debt deductions are not just limited to central government debt. Just as common are automatic third-party deductions for rent and service charge arrears to private landlords, overdue utility bills, council tax arrears accrued whilst claiming UC, court fines, and child maintenance.

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