Why benefits reform is a bit like squeezing a balloon

Sometimes it seems almost impossible to improve the benefits system without making it worse somewhere else. Nowhere is this more obvious than in a little publicised change in tax credit rules announced in this year’s Budget. At the time it seemed to be a simple and largely beneficial change. It’s only now, as the full implications are being felt by parents and families, that the real cost of the change is being felt.

Six months ago, then chancellor Gordon Brown announced a four-week working tax credit “run-on” for working people who lost their job, or who dropped their working hours to below 16 a week.

This looks innocuous enough. A worker, possibly a lone parent or member of a low-income family or a disabled employee, decides that they can no longer stay in work. Or perhaps their employer closes or moves or makes them redundant. In these circumstances, the worker loses their right to working tax credit (based on their wages) as soon as they lose their job.

The problem that the change in regulations was designed to ease was that Revenue and Customs would take a good few weeks to stop the tax credit payment. During those weeks, the person would be “overpaid” credit which the tax authorities would claw back from them later.

So, giving claimants an automatic four-week entitlement to working tax credit after they have left work gives the claimant and tax authorities the time they need to make the notification that work has stopped and to stop the payment.

If only it were that simple.

The change in working tax credit rules could spell trouble for anyone who leaves work and tries to claim a means-tested benefit such as income support or jobseeker’s allowance. They could find that the credit they continue to receive for four weeks will bar them from claiming other benefits for those weeks, as it counts as a source of income.

This will affect certain client groups in particular: lone parents may receive a substantial working tax credit payment, especially if it includes child care costs. If they give up work and claim income support, their income support personal allowance will no longer include the elements for children anyway, as these are now paid for new claimants through child tax credits. The working tax credit may therefore be high enough to bar them from claiming income support for four weeks. This will affect their right to free school meals, Social Fund payments and perhaps prescriptions.

Housing and council tax benefit, which would have needed recalculating for the loss of wages anyway, will need to be reassessed for the four-week period when the only income is working tax credit and again when the income support kicks in. A four-week delay in the start date of the income support claim could also cause problems for claimants who want to claim income support for help with mortgage interest, as it could delay the start of the “waiting period” before that help kicks in.

Claimants who leave working tax credit and claim jobseeker’s allowance will also face problems. Again, the working tax credit may be higher than their jobseeker’s allowance entitlement for those four weeks, especially if they are sanctioned by the job centre for ceding work voluntarily. As well as the problems listed above, an unemployed claimant may be unaware of the need to sign on for four weeks even if jobseeker’s allowance isn’t awarded, to protect their national insurance record.

Welfare reform is a bit like a kid’s balloon – squeeze one place and it just pops up somewhere else.

Gary Vaux is head of money advice, Hertfordshire Council. He is unable to answer queries by post or telephone. If you have a question e-mail graham.hopkins@rbi.co.uk