Benefits debt deductions trapping people in poverty and debt

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.

Figure 1: Over 210,000 households has a deduction above 25% of their standard allowance

It is these third-party debts that can take a deduction above the standard 25% cap of the standard allowance The standard cap on deductions can be breached if it is believed to be in someone’s best interest, for example to prevent an eviction. There were over 210,000 such cases in February 2023, an increase of 130,000 compared to just six months earlier (figure 1). This is on top of the 630,000 households with a 25% deduction.

Across all families in receipt of UC, deductions reduce support towards basic living costs by an average of 8%. This is a £31 a month reduction for a single adult over 25 and £49 a month for a couple over 25. Figure 2 shows that automatic debt deductions make it even more difficult for low-income families to afford the essentials, with the shortfall to the essentials guarantee increasing from £127 to £158 a month for the average single person over 25.

Figure 2: Deductions push families even further from affording the essentials

The prevalence of these deductions varies across the country. In Blackpool South, two-thirds of families (66%) in receipt of UC have a deduction, and in Middlesbrough 64%. This is approaching double the proportion in South West Devon (36%).

Table 1 shows this variation in deductions affects families in the worst and least affected parts of the country. In Blackpool South, debt repayments reduce the average standard allowance by over 11%. This means a single person over 25 loses £44 a month and a couple over 25 lose £69. This is double the reduction in the least affected constituencies. For a full list of constituencies see table 2.

Table 1: The average reduction in UC in Blackpool South is twice that in Wells

Reduction in the standard allowance of universal credit (in percent and pounds) for an average family in 2024/​25 as a result of debt deductions, by highest and lowest ranked constituencies

Source: NEF analysis of parliamentary question 203044 and stat-xplore data on the number of households receiving a non-zero UC payment.

Not only do deductions undermine the adequacy of universal credit, but they also reduce the effectiveness of critical local crisis support. Local crisis support is mostly funded by central government but administered by local government. One form is discretionary housing payments (DHPs), provided by local government, most commonly to alleviate the impact of a working-age welfare reform related to housing, such as the benefit cap, bedroom tax or the local housing allowance.

In 2022/​23, 64% of DHPs were to reduce the impact of welfare reforms. In October 2021, the Covid uplift to UC and working tax credits was removed. Since then, the household support fund (HSF) was introduced to fill the gap, despite being worth substantially less than the Covid uplifts. Upper-tier local authorities (county councils) distribute the HSF to low-income residents. Across England in 2022/​23, local government paid £101m in DHPs (including a £12m top up by local authorities) and £842m through the HSF.

While vital, these support payments were dwarfed by the £1.3bn taken for UC deductions in England. Deductions outstripped local support in every region across England. The north-east saw almost 2.3 times as much taken from UC accounts as was awarded by local government.

Figure 3: Deductions in 2022/​23 outstripped local working-age crisis support in every region of England

This analysis does not include local welfare assistance (LWA), in part because 62% of the £91m spent on this form of crisis support was covered by the HSF. LWA schemes are another vital lifeline, but in 2022/​23 37 of the 152 upper-tier authorities no longer operated one, up from 23 in 2018/​19.

Following a six-month extension at the 2024 spring budget, the HSF is set to run out in September, placing significant doubt over the longevity of LWA schemes across the country. This is particularly pertinent given that local authority bankruptcies are on the rise: LWA is not a statutory service, so schemes are likely to cease if a council declares bankruptcy. If the HSF is not extended beyond September, local spending power to support low-income families experiencing crisis will collapse to just one-seventh of its current value (14%).

Based on 2022/​23 data we find that if the HSF is not made permanent, debt deductions from UC will be 13 times more than local government can provide in crisis support across England. In the East Midlands this is 19 times more and in the north-west it is 17 times. Blackpool will see the largest collapse after September, with deductions worth 43 times more than local support, followed by Wiltshire, and north and north-east Lincolnshire. The lowest difference is in the south-east (12 times) and London (eight times).

Figure 4: Local crisis support will be dwarfed by deductions if the household support fund is not extended

The inadequacy of centralised social security means that local support is a vital lifeline for low-income families. Boosting social security would make these local payments far less critical. Yet the likely closure of the HSF follows the end of the cost-of-living payments, additional support for low-income families introduced while inflation was high. Though inflation has fallen, prices remain substantially higher than before the pandemic, with the removal of these payments meaning that for many families, social security is weaker in 2024/​25 than it was last financial year. This is despite an inflation-linked increase to benefits. To ease the impact of these cuts, this government should at least limit the maximum level of deduction from 25% to 15%. This has been called for by the Children’s Prosperity Plan, a coalition of anti-poverty campaigners who are also urging the government to scrap the two-child limit, abolish the benefit cap and increase child benefit.

But these cuts should not be happening in the first place. They will place greater strain on local government and the families pushed into debt because of the inadequacy of the social security system.

Attempts to reduce debt today should not create further hardship in the future. That is why we are collaborating with the Runnymede Trust and local organisations on the Power to Prosper campaign. The campaign is made up of a coalition of partners working with the communities most harmed by household debt: people of colour, households with disabled people, and single parents.

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