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Managing my money
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2.2.4 State benefits

So far you’ve looked at Income Tax and National Insurance. There are other taxes such as Value Added Tax (VAT), excise duties, Stamp Duty Land Tax and Inheritance Tax – all raising revenue to pay for state benefits and services such as health, education, defence, the transport infrastructure and the police service.

Money raised in taxes goes a substantial way towards paying for the physical and social framework within which citizens live and work. This money, raised and spent collectively, reduces the need for private expenditure that would otherwise be required for health, education and so on.

State benefits represent important components of the welfare state. They have been built up in the UK over the last century or so to provide social protection against various risks such as unemployment, sickness or work injuries, and to ensure that financially poor and marginalised citizens have sufficient income.

One key issue facing governments is a concern that provision of benefits might act as a disincentive for people to seek employment. Related to this is the need to ensure that those on low incomes are not treated unfairly by the tax and benefits system, by making them worse off than those who do not work. One way the UK government has been addressing these issues has been to raise the income threshold at which you start to pay income tax. There have also been two major initiatives since 1997 to address these issues through the structure of state benefits.

The Labour government that came to power in 1997 designed a new form of benefit payment called a ‘tax credit’ to help people move off welfare and into paid employment. These consisted of the Working Tax Credit (WTC) and the Child Tax Credit (CTC), and represented an attempt to integrate the benefits system with the tax system.

The Conservative/Liberal Democrat coalition government elected in 2010 introduced substantial changes to the benefits system. Its strategy was immediately to cut benefits and, in the medium term, replace many work-related benefits with a new benefit called a Universal Credit. Specific measures also included restricting Child Benefit payments to households where neither parent is a higher rate taxpayer, placing a cap on Housing Benefit payments and an overall cap on benefits.

Following trials in North West England, the coalition government’s major overhaul of the benefits system started to be phased in from October 2013, with Universal Credit replacing Income Support, Housing Benefit, Working Tax Credit (WTC) and Child Tax Credit (CTC), as well as the income-related parts of Jobseeker’s Allowance and Employment and Support Allowance. Initially Universal Credit will be paid to new claimants and existing claimants whose circumstances change – for example, if they have another child. Subsequently all other claimants will be transferred, in stages, to Universal Credit with the roll-out of the new benefits system (for both new and existing claimants) now expected to be finalised in 2022. On completion it is anticipated that 12 million working-age claimants will be receiving Universal Credit (BBC, 2013).

Some of these benefits are means tested: they are made only to those who are assessed to have a certain level of income or less, and in some cases a certain level of assets or less.

The government’s objectives are that the new benefits system will be simpler – with a single monthly payment rather than multiple payments to claimants. The new structure is also intended to make work pay by reducing the chance that incomes fall if people move from benefits into low-paid work. Administratively, Universal Credit is planned to be more efficient, with people managing their claims online – although the early trials of Universal Credit were beset with IT problems.

Some households will gain under Universal Credit – particularly those made up of couples with children – while others will lose, particularly couples with no children. Overall the ‘winners’ and ‘losers’ under the new system are widely expected to be approximately equal in number, although this has not stopped critics of Universal Credit claiming that the reform of the benefits system is intended to be a cost-cutting exercise.

Major changes to state benefits were announced in 2015. The key changes, which started to take effect from the 2016/17 tax year included:

  • the freezing of working-age benefits for 4 years
  • an annual household benefits cap of £20,000 for couples, with or without children living with them (£23,000 in London).

Additionally, from 2017/18 Child Tax Credits and the child element of Universal Credit have been limited to 2 children for children born on or after 6 April 2017. Some exemptions to this rule do apply though, for example in the case of multiple births.

Figure 5