Posted May 27, 2021
Following a recent High Court case on the DWP’s use of deductions from Universal Credit to collect debt, our Public Affairs and Policy Manager, Grace Brownfield, examines the issues with the current system and where urgent improvements are needed.
In March, the High Court ruled that part of the DWP’s current approach to deductions from benefits to pay court fines was unlawful. The case was brought by Shelter on behalf of four people: it focused specifically on the DWP’s policy of always setting court fine deductions from Universal Credit at the maximum rate of 30%, even though the law actually provides that these can be taken at a lesser rate, down to a minimum of 5%. The court ruled that, by not showing discretion with where the deduction rate was set – as the legislation intended – the DWP was acting unlawfully.
There’s lots more detail on the specific case and judgment on Shelter’s blog – which is well worth a read – but the case also shone a light on the wider issues with deductions from Universal Credit. These are issues that we encounter time and time again in our own work and research.
What are deductions from benefits?
When it comes to paying certain debts, the DWP has the power to automatically deduct money from people’s benefit payments. Payments can be taken for debts owed to government – such as benefit overpayments, Universal Credit Advances and council tax arrears – as well as other debts such as energy or rent arrears. The percentage that can be taken varies depending on the debt and multiple deductions can be taken at the same time, up to a maximum cap (for people receiving Universal Credit, this is 25%).
As of November 2020 (the most recent figures available), 44% of people receiving Universal Credit were having money deducted to repay debts – with an average deduction of £78 a month. To put this in perspective, single claimants over the age of 25 can typically expect to receive £411.51 per month in Universal Credit, so a £78 deduction is no small amount.
Unaffordable deductions exacerbate debt problems
Unlike many other forms of debt collection, most deductions are taken at a fixed rate and affordability assessments are not conducted before they are put in place. This can leave people who are already on a low income without enough money to meet their essential costs, resulting in them missing bills and trapping them in a cycle of ongoing debt.
The inflexibility of deduction rates from Universal Credit (and the fact that where the rates are variable, they are typically set at the maximum) regularly leaves people unable to afford their basic needs, going without food, or even being unable to pay for rent.”
“The rate of deductions tend to be unaffordable and set at rates which impact on their ability to budget their priority expenditure.”
“Automatic deductions from benefits or wages without affordability assessments can be incredibly harmful, leading debtors to borrow from elsewhere, thus causing recurrent and persistent debt, decreased motivation and poor mental health.”
Responses to sector-wide survey of debt advisers
An inflexible approach
For some debts, there isn’t one set fixed rate of deduction from Universal Credit. Instead, the law allows for a deduction to be set within a minimum and maximum percentage range (this is the case for benefit overpayments and rent arrears for example). For these debts, the DWP says people can get in touch to ask for a reconsideration of the amount being deducted.
While this is welcome, in practice it can be hugely challenging for people to get deductions reduced and as Shelter’s court case highlighted, rates can often be put at the maximum – regardless of whether this is affordable for the person or not.
These concerns are backed up by the government’s own figures that show the proportion of Universal Credit claimants with a benefit overpayment, who successfully applied for a reduction in the rate at which they are repaying that overpayment, was less than one in 10 (9.2%) in 2019.
Perhaps more worryingly, in 2019/20 just ten people on Universal Credit had their debts waived due to medical and/ or financial hardship.[i]
“It seems to be difficult to get the deductions reduced as they just pass you from one DWP recovery team to the next.”
“Usually never hear back from DWP regarding deductions being lowered.”
“There are a huge range of amounts that can be deducted from Universal Credit for magistrates’ court fines, but if the rate is set too high, it's almost impossible for clients to get it reduced, even to an amount which is perfectly possible according to guidelines. The court will insist that they have to speak to the DWP, and the DWP will pass them back to the court.”
Responses to sector-wide survey of debt advisers
What could be done to improve how deductions from benefits are used?
In recent years, there has been some recognition of the hardship deductions from Universal Credit can cause, with the Government twice reducing the maximum total amount that can be taken from a monthly Universal Credit payment. Since April 2021, a maximum of 25% can be taken (down from the 40% initially allowed for under the Universal Credit system).
This is a welcome move, albeit one which means that the DWP still able to take a significant amount from someone’s monthly income without any affordability check.
Just like other forms of debt collection, affordability and fairness should be at the centre of deductions from benefits policy. Urgent action is needed to achieve this:
- Ideally, affordability assessments should be conducted before any deduction is applied.
- The DWP, should also be prepared to accept budgets provided by the individual or their debt adviser to determine a deduction level.
- The high rates of deductions that are currently allowed under Universal Credit for benefit and tax credit overpayments and rent arrears should be lowered to 5% (to match the rate of deduction for other debts such as energy and water arrears).
- The maximum rate at which deductions can be made should also be reviewed and lowered further.
- There should be clearer and more accessible routes for people to ask for a lowering of their deductions and staff should be encouraged to amend or pause deductions where they are causing financial difficulty.
Finally, the Government’s new Breathing Space scheme, which launched this month will play an important part in supporting people in financial difficulty, offering up to 60 days of protection from creditors, interest and fees for those who are eligible. The scheme is the result of years of campaigning across the debt advice sector and represents a milestone in providing safe routes out debt for people struggling with their finances. However, though some deductions are covered by the new scheme, Universal Credit Advances and third-party deductions from Universal Credit aren’t yet included. The Government has promised to bring these into the scheme ‘as soon as possible’ - it’s vital they follow through on this commitment, especially in the wake of Covid-19.
A fairer way forward
Last year, the Cabinet Office ran a Call for Evidence on fairness in government debt management, citing their ambition to ensure people in debt are treated ‘fairly and proportionately’: but our research suggests the current use of fixed deductions goes against this. Reforming deductions must be a key part of efforts to embed fairness and affordability throughout government debt collection.
Deductions can be a part of fair and affordable collections only if they are used as a payment option for affordable repayment plans, set flexibly based on what someone can afford (rather than as a collection method which takes fixed rates regardless of individual circumstances). Until this happens, they will continue to undermine, not help, people’s attempts to resolve their debt problems.
You can find out more about our proposals for reforming deductions from benefits, and wider government debt collection in our Levelling Up report.
[i] Answer to Parliamentary Question 5464, 23 January 2020
Grace is the Money Advice Trust’s Public Affairs and Policy Manager. She previously worked in the policy team at StepChange Debt Charity. Before that she worked on issues related to the financial impact of cancer at Macmillan Cancer Support and NSPCC. View all posts from Grace Brownfield.