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The missing piece of the welfare debate: Debt deductions  

Our Acting Deputy Chief Executive on the issue of deductions from benefits.

Jane Tully

Acting Deputy Chief Executive Money Advice Trust

Posted September 13, 2023

Our Acting Deputy Chief Executive on the issue of deductions from benefits.

Discussions about welfare levels are never far from political debate. And it’s likely we’ll see even more focus on this in the coming weeks, with questions around uprating benefit levels becoming increasingly prominent.  

Something that’s often missing in the debate about the current welfare system is the impact of benefit deductions to repay debt. This is not a niche issue: almost half (45%) of households receiving Universal Credit have one or more deductions attached. To put it another way, while we are (rightly) looking at whether the standard headline rate of Universal Credit is enough to cover people’s essential needs, almost half of claimants aren’t even receiving this.  

It's perhaps not surprising then that the Work and Pensions Committee decided to take a closer look at this issue as part of their inquiry into Benefit levels in the UK. Alongside colleagues from StepChange Debt Charity and Lloyds Bank Foundation, I spoke to the Committee about the challenges unaffordable deductions pose to our clients at National Debtline and Business Debtline.  

How do deductions work?  

The deductions system can be complex, but to summarise it as simply as possible:  

  • People can have up to 25% of their benefit taken to repay debts (although this can be even higher in certain, limited circumstances).  
  • Government debts (such as Tax Credit or benefit overpayments) can be taken at 15% to 25%, depending on someone’s income from work - far higher than the 5% that is taken for most “third party deductions” for things like energy or water arrears.  
  • On average, people in receipt of Universal Credit are having £61 a month taken in deductions, and the majority of deductions (86%) are being taken to repay debts owed to government.  

What’s the issue?  

Deductions are taken automatically and at a set percentage. This means there’s no assessment of what is actually affordable for an individual. We frequently see deductions leaving people without enough money to cover their essentials. In many cases they end up skipping meals or going without heating as a direct result. In many instances, people fall behind on other bills – making their financial problems worse.  

“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.”

– Quote from a National Debtline adviser  -

As I highlighted to the Committee, the DWP’s approach to deductions lags far behind the responsible debt collection practices we see elsewhere. Creditors in financial services and other sectors understand the benefits, for both individuals and creditors, of setting affordable, sustainable repayment rates. The benefits deductions system stands as a stark outlier.  

Simple, low-cost changes could make a huge difference 

During the Committee’s sitting, I was struck both by the level of consensus on the changes we think are needed and the ease at which these could be introduced. Two changes would make a big difference: 

  1. Reducing the overall cap on the amount that can be taken from someone’s monthly Universal Credit payment, from 25% to 15%.  
  1. Reducing the amount that is taken for government debts, like Tax Credit or benefit overpayments, to 5%.  

There are other more technical changes that would also help – amending the order that deductions are taken, to prioritise key debts on essential bills over debts owed to Government. We also want to see the DWP being more proactive in reducing or pausing deductions when they are unaffordable. 

These changes would be very low-cost to government. In April 2021, the Government said the cost of reducing the maximum cap from 30% to 25% was ‘negligible’. 

An Autumn Statement opportunity 

In February of this year (the most recent month for which data is available), the DWP deducted £137 million from people’s Universal Credit to repay debts (an average of £61 per household). Most of this is going towards government debts that could be repaid at a lower rate over a longer period of time.  

£137 million is a huge amount at any time and would make a real difference in the middle of this period of incredibly high cost of living, where people are already facing significant difficulty making ends meet.  

If the Government is looking for a low-cost way to improve support for people on low incomes as part of the Autumn Statement in November, reforming deductions policy would be an obvious place to start.  

Jane Tully

Acting Deputy Chief Executive Money Advice Trust

Jane Tully is the Trust’s Acting Deputy Chief Executive and has served on the charity’s Senior Leadership Team since 2014. She leads our work on policy, communications, marketing and research. She previously worked for the Charity Finance Group, Charity Commission, NSPCC and local government. View all posts from Jane Tully.

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