Ministers are pushing people into poverty and debt through a policy that allows universal credit payments to be cut by up to 25%, a report by the Lloyds Bank Foundation has found.
With the cost of living crisis already putting a severe strain on households, the report, titled Drivers of Poverty, said a system that allows deductions from benefits was leaving some people without enough money to live on, “driving impoverishment and further debt, particularly hitting the most vulnerable”.
It said at a time of rising costs “the government has a choice – and a responsibility – to fix the system.”
Almost half (44%) of those receiving universal credit have money automatically deducted, with an average of £78 a month withheld from their payments. For a single person aged over 25 that represents a fifth of their entitlement.
A single mother quoted in the report said she was supporting three children on £118 a week and did not know why deductions were being made. “They are taking £100 a month, leaving me needing the food bank and struggling with utilities,” she said.
Deductions can be made for a range of reasons, including to cover advance payments made to new claimants or to claw back overpayments. The most frequent is recovery of advances. These are given to cover expenses during the five weeks claimants must wait before universal credit begins. The advance is interest-free but must be repaid from subsequent benefits payments.
Another key reason is overpayments of tax credits, but debts for energy and rent can also be clawed back through the system.
The report found that historical debts around tax credit overpayments often surprised claimants who had been unaware of them. It described this as “a relic of a clunky legacy system that translates to reduced benefit levels”.
The deductions taken are not means-tested, and claimants are struggling to manage on what is left as living costs rise.
The report by the Lloyds Banking Group-backed foundation is based on evidence from charities. It said that, unlike when debts are recovered in the private sector, “no checks are undertaken to understand whether people can afford these deductions”.
“Deductions policies and practices – not individual behaviour – are significant drivers of debt,” the report said. “The increase in the debt people face and the deductions to pay it back are the explicit result of government policy.”
The foundation called for an urgent review of the system, and made recommendations for changes including converting advances into grants, reducing deductions to 5% to help people meet rising costs, and writing off historical debts stemming from government errors.
It said before making any deductions from benefits, the government should follow best practice and carry out affordability assessments by qualified advisers.
Paul Street, the chief executive of Lloyds Bank Foundation for England and Wales, said at a time of soaring cost of living the government was making it harder for people to make ends meet.
“Charities every day see people have significant sums deducted from their benefits that they don’t understand, without warning and that doesn’t take account of their circumstances, leaving them struggling to pay their bills however well they budget,” he said.
The Department for Work and Pensions (DWP) said the cap on deductions had been reduced to 25% in April 2021 and the payback period lengthened, and that cases involving significant debt were rare.
A government spokesperson said: “We carefully balance our support for claimants with our duty to protect taxpayers money so we have further reduced the cap on universal credit deductions and paused the fuel direct scheme, that allows energy bill payments to be taken directly from benefits. Safeguards are in place to ensure deductions are manageable and customers can contact DWP to discuss their repayments if they are experiencing financial hardship.
“We know work is the best route out of poverty so we’re putting an average of £1,000 more per year into the pockets of working families on universal credit and have also boosted the minimum wage by more than £1,000 a year for full-time workers.”
