« Back to Our Blog

Higher rate taxpayers could be eligible for Universal Credit

After proposed changes to Universal Credit (UC) in the Autumn Budget 2021, the improvements came into effect last month. From December 2021, workers claiming UC will be able to keep more of their earnings, and some higher rate taxpayers could be eligible for the benefit for the first time.

The COVID-19 pandemic saw millions of households claim Universal Credit, with numbers rising from 1.7 million to 4.2 million between February 2020 and May 2020. In an attempt to boost income for these struggling families, the government temporarily increased payments until October 2021.

After this Universal Credit uplift expired last autumn, the government took steps to expand UC to allow claimants to earn more without becoming ineligible – meaning that higher earners could now also qualify for the benefit. So, how is Universal Credit changing, and who will be affected by this?

What are the Universal Credit reforms from the Autumn Budget?

Firstly, the Universal Credit monthly work allowance
is increasing from £515 to £557. This is the amount you can earn without affecting your UC payment – an extra £42 a month adds up to £504 a year. For those receiving housing benefits as part of their claim, their UC work allowance
will go up from £293 to £335 a month. You can view the Universal Credit allowances for 2022-2023 online.

Secondly, the Universal Credit taper rate is dropping from 63p to 55p per £1. Previously, claimants would lose 63p of their UC
payment for every £1 earned over the work allowance. Now, workers will be able to keep 8p more of their UC benefit per £1. For example, if a claimant earns an extra £100 over their allowance, their UC payment will only be reduced by £55 rather than the previous £63.

How will Universal Credit changes affect higher earners?

The UK government estimates that these two changes will see 2 million of the lowest-earning families get to keep an average of £1,000 more per year. However, the Institute for Fiscal Studies (IFS) revealed the new taper rate also means that an additional 600,000 households could be eligible for Universal Credit
– even if they’re in the higher rate tax band (40% on earnings over £50,270).

Workers can earn above average while still receiving UC
(as long as they aren’t in a couple with another earner). The IFS
provides the example of a single parent with 2 children and £750 monthly rent earning £51,900 a year before losing UC entitlement, compared to £44,500 before the changes. A couple with only one earner in the same situation could earn £58,900 a year (up from £49,300).

Of course, this also only applies if the single parent or couple doesn’t have savings above £16,000, which would disqualify them from UC
entitlement. As it also only applies to higher rate taxpayers with child dependants, there’s also the High Income Child Benefit Tax to consider. As a complex trio, it’s important to know how tapering UC, higher rate tax, and child benefit tax can affect each other.

How will I know if the Universal Credit changes affect me?

A senior research economist from the IFS, Mr Tom Waters, told the BBC
that people should be aware that the changing UC taper rate and UC work allowance is only good news for claimants who are actually in work – meaning that households with nobody in work won’t be any better off.

Similarly, as the cost of living rises in 2022, including inflation and tax increases, this is likely to negate any benefit or wage increases, even for middle-income earners and those in the higher tax band. That said, it’s always worth claiming what you can – so check your Universal Credit eligibility.

If you require financial advice concerning capital allowances and tax reliefs, and how these intersect with UC benefit entitlement, we provide tax consultancy services and assist with HMRC enquiries. Contact GBAC accountants in Barnsley by calling 01226 298 298 or emailing info@gbac.co.uk today.