Business

Welfare plans: Your benefits may be lower than expected

  • 9 January 2013
  • From the section Business
Pregnant woman
Maternity pay is among the benefits that would be affected by the proposals

MPs have voted on key changes to welfare entitlements that are set to affect millions of people in the UK.

In his Autumn Statement, Chancellor George Osborne announced plans to place a three-year cap of 1% on increases in most working-age benefits and tax credits from April 2013.

That means benefits such as jobseeker's allowance and maternity pay will go up by less than the expected rise in the cost of living - in other words, a real terms cut.

So, what does this mean for you?

Who will be affected?

Many people who are of working age and receive benefits of one kind or another will be affected. They will find that the income from these benefits will not rise as much as they might have expected.

The chancellor wants a 1% cap on the rise in working-age benefits for three years from this April.

That will save the government a lot of money on their welfare bill - some £505m in the first year, rising to an estimated £2.3bn in 2015-16.

What does that mean for me exactly?

If you are claiming jobseeker's allowance, you are single and you are aged 25 or over, then you currently get up to £71 a week. So a 1% uprating (to use the official term) will mean an extra 71p maximum a week on this benefit.

Similarly, maternity, paternity and adoption pay will only go up by 1%. The same is true of child tax credits and working tax credits, which are paid to many low-income families.

How does that compare with the cost of living?

The latest figure for the rising cost of living - indicated by the Consumer Prices Index (CPI) measure of inflation - is 2.7%.

If the chancellor had stuck to the formula of linking benefits to the CPI level in the previous September, then these benefits would have risen by 2.2% in April 2013.

If the forecasts can be believed, then CPI is expected to be 2.6% in September 2013 and 2.2% in September 2014. Clearly, this suggests the cost of living will rise faster in all three years of the cap than the 1% rise in benefits, and would be a cumulative 4% cut in real terms.

But the government argues that savings need to be made to help balance the UK's books.

How many families will be hit in total?

A lot. Significantly more than the recent withdrawal of child benefit from higher earners, for example.

Of 2.8 million households of working age without jobs, 2.5 million will see their entitlements reduced in real terms, according to the Institute For Fiscal Studies (IFS).

They will get an average of about £215 per year less in 2015-16 than they might have expected if the chancellor had stuck to the old formula.

Of 14.1 million working-age households with someone in work, some seven million will see their entitlements cut compared to what they might have expected. This will be by an average of about £165 per year, the IFS suggests. That includes three million who lose out only from the child benefit cap.

Those with the lowest incomes will be affected the most, with the second-lowest 10th of the UK population hit hardest in cash terms, with an average drop of £150 per year compared to what they might have expected.

However, other austerity measures announced by the government have hit the highest earners, as has earnings failing to keep pace with inflation.

Is anyone protected from the planned changes?

Yes, this is a plan to cap working-age benefits. So, pensioners will not be affected.

The basic state pension, for example, will increase by 2.5% in April - owing to a government guarantee - to £110.15 a week.

Benefits for carers and disability benefits such as attendance allowance, the disability elements of tax credits, disability living allowance and the support component of employment and support allowance will continue to be uprated in line with inflation, so by 2.2% in April.

What is the timetable for the welfare changes?

The changes for April 2013 have already been set in stone.

Legislation needed to implement the cap up to 2016 must be approved by the Commons and the Lords.

By approving the proposals of the Welfare Uprating Bill at its second reading on Tuesday, MPs have ensured they move a step closer to becoming law.

Is there any advice for those facing the cuts?

There are a host of free services available to help people with their finances and tips on how to budget.

For example, the government-backed Money Advice Service has suggestions on how to manage your money.

Many charities and debt advice services offer similar services for free online, on the telephone or in person.

The Family and Parenting Institute has offered some basic budgeting tips, including making a shopping list and paying in cash, keeping a diary of daily expenditure, claiming childcare vouchers available through employers, budgeting for costly items throughout the year, and asking friends for recipes for cheap, nutritious meals.

Benefits such as jobseeker's allowance have long been linked to inflation, meaning that when prices rise, so does the amount that claimants receive. The rate is based on inflation in September, with changes taking effect the next April. The Office for Budget Responsibility has forecast inflation to continue at about 2%.
September 2012's inflation rate was 2.2% so benefits were expected to rise by that amount in April 2013. However, in his Autumn Statement, the chancellor capped rises for many working-age benefits at 1% for 2013-14. The government is now seeking to pass legislation to continue this cap for a further two years.
While average earnings are far higher than average benefit payments, they have not grown in line with inflation during the downturn. This analysis by the Institute for Fiscal Studies shows how pay rises have been held down while benefits have continued to keep pace with price increases in recent years.

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