‘Universal Credit fails both as a safety net and as a gateway into work. So what now?’

The UK welfare system is increasingly complex and requires decisive action to address its inherent challenges. The fundamental problem is the ‘welfare trap’, a situation created by the disproportionate effective marginal tax rate paid by welfare recipients compared to those in employment.

The marginal tax rate is the percentage of tax paid on the next pound of income earned. For those in work, the marginal tax rate is zero for the first £12,570 and 20% on the next £47,700. In contrast, claimants receiving Universal Credit retain only 31p for every pound earned. This effective marginal tax rate comprises 20% Income Tax, 8% National Insurance and a substantial 55p reduction in Universal Credit for every pound earned.

This issue has been longstanding and attempts to reform welfare have been hindered by the difficulty of untangling this complex relationship. A fundamental change is required to separate the interaction between welfare and taxation.

The current tax-free allowance is equivalent to a cash payment of £2,514 per year. It is a universal benefit with no conditions, but only for those in work.

READ MORE: ‘Making work work for working families’

Those receiving Universal Credit receive between £4,063 and £5,098 depending on their age. Despite its title, Universal Credit is not universal, incurs significant administration costs and has been shown to create dependency.

Universal Credit fails both as a safety net and as a gateway into work.

So the question is: would we be prepared to implement a significant change by removing the tax-free allowance and Universal Credit replacing both with a truly Universal Basic Allowance for all UK citizens? This is not the same as a universal basic income.

The level at which a Universal Basic Allowance should be set is  key. The answer will depend on the rationale for welfare. This proposal will not provide a safety net for those unable to work; such a role can be fulfilled by other benefits.

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This proposal provides a universal allowance that offers an equal and steady launch pad for all when entering the world of work. It ensures that everyone’s marginal tax rate is the same and retains the full allowance when working. Therefore, in my view, the current tax-free allowance of £2,514 serves as a starting point.

In addition to addressing the welfare trap, this proposal offers several other benefits:

•  Cost Savings in Universal Credit and tax collection: The administration of both the tax code and Universal Credit will be reduced. 
• Increased Tax Take: As all income will be taxed, there will be opportunities to collect tax more efficiently and timely, particularly in the informal economy.
• Increased Workforce Participation: More people will be in work, contributing to economic growth.
• Reduced Economic Migration: As an allowance for UK citizens only, it will reduce the incentive for economic migrants.

This proposal has many benefits, not least saving money. But of equal importance is that it is universal. Universal provision is a core value for all factions of the Labour Party.  This proposal for a Basic Allowance is available to everyone regardless of income, avoids  stigma and will ensure high take-up which in turn will build widespread public support.

As with all universal provision the Basic Allowance will help to reduce inequality, provide redistribution and build social cohesion.  It will also restore the dignity of work.  The problems of today being solved by Labour’s timeless values.

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