The hidden wealth tax in Universal Credit

This blog was written by Ed Pybus, a policy researcher, with a particular interest in social security and social justice, who runs crow.scot, an independent policy consultancy.

Tax Justice Scotland is seeking to promote a better conversation on tax policy. As such, the views expressed in this blog are those of the author and do not necessarily reflect the views of Tax Justice Scotland and its diverse supporters.

Means testing in benefits is often treated as synonymous with income testing, however means testing often considers, alongside income, assets such as savings, land, property, and other capital. The way savings and other forms of capital are treated by the UK mean tested benefits is complex and when I was a frontline welfare rights worker I’d often see cases looking at the way capital impacted benefit entitlement.

More recently though the question I’ve been asking is what if we stopped thinking about it as a benefit issue and started thinking about it as a tax on wealth?

My research shows that the asset means test operates as a wealth tax in all but name. And it falls on people with low incomes and modest levels of wealth, rather than being aimed at people with large fortunes. A parent saving for a deposit. Someone putting aside money for a disability adaptation. A person trying to build a pension. Someone receiving a modest inheritance.

Imagine a single parent in Glasgow with two children, in rented accommodation. They have no earnings and are entitled to Universal Credit, Scottish Child Payment and other support.

With £5,000 of savings, their capital has no effect on their entitlement.

With £10,000, they lose £68 of Universal Credit each month.

With £15,000, they lose £153.

Above £16,000? Each month they lose all of their Universal Credit (£2243) and as well £122.20 Scottish Child Payment, £41.17 free school meals and council tax reduction of £163.75.

My research, which is due to be published in next issue of The Journal of Social Security Law (vol 33 issue 3), has looked at that reduction in household income caused by the asset means test and compared it with the value of the capital a household has. In one of the examples I have modelled, over a 12 month period, a single parent with £10,000 of capital faces an effective wealth tax rate of over 7%. For a household earning £20,000 and holding £30,000 of capital, the rate is 50%. And the longer a household remains entitled to Universal Credit, the bigger the impact can become.

Imagine for a moment that even a 2% tax on wealth was announced in the next budget. We would expect a wide discussion about this – was it proportionate, how would it be collected, what impact would it have on people’s behaviour, on the economy, on ‘growth’. Yet low income households face far higher effective taxes on their wealth, and there has been very little discussion about the impacts or fairness of this.

Treatment of the rich v the poor

It can be argued that economic and social inequalities are sustained by distinct ways of thinking about ‘richer’ and ‘poorer’ people, and how these are embedded in legal, political and cultural norms. The difference between the way we currently tax wealth and the Universal Credit assets means test provides a useful example.

Take inheritance tax. Inheritance tax generally starts to apply to estates above £325,000, with allowances that can mean considerably more can be passed on tax free in some circumstances. The assets means test in Universal Credit means that for savings above £16,000 a household loses all entitlements.

Around half of people will inherit nothing. But there is also a large group of people who inherit what could be described as ordinary amounts of wealth. Much of that wealth will fall below the thresholds for inheritance tax. So for someone on a higher income, receiving a modest inheritance might have no immediate tax consequence. However someone on a low income getting Universal Credit, who receives the same inheritance, could face an effective wealth tax of 50% or more.

That looks like a double standard.

Isn’t the asset means test just common sense?

The usual argument for an asset means test is straightforward. If someone has savings, why should the state support them before they have used those savings?

It sounds reasonable. But look at it through the lens of a wealth tax. Imagine being asked whether a person with £10,000 in savings should pay a 7 per cent wealth tax just because they are on a low income. Or whether someone who receives an inheritance should lose more than half of it through an effective wealth tax because they are entitled to get social security. There are genuine questions about how a means-tested system should work and how public money should be targeted.

There are of course costs to changing the rules. Recent research estimated that removing capital limits from Universal Credit could cost around £2.3 billion. But again we could turn that figure around. £2.3 billion is the amount of wealth taxation that we are, in effect, imposing on the capital of low-income households.

The rules have deep roots. Asset tests have been part of social assistance for centuries. But the distribution and nature of wealth has changed enormously. We should not assume that a rule which once seemed like common sense still makes sense today. The useful thing about describing the asset means test as a wealth tax is that it forces us to look at the policy from a different angle.

Who is paying it?

How much are they paying?

What does it discourage people from doing?

And, perhaps most importantly, is it really targetting the people whose wealth we would choose to tax?

So perhaps it is time to stop treating the asset means test as an inevitable part of means-tested social security. It is a policy choice. A policy choice that acts like a wealth tax. And we should ask is it a fair one?