Capping in the Current System
As recently as 21st March, Employment Minister Chris Grayling responded to a written question about the criteria for the proposed benefits cap.

Chris Grayling: As the spending review announced, households which contain a member who is in receipt of working tax credit will be exempt from the cap. We are still considering the precise criteria for an equivalent exemption under universal credit.

This reiterated the government’s consistently expressed link between the cap and the receipt of Working Tax Credit (WTC).

Our modelling had demonstrated the results of this policy on households where hours were too low, or incomes too high, to receive WTC but remaining benefits were still above the cap level. This created potentially very large poverty traps in some circumstances with small increases in income leading to a drop in net incomes of sometimes hundreds of pounds a week.

In April, however, an official wrote to us

It has always been the policy intention that this exemption should cover those households who work sufficient hours to qualify for Working Tax Credit but whose high earnings result in a “nil” award. When we have referred to households being in receipt of Working Tax Credit in a number of answers to Parliamentary Questions, this was understood to include those people who may qualify for Working Tax Credit but for the level of their earnings. We will make this clearer in future communications.

This issue will only exist up until the time households begin to receive Universal Credit and are therefore unable to qualify for Working Tax Credit. Universal Credit will be paid both in and out of work and we are still considering the precise criteria for an equivalent exemption under Universal Credit for those in work.

We welcome this clarification and the removal of the poverty trap danger that would have been caused by our previous interpretation, although we confess to being slightly puzzled by the concept that ‘in receipt of’ should have been read as including ‘not in receipt of’.

As it is now appears that the receipt of WTC is not itself relevant to the avoidance of the cap, but that the test is simply one of hours worked and household composition, we have carried out some new modelling to examine these effects.  Some of this can be seen a new edition of ‘Benefits And The Bill’ downloadable here

Universal Credit and Capping
During the committee stage of the Bill, on 28th April, Employment Minister Chris Grayling spoke about the possible ways in which the benefits cap might be applied under Universal Credit. It is unlikely that an hours’ based cap will be introduced but instead a cap based on a level of earnings, or income, seems more likely.

Chris Grayling: We are unlikely to do it on an hours basis. There are a number of ways that we could do it; we could relate hours to the minimum wage and achieve a formula, for example. We are unlikely to seek to use the system to collect hours worked—I think it would be extremely difficult to do that—but we are considering the best way to set the appropriate parameters.

…. Clearly, we need to set a relationship between hours and amount of money earned. There are only two permutations. Either we calculate the number of hours or the amounts of money, or we find a mechanism to relate the two. We are unlikely to collect hours data, but we might seek to create a formula that linked the two. If someone earns more than the equivalent of the minimum wage for a defined full-time week, they move beyond in-work conditionality. That is an example of how we can set a formula that moves people beyond a certain point in relation to a number of hours without counting them. It would be quite impractical to count them, but we can create a formula that links an income and a number of hours and sets a threshold in cash terms. We will probably want to come up with a formula of that kind.

In many ways, this is worse than the hours ‘step’ that will now apply to the current scheme as changes in rates of pay (and possibly minimum wage) as well as hours may trigger or stop the cap applying.

If the Government intend to pitch this figure low (e.g. at current rates 24 hours at minimum wage would be £142.32 a week – just under £7,500 pa) then, while the cap would apply to fewer people, those affected would presumably include those on the periphery of employment, often dipping in and out of work, who were intended to be helped by UC’s smooth and seamless operation.

People in lower paid jobs could be hit by the cap while those, working the same hours on higher rates of pay, would escape. It is possible that there may be an interesting effect if the comparator is net earnings rather than gross, because earnings deductions for many will be zero at very low earnings levels, but until further details are available it is impossible to be certain. At the moment, it is not possible to model the effect of the cap in Universal Credit for the same reason.