Ministers are pushing people into poverty and debt through a policy that allows universal credit payments to be cut by up to 25%, a report by the Lloyds Bank Foundation has found.
With the cost of living crisis already putting a severe strain on households, the report, titled Drivers of Poverty, said a system that allows deductions from benefits was leaving some people without enough money to live on, “driving impoverishment and further debt, particularly hitting the most vulnerable”.
It said at a time of rising costs “the government has a choice – and a responsibility – to fix the system.”
Almost half (44%) of those receiving universal credit have money automatically deducted, with an average of £78 a month withheld from their payments. For a single person aged over 25 that represents a fifth of their entitlement.
A single mother quoted in the report said she was supporting three children on £118 a week and did not know why deductions were being made. “They are taking £100 a month, leaving me needing the food bank and struggling with utilities,” she said.
Deductions can be made for a range of reasons, including to cover advance payments made to new claimants or to claw back overpayments. The most frequent is recovery of advances. These are given to cover expenses during the five weeks claimants must wait before universal credit begins. The advance is interest-free but must be repaid from subsequent benefits payments.
Another key reason is overpayments of tax credits, but debts for energy and rent can also be clawed back through the system.
The report found that historical debts around tax credit overpayments often surprised claimants who had been unaware of them. It described this as “a relic of a clunky legacy system that translates to reduced benefit levels”.
The deductions taken are not means-tested, and claimants are struggling to manage on what is left as living costs rise.
The report by the Lloyds Banking Group-backed foundation is based on evidence from charities. It said that, unlike when debts are recovered in the private sector, “no checks are undertaken to understand whether people can afford these deductions”.
“Deductions policies and practices – not individual behaviour – are significant drivers of debt,” the report said. “The increase in the debt people face and the deductions to pay it back are the explicit result of government policy.”
The foundation called for an urgent review of the system, and made recommendations for changes including converting advances into grants, reducing deductions to 5% to help people meet rising costs, and writing off historical debts stemming from government errors.