Welfare in the 21st Century: From Hand Down to Hand Up

The total welfare bill in the UK, has risen from approximately £100 billion in the early noughties, to £333.6 billion in 2025-26, a more than a threefold increase in just over twenty years, It now comprises 10% of our total GDP. It is expected to hit £400 billion by the end of the decade, according to a recent report by the Centre for Policy Studies. This unsustainable growth in welfare spending needs tackling. In this article, I am going to advocate a welfare system which is simpler, fairer and ensures that working pays better than welfare dependency.

Simplification

Currently there are multiple benefits that an eligible individual can qualify for in the UK, namely, Universal Credit (being the primary benefit), New Job Seekers Allowance, Personal Independence Payment (PIP – Health & Disability Benefit), New Employment and Support Allowance, Child Benefit and Housing Benefit. Some people also consider the state pension to be a form of a welfare, but for the purpose of this article I will not be looking at this.

In 2010, the Tory led coalition government made some welcome changes to simplify the welfare system, by eliminating several other welfare benefits that could be claimed for such Tax Credits. The coalition reforms were intended to have two major impacts on welfare as a whole. Firstly, to reduce welfare dependency and secondly, to incentivise paid employment. Unfortunately, the reforms have failed to meet these expectations.

The relationship between the Tax and Welfare systems

The need for simplification can be demonstrated by analysing the intricate relationship between the tax and welfare systems, as the following examples show.

Lower and middle earners are simultaneously paying Income Tax and National Insurance contributions. Some also receive Universal Credit depending on how many hours they work – a maximum of 16 hours per week, per claimant. This leads to very high marginal deduction rates for these tax payers. For every £1 such a person earns, they lose a total of 32p in PAYE. Of the 68p left, they lose another 28p in Universal Credit withdrawal, meaning they keep only 40p, which amounts to an effective tax rate (called ‘marginal withdrawal rate’) of 60%.

This is a massive disincentive for anyone thinking of taking on a temporary or low paid job.  Even worse is the problem of coming off and going back on welfare if a job is temporary. This is a time-consuming and complicated process, which can leave claimants penniless for weeks. There is in some cases up to a 6 week long-waiting period for receiving Universal Credit in the first place.

To complicate matters further, some benefits are mutually exclusive: for example, you can only claim one of New Employment and Support Allowance, New Jobseeker’s Allowance or PIP. There are also other less common forms of welfare such as Statutory Maternity Pay, Statutory Sick Pay and Carers Allowance. All students can get soft loans to cover living expenses and some students from low-income households also get modest grants.

It gets more complicated

In addition, everybody is entitled to the income-tax free personal allowance, which is currently set at £12,570 and the National Insurance earnings threshold. There are then extra personal allowances for pensioners, savings income and small trade profits, but low earners do not get the full benefit of these allowances. Meanwhile higher earners benefit from tax breaks for pensions saving and tax exemptions for income from their ISA-savings. Low and non-earners are penalised if they have savings because of the way the welfare system is designed – a punitive affect, which merely exasperates the underlying issue of how our tax system disproportionately favours wealth over the employment.

A flat rate Basic Income

As Liberals I believe we should be supporting the idea that we should add up the cost of all these benefits and replace the majority of them with one single benefit, a flat rate Basic Income. This reform would leave the total cost the same and tax rates unchanged – it would both simplify the system and remove unnecessary bureaucracy. This is how it could work:

1. Universal Credit, New Job Seekers Allowance, New Employment and Support Allowance would all be replaced with a Basic Income of £125 per week per adult.
2. Child Benefit would be replaced with a flat rate Child Basic Income of £125 per week per child. This would be capped at three children.
3. The National Insurance Threshold (currently £12,570) should be increased to £20,000, along with the income tax personal allowance. Each working age adult would then have a straight choice:
   1. Claim the personal allowances (and decline entitlement to the basic income),
      or
   2. Claim the Basic Income of £125 per week (and NOT be entitled to the personal allowance). *

The flat rate basic income would be available to anyone currently earning less than £50,250, whether UK citizens, legally resident non-citizens or those who aren’t entitled to claim from another country.

In addition to simplifying the system and removing multiple layers of different welfare payments (something that Universal Credit was initially designed to do but has failed to deliver on), basic income is designed to remove unnecessary bureaucracy, while empowering people to make their own decisions for themselves, without being constrained by the state in the form of the welfare system, as is currently the case.

The crucial concept in implementing a flat rate Basic Income at the rate set above, as well as increasing the personal tax threshold to £20,000 is that welfare must never pay more than work and therefore welfare dependency should cease to exist.

Finally, the flat rate basic income would get rid of Universal Credit and other subsequent benefits, previously adumbrated, apart from Housing Benefit and PIP (which would be renamed Disability Benefit):

Housing benefit

Housing benefit would continue to be devolved down to Local Government level and would only be given to those out of work and actively seeking employment. Weekly checks would be made to ensure that claimants were actually fulfilling their duties by looking for a job. It would be set at a flat rate of £125 per week.

Disability benefit

Personal Independence Payment will replace the Disability Living Allowance and the Daily Living Part will replace Mobility and would be also set at £125 per week. This would also be subject to rigorous testing to prevent fraud. One such test, would be to ensure that every claimant has to have an in-person consultation with at least two different doctors to validate their claim of sickness.

Lastly, should anyone claim all three forms of the above welfare proposals, they would be entitled to a maximum of £18,000 annually, £2000 less than the personal tax threshold of £20,000. This ensures that work always pays over and above welfare dependency and would discourage people from treating the welfare system as an end in itself, rather than a means to an end to get back into employment – something all liberals should be encouraging!

* I am also advocating the merger of Income Tax with National Insurance which would remedy the problem of the 60% marginal withdrawal rate.

Kayed Al-Haddad is spokesperson for The Liberal Party for Economics, Fiscal Policy and Monetary Policy.