The Benefit Cap and Universal Credit — What you need to know — Updated for 2024

NOTE: This article updates and replaces a previous article written by Ashleigh Cheung

Background

What is the benefit cap?

The benefit cap (the BC) was introduced in 2013, by section 96 of the Welfare Reform Act 2012. The BC can be applied to either Universal Credit (UC), or to legacy benefits through the client’s Housing Benefit (HB) award. This article focuses on the BC as it applies to UC.

The BC limits the amount of benefits each household can receive. It is calculated according to the difference between the total amount of benefits one household is entitled to in a monthly UC assessment period, and the BC figure that applies. The current BC is set out in section 8 of the Welfare Reform and Work Act 2016. From April 2024 these amounts will be £1,835.00 per assessment period for a couple or lone parent (£2110.25 for those in Greater London), and £1,229.42 for single claimants who are not responsible for a child or qualifying young person (£1,413.92 for those in Greater London).

Assessment periods are used to calculate a household’s earnings and needs for the purposes of UC. The assessment period begins on the date on which the UC claim is first made and lasts for one calendar month, with the UC award paid seven days after each assessment period.

Benefits taken into account

The benefits taken into account when calculating the BC for UC are:

• Child benefit
• Employment and support allowance (ESA)
• Jobseeker’s allowance
• Maternity allowance
• Universal credit
• Widowed mother’s allowance
• Widowed parent’s allowance
• Widow’s pension

Once the difference between the total amount of benefits received and the BC figure is calculated, the award of UC is reduced by the excess amount, excluding any childcare costs (Regulation 81, UC Regs 2013). The resulting amount is the total UC award the household may receive for the assessment period.

Example calculation:

Nicola has two children — a son aged 12 and a daughter aged 2. Her rent is £1,250.00 pcm, and the relevant local housing allowance (LHA) rate is £1,146.86pcm. She works 8 hours per week and is paid monthly, earning £397 pcm.

From April 2024 her maximum UC is:

• £393.45 standard allowance
• £333.33 child element (first child)
• £287.92 child element (second child) and
• £1,146.86 housing costs element

This equals £2,161.56 maximum UC. Much of which is due to the high level of housing costs.

Her UC award is first reduced because of her earned income. She gets a work allowance of £404. After factoring in the work allowance, there is no reduction to the maximum UC award.

As her earnings are below the earnings exemption threshold of £793 (from April 2023), the benefit cap applies. As she lives outside Greater London, the Cap figure that applies is £1,835.

The total relevant benefits are:

• £184.38 child benefit (for two children)and
• £ 2,161.56 UC

This equals £2,345.94 of relevant benefits.

This is £510.94 over the cap. As a result, the UC is reduced by this amount. Her UC award after the cap is applied is £1,650.62.

You will note from this calculation the impact that high housing costs have on the application of the BC. The high amount of these unavoidable costs is a major factor in the increasing application of the BC. In addition, between 2016 and April 2023 the benefit cap was not uprated which resulted in an increasing number of claimants becoming subject to the BC. The BC has not been uprated again from April 2024. You will also note that there is no automatic exemption from the BC for some claimants who have few or no work-related requirements under UC, for instance, lone parents with children under three.

Housing costs not covered by Universal Credit

There are circumstances where a claimant’s housing costs cannot be covered by the UC housing costs element. This includes claimants in temporary and specified accommodation, as defined in paragraph 3A and 3B of the Universal Credit Regulations 2013. In these situations, a claimant may receive both UC and HB. If this situation applies, the amount of HB taken into account for the BC is £0, under Regulation 80(2A), UC Regulations 2013.

Example

Alannah is a lone parent with two children under 5. She is not currently working and she lives in temporary accommodation. Her rent is £1500 a month and is covered by housing benefit (HB). Her child benefit and UC payments come to £1154.06 (from April 2024) which is below the amount of the BC. If her housing costs were included in her UC entitlement she would be £819.06 a month above the BC (from April 2024). However, as she is living in a type of accommodation that can be covered by HB the BC will not apply as the HB award is not included in the BC calculation.

Helping clients affected by the benefit cap

As demonstrated by the examples given, a major factor in the application of the BC is the high amount of UK housing costs. This means that many claimants who are affected by the BC are at risk of accruing rent arrears. In addition, research has shown that the BC has contributed to a growth in child poverty. Given the high risk of homelessness and financial hardship, it is important that claimants affected by BC are given thorough and tactical benefits advice when they seek help. Advisers should consider the following checklist when advising these clients:

Can the client be exempt from the benefit cap?

The first thing to consider is whether a client, or a member of their benefit family, falls within a group who can be exempt from the BC. There are a wide range of exemptions. However, as these mainly relate to disability, sickness and carers benefits these exemptions are substantially underclaimed. Therefore, it is important that advisers always check for missed benefit entitlement for claimants who are affected by the BC even if this isn’t the issue that the client presents with.

Under Regulation 83 of the UC Regs 2013, claimants are exempt from the BC if they, or a member of their ‘benefit family’ (someone included in their benefit award) are receiving any of the following benefits:

• Disability living allowance (DLA)
• Personal independence payment (PIP)
• Carer’s allowance (CA) or the carer element of UC
• The limited capability for work-related activity element in UC
• Employment and support allowance which includes the support component;
• Attendance allowance (AA)
• Armed forces independence payment (AFIP)
• A guaranteed income payment or survivor’s guaranteed income payment under the Armed Forces Compensation scheme
• Guardian’s allowance (but not special guardianship payments made by local authorities)
• An industrial injuries benefit
• A war pension

In the cases of DLA, PIP, AA, AFIP, and war pension, the client is exempt from the BC if they (or a member of their benefit family) are entitled to these benefits, but not receiving them whilst in a hospital or care home.

In many cases the reasons the client is affected by the BC will point to the potential for an exemption. For instance, with the exception of those with very young children, the reason many claimants are unable to work sufficient hours to exceed the earnings threshold relate to health problems or caring responsibilities. This includes the following situations:

• Providing care for children with disabilities or disabled relatives;
• Health problems and disabilities which limit work prospects or the number of hours that can be worked

In these situations a client loses out two fold if they do not claim relevant disability and carers benefits. They do not benefit from these increased amounts of entitlement and the application of the BC further restricts their financial resilience. Claiming disability and sickness benefits in these circumstances can improve the household’s situation substantially and can often prevent a referral to homelessness services. Note, it is often necessary to appeal initial refusals of disability and sickness benefits to gain the correct entitlement. Figures show that 50% of PIP claims are refused but 80% of these decisions, if challenged, are subsequently overturned at appeal.

Backdating exemptions

As many claims for disability and carers benefits can be subject to delayed decision making or appeals it is important to ensure that any exemption from the BC is backdated to the date that the relevant person became entitled to the relevant benefit. The DWP should do this automatically when informed of the new entitlement, but this doesn’t always happen. The provisions that allow for this are Regulation 12, 23 and Sch 1, Paragraph 31(2)(a)(ii) UC (Decisions and Appeals) Regulations 2013 which allow an award of UC to be revised or superseded when a qualifying benefit is awarded to someone in the claimant’s benefit household. See the following example:

Example

Emma is a lone parent affected by the BC. She comes to Citizens Advice to see an adviser in October 2021. She states that she is struggling to work as her son has ADHD and is often excluded from school. He also has night-time care needs. She has tried to work but keeps losing jobs due to having to take time off to look after her son. She does not receive any disability benefits for her child. An adviser puts in a DLA claim for the son in October 2021 which is initially refused but is successful at appeal in January 2023. Not only should the son’s DLA, the UC disabled child element and Emma’s new carers allowance claim be fully ‘backdated’ the BC should be removed from October 2021. Emma should let UC know that DLA has been awarded from this date. If the BC is not removed from October 2021 she should challenge this decision on the basis that Regulation 23 and Sch 1, paragraph 31(2)(a)(ii) should apply to allow for full ‘backdating’ of the exemption (see also articles — Universal Credit Supersessions and Universal Credit Revisions).

Can the client increase their earnings or alter the way in which they are paid?

For some clients, whose circumstances allow for it, increasing their earnings or altering the way in which they are paid might enable them to avoid the application of the BC. The BC does not apply if the client’s net earnings (or combined earnings in a joint claim) are more than the earnings exemption threshold. The earnings exemption threshold is equivalent to 16 hours per week at the national living wage (NLW), converted to a monthly amount. The monthly threshold is £793 from April 2024.

For some claimants who are affected by the BC who are paid four-weekly and whose earnings are close to the earnings exemption threshold they might be able to avoid the BC if they are paid monthly. See example:

Example

Jasmine is paid £780 every four weeks. In the majority of UC assessment periods she receives only one four-weekly payment of earnings. As a result, the BC is applied to her in these assessment periods and she loses about £800 a month in UC entitlement. Her employer agrees to pay her calendar monthly and she receives £845 a month. This way of paying her earnings means she no longer has the BC applied without increasing her earnings as her earnings are now above the level of the threshold in every assessment period.

Check whether you client can benefit from the ‘Grace Period’

If a claimant is subject to the BC due to a fall in earnings or a reduction in pay or working hours it is worth checking whether they might benefit from a 9-month grace period before the benefit cap applies. This grace period begins on either:

• The first day of the assessment period in which the household’s earnings are less than the earnings exemption threshold or
• The day after paid work ceased prior to any UC award

Whichever is the most recent day.

The grace period will only apply if, for the 12 months immediately before the unemployment or reduction in earnings, the claimant’s income was equal to or exceeded that stipulated in the earnings exemption threshold.

Apply for a discretionary housing payment (DHP)

As stated previously, the reason many claimants are affected by the BC is due to high housing costs. An important tactic for assisting with this can be to make a claim for a discretionary housing payment (DHP) to help make up the shortfall in the rental payments. Local authorities can make payments of DHP to claimants if they are entitled to the UC housing costs element or HB. The claimant must appear to need financial assistance in order to meet their housing costs.

Payments are discretionary and each local authority has their own DHP policy. This means that applications for DHP should be as persuasive and detailed as possible. It can be important to highlight any of the following that apply to a client and their family:

• Evidence of financial hardship including the risk of homelessness if this applies
• Risks to the health and security of other family members if rental payments are not made — in particular children
• Whether the circumstances are likely to be temporary i.e the client just needs short-term support until they find a suitable job or pending a disability appeal — local authorities are often more likely to make short-term payments
• It might also be helpful to point out that in many cases the local authority might have a duty to rehouse a family/a vulnerable client if they are made homeless
• If you are providing benefits advice and think there is a possibility of an exemption you should also mention this. As local authorities may be more likely to make a payment to support a client whilst they are in the process of obtaining an exemption. In these cases the local authority might ask for repayment of DHP out of any benefit arrears but the claimant is under no legal obligation to repay this

Legal challenges to the benefit cap

To date, there have been two decisions made by the UK Supreme Court on the overall legality of the benefit cap (R (SG) v Secretary of State for Work and Pensions [2015] UKSC 16 and R (DS and Others) v Secretary of State for Work and Pensions [2019] UKSC 21). These cases concerned the BC as it applies to legacy benefits. In both cases, the BC compatibility with Article 14 of the European Convention on Human Rights (ECHR) (non-discrimination provision) in conjunction with both Protocol 1 Article 1 (right to peaceful enjoyment of property) and Article 8 (right to respect for private and family life) were raised. Neither of these challenges were successful although they have proved to be important cases in relation to the development of human rights case law and, in particular, the rights of the children. Lady Hale delivered a strong dissenting judgement in both cases outlining this.

In R (DS and Others) v Secretary of State for Work and Pensions [2019] UKSC 21) dissenting opinions were issued by both Lady Hale and Lord Kerr suggesting that a further legal challenge to the European Court of Human Rights might be possible. However, to date, this has not happened.

In R (Pantellerisco and others) v SSWP [2020] EWHC 1944 (Admin) a challenge was lodged as to the application of the BC within an award of UC for workers who are paid four-weekly who would not be subject to the BC if they were paid calendar monthly. This ‘irrationality’ was found to be unlawful by the High Court but the judgement was subsequently overturned by the Court of Appeal. Permission to the Supreme Court has been refused meaning the judgement by the Court of Appeal is now final. The only option currently for affected claimants is to seek to have their wages paid calendar monthly if possible to avoid the BC.

Future Changes

Migration from legacy benefits to UC

When a client is moving from legacy benefits to UC, they might have the BC applied to them for the first time, or be capped by a higher amount on UC than they were on legacy benefits. This is because on legacy benefits, the BC is only applied to Housing Benefit, so cannot reduce their overall benefit entitlement by more than the total amount of HB they are entitled to. In contrast, on UC the BC could reduce their benefit entitlement by more than the amount of the housing costs element in their UC award.

If the client is moving to UC under managed migration, they may be entitled to a transitional element to top up their UC award to the level of their legacy benefits. The calculation of the transitional element will apply the BC to the client’s legacy benefits in the same way that it’s applied to their indicative UC (Regulation 53(11) of the UC (Transitional Provisions) Regulations 2014). This means that transitional protection wouldn’t stop the client from being subject to the BC for the first time on UC, or stop them from being capped at a higher level on UC than they were on legacy benefits. Clients in this position would be worse off after their move to UC despite the existence of transitional protection.

Conclusion

The BC can have a significant impact on a household’s financial resilience. The effect of reducing the amount available to pay for housing costs can also lead to a high risk of housing insecurity and homelessness. The increase in UK housing costs and wage deflation has brought many more claimants within the auspice of the BC. Despite this, there are often tactics that can be deployed by advisers to successfully help affected claimants to avoid the BC.

Rachel Ingleby is a Benefits Expert in the Expert Advice Team at Citizens Advice.

The information in this article is correct as of the date of publication.

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