Deepening destitution: the effect of benefit debt deductions in the cost of living crisis
Imagine this: you’ve been recently discharged from serving your country in the army and are dealing with post-traumatic stress disorder (PTSD). You’re not well enough to work and you have few possessions to your name. Having lost the structure and support system of your work, the sudden loss of your father and the breakdown of your marriage hits you hard. Your mental health plummets.
You’re facing extreme financial pressure. You’ve applied for Universal Credit, but you’re waiting for your application to be processed. In the meantime, you’ve been given a small loan from the Government in the form of an advanced payment. Eventually you’re awarded a monthly amount to support your basic living costs. However, with the care of your two young children to consider, it’s simply not enough to pay your bills. What’s more, the Government then deducts a monthly amount from your income. This, along with the rising cost of bills, tips your budget deep into the red.
For CAP client Stephen, this situation is his current reality.* Stephen was awarded £689 per month to live on. That’s £160 a week, from which he has to balance the cost of utilities, transport, food, internet and mobile packages, Council Tax, clothing and toiletries. Even for him this is a complete stretch, but he also has the part-time care of his two young children to consider.
On top of this, Stephen is still tormented by thousands of pounds worth of debt. Back when his income first failed to cover his living costs, he took out loans to cover mounting debts. Letters and calls from debt collectors meant that he feared enforcement agents would turn up at his door. As the strain mounted, he experienced a nervous breakdown.
During this period of severe financial and mental health difficulty, Stephen’s income has been automatically cut by £81.21 a month in order to recover Government debt. No affordability assessment was taken to establish whether he can afford to repay at this rate. What’s more, £29 a month of this deduction is to repay the Government for the loan he received due to their delay in processing his Universal Credit application.
Stephen’s income was already inadequate to cover costs, and now the deductions and rising cost of bills mean that he’s unable to afford a food shop. The stress of worrying how to feed and clothe his children keeps him up at night.
Benefit deductions deepen destitution for thousands
Stephen is one of the many CAP clients and individuals across the UK who are being pushed further into destitution by benefit debt deductions — payments that the Department for Work and Pensions (DWP) automatically take from benefit payments to repay Government and some third sector debt. Deductions are largely the result of Government policy rather than individual actions, with the most common deductions being advanced Universal Credit payments (loans) and historic tax credit overpayments.
Unlike most private sector debt, Government debt is deducted from benefits without consistent affordability assessments to ensure that individuals can still afford household essentials alongside debt repayments. Furthermore, the Government can deduct up to 25% of a person’s standard allowance in order to repay Government debt and rent arrears. This is significantly higher than the deduction rate of 5% for third party debts such as energy and water arrears. These two factors mean that benefit debt deductions can become counterproductive; many individuals are actually pushed further into debt, and less likely to repay debt to their creditors. In other words, there is significant space to reform Government debt collection in line with industry standards in order to more sustainably and effectively collect debt.
As well as pushing people further into debt, Government benefit deductions are leaving people without enough money to meet their essential living costs. The Joseph Rowntree Foundation (JRF) reports that a shocking 93% of households on means tested benefits that are subject to deductions, have gone without at least one essential in 2022, or without enough food in the last 30 days. In the context of benefit payments standing at a historic low and the cost of living crisis causing household bills to rise, benefit debt deductions are contributing to destitution amongst many low income households.
Policy reforms: preventing deepening destitution
In light of this, CAP is standing with a number of other organisations to call for imminent reform to Government debt deduction policy in order to reduce levels of destitution. These simple reforms could provide an effective way for the Government to provide targeted support to low income households, without committing to further spending. Below, CAP points to some possible reforms:
- Make payment holidays of six months available to all benefit claimants until at least April 2023. This would apply to Council Tax arrears, Universal Credit advances, benefit and Tax Credit overpayments, and court fines deducted from benefits.
- Require affordability assessments for individuals to better determine their ability to repay debt deductions (as is standard for other regulated sectors such as financial services and utilities).
- Greater provision of more upfront information about the exemptions, adjustments, appeals and safeguards that benefit claimants can request.
- Urgent review of the maximum rates at which debts can be deducted and exempting income from a claimant’s Standard Allowance for housing costs due to the benefit cap or Local Housing Allowance.
Take action! You can join us in calling on the Government to make reforms to benefit deductions by using this template to write to your MP.
*Client name has been changed to protect client confidentiality.