End to universal credit’s Covid top-up is fuelling rise in poverty, warns IFS

The scrapping of the government’s £20-a-week pandemic boost to universal credit has set back the fight against poverty and led to an increase in the number of families struggling on low incomes, a leading thinktank will reveal this week.

Research by the Institute for Fiscal Studies seen by the Guardian shows that the emergency programme of universal credit (UC) support led to a sharp fall in the number of households living in absolute poverty during the 18 months it was in force.

But the thinktank has found the replacement for the benefit top-up – changes to work allowances and taper rates that allow workers to keep more of their benefits as earnings rise – have been far less effective.

After a fall of almost half-a-million people living in absolute poverty in 2020-21 – the first year of the pandemic – the IFS estimates the total will rise by more than 100,000 in 2022-23 as a result of the changes to the two policies.

Rishi Sunak, the chancellor in 2020 and 2021, came under pressure from anti-poverty campaigners and MPs to make the emergency boost to UC permanent but thought the £6bn-a-year bill was too high. The permanent changes to work allowances and taper rates cost £3bn a year.

The IFS report will say that the greater impact on poverty of the increase in UC was only partly due to it being a more expensive programme. On a per-pound basis, the £20 uplift had a 40% larger effect on poverty than the changes to work allowances and taper rates.

It notes the taper rate reduction only benefits working households on UC, with bigger effects for those with higher levels of earnings. These households tend to be further up the income distribution and often already above the poverty line.

In contrast, the £20 uplift applies equally to all UC recipients (except those who were subject to the benefit cap) – therefore boosting incomes for those who were near the poverty line.

Xiaowei Xu, an IFS researcher, said: “Poverty rates fell over the pandemic despite the wider economic turmoil. This is in large part due to the £20 uplift to universal credit, which shows the power of the government to reduce poverty.

“However, the changes to universal credit that replaced the uplift, which are aimed at working households slightly further up the income distribution, have a much smaller effect on poverty. Poverty rates are likely to be higher than in 2021, now that the £20 uplift has been withdrawn.”

During the first year of the pandemic (2020–21), absolute poverty among the whole population fell by about a percentage point from 17.9% to 16.8%. In 2021–22, it rose slightly, but at 17.1% it was still 0.7 points (479,000 people) below the pre-pandemic level.

The IFS said it expects the absolute poverty rate to be 0.16 points (106,000 people) higher in 2022–23 than in 2021–22 as a result of the changes in the two policies. A household with less than 60% of the UK’s 2010–11 median income, adjusted for inflation, is defined as being in absolute poverty.

A Department for Work and Pensions spokesperson said: “The temporary £20 uplift to universal credit was brought in to support claimants during the pandemic. As the country has reopened, we have rightly moved towards more targeted support to those most in need – providing record financial support worth an average £3,300 a household – and employment support to help people back into work.

“We have also raised benefits including universal credit by over 10%, increased the national living wage and are helping households with food, energy and other essential costs.”