The government has been urged to rethink its tax and benefit rules for low-paid workers after it emerged that some staff at the bakery chain Greggs could get to keep just a quarter of their £300 annual bonus as a result of universal credit deductions.
Greggs announced last week that its 25,000 workers would receive a windfall of up to £300 under a £7m reward scheme linked in part to the success of the company’s vegan sausage rolls.
However, benefits experts have pointed out that some staff who are on universal credit will keep as little as £75 after tax and national insurance (NI) are paid and bonus earnings clawed back by the government at a rate of 63p in the pound.
Benefits consultant Gareth Morgan said the clawing back of the bonuses through universal credit meant that the government might ultimately be one of the biggest beneficiaries of the Greggs reward scheme.
Morgan calculated that under current tax and benefit rules, a worker earning less than the tax and NI thresholds of £8,632 a year would typically be left with £111 of the £300 bonus. One earning more than that but less than the upper threshold of £12,500 a year would get just £97.68 while a worker on more than £12,500 a year would end up with £75.48.
Universal credit originally aimed to incentivise claimants to earn more by introducing a work allowance allowing them to keep hold of more of their benefits as their income rose. However, this was cut in 2015, and only partly restored. Claimants’ earnings over and above this allowance are in effect reclaimed at a 63% taper rate.
What is universal credit?
Universal credit (UC) is the supposed flagship reform of the benefits system, rolling together six benefits (including unemployment and benefits, and tax credits) into one, online-only system. The theoretical aim, for which there was general support across the political spectrum, was to simplify the system and increase the incentives for people to move off benefits into work.
How long has it been around?
The project was legislated for in 2011 under the auspices of its most vocal champion, Iain Duncan Smith. The plan was to roll it out by 2017. However, a series of management failures, expensive IT blunders and design faults means it is six years behind schedule and rollout will not be complete until 2023.
What is the biggest problem?
The original design set out a minimum 42-day wait for a first payment to claimants when they moved to UC (in practice this is often up to 60 days). After sustained pressure, the government announced in the autumn 2017 budget that the wait would be reduced to 35 days from February 2018. This will partially mitigate the impact on many claimants of having no income for six weeks. The wait has led to rent arrears and evictions, hunger (food banks in UC areas report notable increases in referrals), use of expensive credit and mental distress.
Ministers have expanded the availability of hardship loans (now repayable over a year) to help new claimants while they wait for payment. Housing benefit will now continue for an extra two weeks after the start of a UC claim. However, critics say the five-week wait is still too long and want it reduced to two or three weeks.
Are there other problems?
Plenty. Multibillion-pound cuts to work allowances imposed by the former chancellor George Osborne mean UC is far less generous than originally envisaged. According to the Resolution Foundation thinktank, about 2.5m low-income working households will be more than £1,000 a year worse off when they move to UC, reducing work incentives.
Landlords are worried that the level of rent arrears accrued by tenants on UC could lead to a rise in evictions. It's also not very user-friendly: claimants complain the system is complex, unreliable and difficult to manage, particularly if you have no internet access.
And there is concern that UC cannot deliver key promises: a critical study found it does not deliver savings, cannot prove it gets more people into work, and has plunged vulnerable claimants into hardship.
Ronnie Draper, the general secretary of the Bakers, Food and Allied Workers union, which represents thousands of Greggs staff, said it had so far only been contacted by one worried worker about losing out on the bonus but would discuss alternative ways the company could make the payment if it emerged individuals were losing out.
It is not known how many of Greggs workers are on universal credit, which replaces a number of working-age benefits and tax credits. All households claiming legacy benefits and tax credits will be expected to have moved across to the new system by 2023.
Draper praised the company for paying an annual staff bonus equivalent to 10% of profits every year as well as the one-off £7m bonus paid this year. “As far as wages go, Greggs pays higher than most on the high street,” he said. “Greggs is a decent company. It recognises trade unions properly when lots of retailers on the high street don’t.”
Torsten Bell, the chief executive of the Resolution Foundation thinktank, said: “While workers on universal credit could lose up to £225 of their £300 cash bonus, that is an argument for the government to lower the taper rate in universal credit, rather than for employers to stop paying their staff more.”
He said Greggs should not be blamed for choosing to reward staff in this way: “Greggs should be congratulated for offering organisation-wide flat-rate bonuses that disproportionately benefit lower-paid staff. More firms should follow suit.”
Helen Barnard, the deputy director of policy and partnerships at the anti-poverty charity the Joseph Rowntree Foundation (JRF), said it was “morally right” for employers such as Greggs to boost the living standards of their employees and the bonus was welcome, although many of those on universal credit might gain very little from it.
The rise of in-work poverty has become a salient feature of the UK economy in recent years. JRF estimates that stagnant wages and welfare cuts mean about 4 million people are living below the breadline despite being in a job, meaning about one in eight people in the economy were now classified as working poor.
The TUC general secretary, Frances O’Grady, said: “This is another example of how universal credit is failing working people. The government needs to come up with fresh plans to give low-paid workers better support, and fairer incentives and rewards.”
The Department for Work and Pensions said it did not comment on the issue but added there were no plans to change tax and benefit rules.