Working around universal credit

25 October 2018

This article was featured in the November 2018 issue of the magazine.

Steven Tucker, managing director of The Payroll Site Ltd, exposes the impact of employers’ pay practices and suggests a workaround

As universal credit is being rolled out across the UK, problems are emerging with the way it adjusts to account for a claimant’s wages. Although employers are not responsible for these problems, they may be in a position to help, by choosing a ‘UC-friendly’ payroll that is kinder to employees who receive this social security benefit.

Universal credit replaces six benefits, including working tax credit and child tax credit. Its roll out is due to cover the whole of the UK by December 2018.

A key feature of universal credit is that, each month, it adjusts payments for the claimants who have jobs. This is possible because employers report real time information about wages, in the form of a full payment submission (FPS).

 

Assessment periods

The process of calculating universal credit is described in the Universal Credit Regulations 2013 (https://bit.ly/2y6tIKW). When someone makes a claim, that day is the start of the first assessment period, beginning a regular, monthly assessment cycle. As there are up to 31 days in a month, it means that there are 31 possible assessment cycles.

The earnings information comes via HMRC, as explained in regulation 61(2)(a): “the amount of the person’s employed earnings from that employment for each assessment period is to be based on the information which is reported to HMRC under the PAYE Regulations and is received by the Secretary of State from HMRC in that assessment period.”

The condition that the information must be received ‘in that assessment period’ implies that assessments can only be reliable if FPS returns are made on or before the pay date.

The other parts of regulation 61 give the secretary of state for work and pensions the power to deviate from the above rule in certain cases.

 

Early warning system

The Child Poverty Action Group (CPAG) set up an early warning system with the support of Oak Foundation and the Barrow Cadbury Trust. This initiative gathered information and case studies from universal credit claimants, which were published in a report. 

Most of the problems uncovered were a direct result of universal credit assessment periods being out of step with the way people’s wages were actually paid. Some problems were caused by apparent fluctuations when weekly, fortnightly or four-weekly payments were shoehorned into monthly assessment periods. Other complications occurred when a monthly pay date changed to avoid weekends and bank holidays.

The CPAG report gives a detailed insight into the consequences of the mismatch between real-world pay practices and the monthly assessment cycles. Affected employees and their families can be subjected to a benefit cap, lose their work allowance, receive erratic universal credit payments and be deprived of their free health entitlements.

It is important to note that these problems don’t affect every employee who claims universal credit and can seem quite arbitrary. Two people in identical jobs may have very different experiences, depending on which day they completed the online form to claim universal credit.

You can read the report, Rough Justice – Problems with monthly assessment of pay and circumstances in universal credit, and what can be done, at https://bit.ly/2y9WcDg.

 

What can be done?

The CPAG report makes a number of recommendations to the government on how to improve universal credit and alleviate the issues identified. In the meantime, employers may wish to consider whether their payrolls might trigger any problems, and whether to apply a workaround.

Changing the pay dates for an existing workforce, just to help a few employees, is unlikely to be practical; however, there is also the option to create a new, UC-friendly payroll next to the old one, and just move across those employees who request it.

 

The business case

Although employers are not responsible for the way universal credit was designed and have no obligation to solve this problem, some do care about the welfare of their employees and want to help them avoid unnecessary hardship and distress. 

The case studies in the CPAG report include instances of severe financial insecurity, rent arrears, depression and being unable to afford to travel to work. 

If a business case needs to be made, it is that when these problems occur it can be stressful and distracting in the workplace, and this can lead to reduced productivity or absence from work.

 

The choice of pay date

If you make payments weekly, fortnightly or four-weekly, all employees claiming universal credit are likely to see some adverse effects, as detailed in the CPAG report. These effects are not as severe as the worst of the problems experienced with monthly payrolls.

If you want to design a payroll that avoids all of these problems, by meshing perfectly with universal credit, then a monthly payroll is the most practical way. The regular pay date should either be the last day of each month or a fixed date from the 1st to the 26th. These pay patterns guarantee one pay date per assessment period for all 31 possible assessment cycles in all twelve months of the year.

The reason why the 27th and 28th cause problems is found in regulation 21(2)(b). Once a year, this rule changes the assessment cycles which normally start on the 29th and 30th, so they start on the penultimate day of February.

 

Non-banking days

To make a payroll UC-friendly, the regular date must be reported in the FPS each month. However, if that date falls on a non-banking day, you can actually make the payment on a different day.

The HMRC web page ‘CWG2: further guide to PAYE and National Insurance contributions’ (https://bit.ly/2sQ4D7C) explains the options in section 1.8: 

“When a regular payday falls on a non-banking day (Saturday, Sunday or bank holiday) and because of this payment is made on the:

• last working day before the regular payday

• next working day after the regular payday

for PAYE purposes the payment may be treated as having been made on the regular payday. This is also the date that should be reported [in] the FPS as the ‘payment date’ even if the actual payment is made slightly earlier or later.”

The ability to vary the pay date gives us three UC-friendly options when a regular payday doesn’t fall on a banking day, as follows.

• Pay on the regular date.

• Pay on the working day before the regular payday but report the regular payday in the FPS.

• Pay on the working day after the regular payday but report the regular payday in the FPS and send it on or before the regular payday.

Some of the options won’t be possible if you can’t make a payment at the weekend or send the FPS in advance. You may also be constrained if your software can’t make a payment on one date and report a different date in the FPS. n

As we have seen, some payrolls avoid the assessment period lottery and work consistently for all claimants. Whether employers choose to implement this workaround, is now up to them.