5 reasons a higher minimum wage could be bad news for people claiming benefits – a blog from Citizens Advice

The minimum wage rise will interact in complex ways with the benefits system

The rise in the National Living Wage (NLW) announced at the Autumn Statement in November was very welcome. From April, the lowest paid employees will earn £11.44 per hour, rather than £10.42 — an increase of 9.8%.

There was good news for young people in particular. 21 and 22 year-olds will be eligible for the NLW for the first time, so their minimum hourly pay rises by 12.4%. People aged 18–20, and people under 18 or working as apprentices, will see rises of 14.8% and 21.2% respectively.

Sadly, however, it is not all good news.

In a welfare system for working-age people based largely on income-related benefits, higher earnings can lead to the reduction of benefit income and a loss of eligibility for things like free school meals. The NLW is also used as a benchmark for exemptions to the benefit cap and conditions around searching for work — a higher value tends to restrict the numbers eligible for such exemptions.

Here, I outline 5 possibly not-so-good implications of increasing NLW…

1. Low-income working households will not see the full value of a higher NLW

Many low-income households receive part of their income from employment, and part of their income in benefits. Thankfully, the government has decided to uprate working-age benefits by 6.7% from April 2024. But NLW is going up by nearly 10%, which means that benefit payments will be reduced, as earnings rise, at a faster rate than they are increasing.

Some working households will also now be paying more tax, as a result of income tax and National Insurance thresholds being frozen while earnings rise. This actually helps to minimise benefit withdrawal (because income-related benefits are calculated using post-tax income) but ultimately holds back increases in overall income.

For a typical family of 4, where both parents work around 25 hours per week earning NLW, their 2024/25 pre-tax income from employment will be around £220 per month higher. But as a result of tax and benefit decisions (excluding housing costs), their overall income will be only around £160 per month higher. Without this gap, they would be more than £700 per year better off.

Some people will of course be moved off Universal Credit altogether as a result of these changes. Receiving only a very small amount of Universal Credit can mean households are eligible for ‘passported’ support with living costs such as the Warm Homes Discount or Cost of Living Payments (although the latter scheme is due to end before April 2024).

2. Fewer people will be exempt from the benefit cap as a result of higher NLW

Perhaps the worst outcome of the Autumn Statement was the decision to freeze the benefit cap in 2024. This means that some households will see little or no gain from the uprating of Universal Credit and/or LHA.

While there are a range of exemptions to when the benefit cap applies to households, a higher NLW raises the bar that working households need to reach to qualify for the earnings-related exemption.

Under this rule, households where adults (alone or in combination) have earnings equivalent to 16 hours per week earning NLW are exempt from the benefit cap. In April, this threshold is expected to rise from £722 to £793 per month.

Those already working the required hours, earning NLW, will see no impact. Those with higher hourly pay, but working fewer hours, may now see their benefit income capped — their earnings will not rise as a direct result of the NLW increase.

This is not an unlikely scenario. 90% of households subject to the benefit cap include children (according to the latest statistics). Parents who are skilled workers with higher hourly pay often work reduced hours in order to care for young children.

3. A higher NLW lifts people out of eligibility for free school meals

To qualify for free school meals (FSMs) in England and Wales, a household must have earnings of no more than £7,400 per year. When this cut-off was introduced in 2018, it was equivalent to working for around 18 hours per week, earning NLW.

With the threshold frozen ever since, from April 2024 it will be equivalent to working around 12 hours per week, earning NLW. As a result, far fewer low-income households will qualify for FSMs for their children.

And school meals are effectively more expensive for Universal Credit claimants than households without income-related benefit income — because Universal Credit payments are withdrawn at a rate of 55p for every additional £1 earned. Once parents reach the £7,400 cliff-edge and lose FSM eligibility, they must earn more than double the annual cost of £480.70 per child to increase their overall income by an equivalent amount.

4. A higher NLW has implications for Universal Credit conditionality

One of Universal Credit’s lesser-known features is the Administrative Earnings Threshold (AET), which determines the extent of conditionality that a claimant may be subject to.

The AET is linked in regulation to NLW. A single person must have earnings equivalent to 15 hours per week earning NLW, and a couple must have earnings equivalent to 24 hours per week earning NLW, in order to be eligible for ‘light touch’ conditions. If they earn less than this, they will be placed in an intensive work search (IWS) regime with requirements to seek a higher paid job.

The IWS regime comes with the threat of sanctions, if conditions are not met.

People already working the required hours at NLW will of course not be affected by this change. But take the example of a part-time employee, working around 12 hours per week and earning around £13.50 per hour. They are a single parent for one child and have a Universal Credit award of around £460 per month (excluding housing costs). Their Universal Credit award will rise as a result of uprating, but their pay will not rise as a direct result of the NLW increase.

Therefore, whereas their weekly earnings this year lift them out of conditionality, next year they will be subject to IWS conditions. They could try to increase their hours or pay to avoid this — but would then also lose some of their benefit income.

5. Self-employed people may lose benefit income when NLW rises

The presumption that self-employed people could deliberately restrict their own earnings in order to qualify for income-related benefits means the Universal Credit system includes expectations around what they should be earning. These expectations are linked to NLW.

A self-employed claimant’s ‘minimum income floor’ (MIF) is usually equivalent to working 35 hours per week at the minimum wage rate for their age group. For those aged 23 or above, the MIF will rise with NLW from £1580 per month to £1735 per month in April 2024.

With 21 and 22 year-olds now eligible for NLW, self-employed people in this age group will also have a floor at this level, rising from £1544 per month.

The significance of the MIF is that the government will calculate your Universal Credit entitlement based on its value even if you are actually earning a lower amount. Given that self-employed people will not automatically see their earnings rise in line with NLW, a higher NLW risks their benefit payments being reduced significantly.

The low-paid self-employed may of course already be earning considerably less than the legal minimum for employees, and ‘platform’ workers have little scope to raise prices to increase their earnings.

MIF rules apply differently to self-employed people with childcare responsibilities. But the Autumn Statement has made these rules more restrictive, compounding the impact of the higher earnings expectations. Even where designated as the main carer for children aged 3–12, the Universal Credit system will now assume a self-employed claimant has earnings equivalent to 30 hours per week earning NLW. This is a significant increase from the rules applicable in 2023/24 (16 hours for parents of 3 and 4-year-olds, and 25 hours for parents of 5 to 12-year-olds).

In the UK welfare system, nothing is ever quite what it seems! The good news of a higher NLW should be celebrated — but we also need to look closely at its knock-on effects to understand how benefit claimants will be affected in practice.

Editor’s Note

This blog, first published on December 18, is replicated here by kind permission of Craig Berry from Citizens Advice.