Designing out deductions: how to address the welfare debt trap

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Benefit deductions mean that people receive lower benefit payments in order to repay debts. They arise largely from debts that claimants owe to government itself. This report details the impact that such deductions can have on people receiving Universal Credit, and outlines policies that can prevent and alleviate deductions.

Deductions have been normalised: 2.25 million households on Universal Credit – containing 2.3 million children – are now receiving less income than they are entitled to as a result of deductions. Given that Universal Credit is already failing to provide an adequate income for many claimants, the scale and spread of deductions is alarming.

And the situation is getting worse. In 2023, Citizens Advice supported 28% more people with Universal Credit deductions than in the year before the pandemic. The number of people seeking help with overpayments rose by almost 25%, and with advance loan deductions by almost 10%. The number of people we helped with the overall financial level of their deductions (including both debts to government and third parties) grew by almost 300%. 

Groups already more likely to be in financial hardship are particularly affected by advance loan and overpayment deductions. Compared to the people who seek our help with general Universal Credit issues, social tenants and people with long-term health problems are over-represented among the people we help with deductions issues.

1 in 3 of Universal Credit claimants we supported with overpayment or advance loan deductions also needed support accessing localised social welfare, and nearly 1 in 5 needed help with fuel vouchers. 6 in 10 of those we helped with advance loan repayments in the past year needed a food bank referral. Deductions feed into a ‘cycle of debt’ that many of the people we help are experiencing; more than half also needed debt advice. And almost 80% of our advisers say that overpayment and advance loan deductions negatively affect the mental health of the people they are supporting.

Part of the problem is that the Department for Work and Pensions (DWP) provides very little information to Universal Credit claimants about why their benefit payments are being reduced – especially in the case of historic overpayments. Claimants are not empowered to challenge decisions around deductions, and debt repayments are very rarely fully or partially waived, or even delayed to allow claimants to adjust their income expectations.

There are grounds for deductions in some circumstances. They can help claimants manage their debts to third parties (while noting that most ‘third party’ debts are actually owed to other parts of the public sector). Advance loans – repaid via deductions – can also help claimants to manage their own finances. And, in general, it is understandable that the DWP seeks to recover overpayments caused by claimant error. 

However, overpayment recovery practices now exceed this mandate. Deductions are being made where overpayments arise due to government error, or as anomalous features of the ‘managed migration’ from legacy benefits to Universal Credit. Even in the case of claimant error, overpayments may have occurred because the DWP failed to act upon new information provided by claimants that affected their benefit entitlement.

Furthermore, most advance loan repayments are due to new claim (or benefit transfer) loans which are only necessary because of the 5 week waiting period for first Universal Credit payments. The application of monthly payments in arrears (the main cause of the wait) is based on unrealistic assumptions about the financial circumstances of low-paid employees. The 5 week wait is therefore a significant source of hardship, and the loans provided by the DWP to bridge the income gap prolong its impact even as they soften it. Expecting people to start their Universal Credit journey in debt to the DWP, in return for mitigating the 5 week wait, is not a sustainable situation.

In order to eliminate the 5 week wait and the deductions it leads to, the report recommends that new claim or benefit transfer loans are replaced with new claim grants. Alternatively, the DWP could opt to make payments up front – albeit at the risk of further complicating the Universal Credit system – or, if advance loans are retained, the maximum repayment period should be at least doubled to 4 years. 

We also recommend writing off all overpayments due to government error, and consider writing off overpayments that occurred more than 5 years ago. The DWP should also widen access to deduction waivers where there is evidence that overpayment recovery and other deductions cause significant hardship, and allow for more detailed and straightforward communications that would empower claimants to challenge DWP decisions.

The report's co-authors are Craig Berry and Julia Ruddick-Trentmann