By Rory Ewan, Senior Policy and Data Analyst at Policy in Practice
Universal Credit (UC) is set to become the UK’s sole means-tested benefit for working-age adults. While much of the debate has focused on whether award levels are adequate, the more pressing issue is that many claimants don’t receive their full entitlement. Deductions, used to repay debts or imposed as sanctions, routinely reduce payments, undermining financial security and pushing many households into deeper hardship.
To fully understand UC’s role in poverty and economic insecurity, policymakers must look beyond headline award rates and focus on the actual amounts households receive.
Our findings show that millions of claimants don’t receive their full Universal Credit award: more than half (54%) of all low-income households on Universal Credit face deductions, which strip £40 to £50 a month from many claimants.
The impact of deductions is not uniform with some particularly vulnerable groups being disproportionally affected. Our analysis shows that over six in ten single parents, carers and those with disabled children face deductions.
We have found that debt-related deductions significantly worsen poverty among low-income families. The recent introduction of the Fair Repayment Rate, which caps debt deductions from the UC standard allowance at 15% (down from 25%), is a welcome step. This change provides a substantial income boost, five times more in real terms than the annual uplift to the standard allowance. However, it only covers certain deductions and doesn’t shield families from other reductions in their benefit, such as through the benefit cap, two-child limit or bedroom tax.
These deductions have real consequences. Before any are applied, 1 in 10 low-income households struggle to meet basic living costs. After deductions, this rises sharply. Single-parent families are especially vulnerable: almost 1 in 4 cannot afford essentials once deductions are applied.
Housing costs are also severely affected. Even before deductions, 84% of private renters and 43% of social tenants on UC cannot afford their housing. After deductions, this rises further, by up to 3% for some groups.
The most damaging deductions are benefit sanctions, which can remove up to 100% of a claimant’s standard allowance, leaving them with no income for living costs at all. Sanctions significantly increase housing unaffordability, with rates jumping from 75% to 85% among affected households. This can trigger a dangerous cycle: housing instability makes it harder for claimants to meet their commitments, increasing the risk of further sanctions.
Universal Credit is meant to provide a financial lifeline, but for millions, it’s become a debt trap.
To address this, we recommend that the Department for Work and Pensions (DWP) implement mandatory affordability assessments before any deductions are applied, ensuring that claimants (particularly vulnerable groups such as families with disabled children) are not pushed into further hardship. The recently introduced 15% Fair Repayment Rate should be extended to cover all deductions, not just those for debt repayment, including those arising from the benefit cap, bedroom tax, and Local Housing Allowance shortfalls. Capping the total amount deducted from a household’s benefits would help ensure that families retain enough income to meet their essential needs.
Sanctions, which are among the most financially damaging deductions, should be reformed to become a measure of last resort, especially given that, of those sanctions that are challenged, 81% are overturned on appeal. They must be proportionate and preceded by a financial impact assessment to avoid pushing households into destitution. Crucially, automatic deductions should be replaced with a system that offers proactive support, such as referrals to the Money and Pensions Service and flexible repayment options, giving claimants more control over their financial recovery.
Debt deductions and sanctions significantly reduce household incomes, making it harder for families to cover essential costs and worsening both poverty and housing unaffordability. While the government’s introduction of a 15% Fair Repayment Rate is a welcome and positive step, it is not enough on its own. Without further action, many low-income households will continue to face a downward spiral where reduced income, persistent deductions and mounting debt reinforce and deepen financial hardship.
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This article is featured in our 2 July newsletter.
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