Palace of Westminster

Parliament is discussing plans to put in place a 1% cap on benefit and tax credit increases for the next three years.

This would mean that key benefits such as child tax credits and child benefit increase by less than the expected rate of inflation. This will make it even harder for many families already struggling to make ends meet already to keep up with the rising costs of living.

Even though the government has had to admit that this move will push 200,000 children into poverty, it claims it will be fair to working families, whose wages either increase slowly or not at all. But our analysis clearly shows that this law would hurt many families who are in work and depend on in-work benefits such as child and working tax credits and housing benefit.

Rather than promoting fairness, for these families the combination of wage freezes and lower-than-inflation benefit up-rating will be a double blow. (Use our calculator to see the effect of the changes on families.)

Affecting hundreds of thousands of families

The government's assessment of the bill shows that 85% of households with children will be affected by the cap. This means it will affect families from all walks of life – both in and out of work. We estimate that those who will be affected include around 300,000 nurses and midwives, 150,000 primary school teachers and 40,000 armed services personnel.

And for many families the losses will be large. You can use our benefit up-rating calculator below to see the impact of changes to benefit up-rating on different types of families between now and 2015. 

We found that:

  • A lone parent working as a nurse with two children, earning £530 a week would lose £424 a year by 2015.
  • A couple with three children, one earner, a corporal in the Army, earning £619 per week would lose £552 a year by 2015.
  • A lone parent working as a hairdresser with one child, earning £195 per week would lose £296 a year by 2015.
  • A couple, one a childminder earning £240 per week, and the other a postal worker earning £395 per week, with two children would lose £351 a year by 2015.
  • A couple with two children with one earner working as a primary school teacher earning £600 per week – would lose £424 a year by 2015.

These cases assume that the households are not receiving housing benefit, either because they own their own home or because their income is too high. The impact on families is likely to be even greater if they are renting their home and receiving housing benefit. This is because in most areas, maximum support with rent will also only be up-rated by 1% in 2014 and 2015.

Low-income families face even more risk

The impact of this bill is based on predictions of inflation over the next three years. The government expects prices to rise between 2-3% every year. If prices rise faster than this families could lose a lot more than has been estimated here.  

This is particularly worrying given that the incoming governor of the Bank of England has suggested that central banks consider scrapping inflation targets. The benefit up-rating cap transfers much of the risk of high inflation from the exchequer to low-income families.

Calculate the impact

Use our calculator to project the impact of the benefit up-rating bill on different types of family both in and out of work, and with different levels of income. The impact will be even greater if the household receives housing benefit or if prices rise faster than expected. 

Notes and assumptions

For working households it is assumed that (where applicable) sufficient hours are worked to gain entitlement to working tax credit.

Where households earn in excess of £50,000 per year, it is assumed that the high income child benefit charge applies.

It is assumed that households do not have significant other income or savings.

Assumptions for consumer price index (CPI) rates are based on:

  • 2013 up-rating - actual CPI September 2012 (2.2%)
  • 2014 and 2015 up-rating based on ONS/OBR forecasts (Dec 2012) for year to the third quarter of 2013 (2.6%) and the third quarter of 2014 (2.2%)

Entitlements measured include job seekers' allowance/income support, child benefit, child tax credit, working tax credit. It is assumed that households do not receive other additions (eg on account of a disability).

* Gross weekly income is an individual's total personal income before taking taxes or deductions into account

More on the welfare benefit up-rating bill

To find out who will be affected and the cost for families please see our briefing.

Please read our analysis of the government’s impact assessment.

By Sam Royston - Policy Adviser
Sam Royston
- Policy team

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