Under the current Department for Work and Pensions (DWP) rules, individuals receiving Universal Credit are being severely penalized for having savings above certain thresholds, causing further financial strain for many already struggling families.
These penalties are leaving families with difficult choices as they try to balance saving money and receiving the support they desperately need.
Universal Credit Savings Penalties Explained
A recent report titled “Saving Penalties” sheds light on the harsh reality faced by claimants. Universal Credit payments are significantly reduced for those with savings exceeding £6,000.
Once savings exceed £16,000, claimants lose all eligibility for support. This penalization system is proving detrimental, especially to families who are trying to save.
| Savings Amount | Impact on Universal Credit |
|---|---|
| Up to £6,000 | No penalty; full eligibility |
| £6,000 – £16,000 | Partial reduction in benefits |
| Over £16,000 | Full loss of entitlement |
Denial of Support for Over a Million Families
From 2020 to 2022, around two million families who should have qualified for Universal Credit saw their claims either slashed or completely eliminated because of these capital thresholds.
Among these, 830,000 families faced partial benefit reductions, while a staggering 1.2 million families were denied any support at all due to their savings.
The Strain on Families
This policy is especially harmful to low-income households, as it forces them to make tough financial decisions.
Molly Broome, a senior economist at the Resolution Foundation, explains that the capital rules in Universal Credit undermine broader efforts by the government to encourage savings among low-income families.
Government Schemes Ignored
Broome points out that helpful savings schemes like Help to Save and Lifetime ISAs, which aim to assist families in building financial security, are not exempt from these capital rules.
This means that people trying to save for the future are penalized for doing so, which contradicts the government’s goal of fostering financial stability.
Inflation Worsens the Situation
The issue is exacerbated because the DWP has failed to adjust the savings thresholds in Universal Credit for inflation. Over the years, the percentage of UK families with savings over £6,000 has increased significantly.
In the period from 2006 to 2008, only 35% of families had savings over that amount, but by 2020-22, this figure had risen to nearly 45%. Had the thresholds been adjusted for inflation, families with savings of around £10,000 to £27,000 would still be eligible for support.
The Problem with “Cliff Edges”
The current system also creates significant “cliff edges”, where even a tiny increase in savings leads to a dramatic loss of support.
For example, if a family is entitled to £750 a month based on income alone, having exactly £16,000 in savings would reduce their monthly payment to £576.
However, if their savings increase by just one penny over that threshold, they would lose all of their entitlement.
DWP’s Failure to Adapt
This severe penalty system runs counter to the original aim of Universal Credit, which was designed to provide a compassionate safety net for families in need.
The Saving Penalties report reveals that the DWP has not kept the rules up to date, leaving vulnerable families facing the impossible decision of whether to save for their future or continue receiving the support they need to survive day to day.
Urgent Need for Reform
At a time when millions of families rely on Universal Credit for their basic needs, the government’s refusal to adjust outdated savings thresholds and include important exemptions only exacerbates the financial hardship of low-income households.
There is an urgent need for the DWP to reconsider the current capital rules to ensure that those trying to save aren’t punished for doing so.
The Department for Work and Pensions (DWP) needs to urgently reform the Universal Credit system to ensure that families who are trying to save aren’t unfairly penalized.
The outdated savings rules have created significant financial strain on families, and adjustments are needed to keep the system fair and effective. Universal Credit must be reformed to help, rather than hinder, families working toward financial stability.
FAQs
What is the savings threshold for Universal Credit?
The savings threshold for Universal Credit is £6,000. If savings exceed £16,000, the claimant will lose all entitlement to the benefit.
How do savings impact Universal Credit?
Savings between £6,000 and £16,000 result in partial reductions in benefits. If savings exceed £16,000, there is a complete loss of entitlement.
Why are Help to Save and Lifetime ISAs excluded from exemptions?
Currently, savings in schemes like Help to Save and Lifetime ISAs are not exempt from Universal Credit‘s savings rules, meaning families saving through these programs are penalized.