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More responsible debt collection from government will ensure low-income households benefit from support

5 min read

The most vulnerable households are still being forced to repay debts at an eye-watering rate.

With inflation running at 9.1 per cent, the government has rightly identified that the poorest families need more help than those better off to manage the cost of living crisis. The £650 Cost of Living Payment for households on means-tested benefits is hugely welcome and timely.  

Last month I called on the government to demonstrate they had not forgotten about low-income families, and I am reassured that they now understand the scale of challenge families are facing.  But the job isn’t done - there is something else the Chancellor urgently needs to fix which is quietly causing great hardship in such difficult times.    

Almost half of those on Universal Credit have money taken from their social security support by the government each month to pay back debts to central government and other creditors such as councils or utility companies. For some this can be as much as a quarter of their income.  

Being forced to repay these debts at eye-watering rates, when support is needed most, is leaving many households without enough to cover the essentials - often, ironically, forcing them into more expensive debt and into the hands of payday lenders.

A survey published today from the Joseph Rowntree Foundation found that soaring prices and bills are already having a severe impact on low-income households, and families have fallen behind on payments, such as rent and energy bills, by an average of £1,600. About 7 million households – equivalent to every family in the north of England - have missed out on essentials like heating, toiletries or showers this year, or didn’t have enough money for food last month.

In addition, 1.3 million low-income households (11 per cent) have used credit to cover essentials this year. Large numbers are in debt to high interest lenders like doorstep loans and loan sharks or buy now pay later lenders. These can send families into a spiral of debt, and it is not right that the government is adding to this.    

Data I sourced from Department for Work and Pensions revealed that disproportionately it is children and people who are ill or disabled who are most likely to have their support deducted. Further, while on average, households repay around 15 per cent of their basic Universal Credit ‘standard allowance’ (which would mean a deduction of £50 per month for a single person aged 25 or older) almost half of households with deductions (47 per cent) lose over a fifth of their basic allowance.

This would mean, for example, a deduction of £24 per week for a couple. This is vital support that these households cannot afford to lose. Lloyds Bank Foundation has described such deductions as “confusing, unmanageable, and forcing people into hardship, often through no fault of their own”, driving poverty which our social security system should be there to prevent.

For over a million households these deductions are to repay debts to DWP for ‘advances’, often taken out from DWP by households to cover the time it takes to wait for the first payment (a minimum of five weeks). Some families have debt for Tax Credit overpayments, often from many years ago. 

Organisations such as the Centre for Social Justice, have suggested that Tax Credit overpayment debt that is from over three years ago should be remitted. It seems more than just that families, in their time of need, should not be made to pay for poor administration by HMRC many years later, especially as they are often unaware of these debts before they start a claim. 

However, the main problem here is the totally unnecessarily heavy-handed approach to debt collection by government. We are trapping people into poverty when we want to help them get back on their feet.

DWP has made a step in the right direction, cutting maximum repayments that can be taken from benefits payments down from a huge 40 per cent of the UC standard allowance, to 25 per cent. This is progress but the reality is that government is still automatically deducting support at completely unaffordable rates, when it holds private companies to much higher standards, requiring consideration of affordability for loans and repayments.

The solution is simple. Firstly, the government should never take more than 5 per cent of anyone’s standard allowance each month to pay back debt owed to the DWP or HMRC. It can afford to wait a little longer to allow households to repay in an affordable way - paying back the government shouldn’t cause people to get into more personal debt. Then, the maximum deduction limit across the total of all debts owed should come down from 25 per cent to 15 per cent of the standard allowance. This way the money gets paid back, but without households losing a huge proportion of the support they need.  

This period of hardship is rightly shining a spotlight on a problem that has been going on for too long and the government has an opportunity to put it right. This is an affordable and simple change that would have a huge impact on those at the sharpest end of this crisis.

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