Real Pay Cycles Send Universal Credit Loopy

Part of the lunar cycleUniversal Credit is a monthly payment that is replacing six benefits, including Working Tax Credit and Child Tax Credit. It gives essential support for people who need it, including those in low paid jobs. However, the way it is calculated makes it highly sensitive to the exact dates when the worker is paid. As a result, employers choosing certain pay patterns can inadvertently make life very difficult for staff who receive Universal Credit.

Universal Credit is designed on the assumption that employees are paid on the same date each month. The gov.uk website explains, “If you’re paid once a month on the same date and nothing changes in your earnings, then your Universal Credit amount should stay the same.”

This is because Universal Credit payments are adjusted each month, based on how much the employee was paid. When someone first claims Universal Credit, they are allocated a date when their assessment period starts. If they have a job, their employer reports their wages via Real Time Information (RTI). The Department for Work and Pensions uses the payment dates in the RTI submissions to decide which payments fall in each assessment period. The earnings in each assessment period are then used to decide how much (if any) Universal Credit is due that month.

For example, consider an employee who has an assessment period starting on the 27th of the month. If he is paid before the 27th, it would count for the earlier assessment period; however, if he were paid on the 27th or later, it would count towards the next month’s assessment. New assessment periods start on the same date of the each month. As long as the pay consistently falls the same side of the 27th each month, there will be one payment per assessment period, and the Universal Credit payment will be based on one month’s wages. Different claimants have different assessment periods, but the same principle applies.

So that’s the theory of how Universal Credit should work but how does it work in the real world?

The Chartered Institute of Payroll Professionals (CIPP) ran an annual survey up until 2016, in which payroll professionals were asked about the payrolls they operate. It showed that a variety of pay patterns were in common use. Not all employees were paid once a month. And employees who were paid monthly, didn’t all keep the same pay date each month.

The graphs on pages 15 to 17 of the CIPP report show the different pay patterns being operated by the survey respondents. Whilst many did operate patterns that were consistent with Universal Credit assessments, there were also many who operated other pay arrangements. The most common pay day for monthly payrolls was the last working day of the month, which is influenced by weekends, bank holidays and the number of days in the month. Some employers paid staff on the last Friday of each month; others paid weekly, fortnightly or four-weekly. This is consistent with my experience of payrolls operated now by our customers, which are small businesses.

Putting together the theory and the reality, we can work out what happens to a claimant whose assessment period starts on the 27th and a job that pays on the last Friday of the month. In this case, the pay date will sometimes be before the 27th and sometimes it won’t. The result is that some assessment periods will include one month’s pay, some will include two months’ pay, and some will include no pay at all.

A recent Guardian article, based on information from the Child Poverty Action Group, explained the consequences of this mismatch. It can cause the employee and their family to be subjected to benefit-cap penalties, erratic Universal Credit payments and even the loss of free healthcare entitlements. As a result, the design of Universal Credit assessments causes hardship for the same low paid workers it was intended to help. You can find further information, including real case studies, in the Child Poverty Action Group report.

A similar thing would happen if the employee were paid every four weeks, which payroll professionals often refer to as ‘lunar monthly’, or just ‘lunar’. This pattern usually results in 13 pay dates in a year; that is to say, once a year, two pay dates will fall in the same Universal Credit assessment period. When this happens, the pay appears to have doubled and Universal Credit is stopped or significantly reduced. Fortnightly and weekly pay patterns also trigger fluctuations in Universal Credit, albeit to a lesser extent.

Another common practice which can have harsh consequences, is paying a monthly payroll earlier in December, so that the employees have their money before Christmas. If the payment falls into the earlier assessment period, it can cause their Universal Credit payments to stop, cold-turkey.

As we have seen, employers who don’t follow the idealised monthly pay pattern can unintentionally trigger problems for staff who claim Universal Credit. This can be resolved in two ways. Either Universal Credit can be changed to account for the ways people are really paid, or employers can change their payment practices to align with Universal Credit’s stubborn, monthly assessments.

Steven Tucker

By Steven Tucker - Co-founder

Steven is one of the founders of The Payroll Site. He writes about things affecting small businesses, especially those things connected with payroll. He's also a Maths graduate and a Chartered IT Professional and has a few views about technology, maths and the misuse of both.