Quick summary: Financial analysis from advisory firm Blick Rothenberg indicates that the mechanism used to withdraw Universal Credit benefits as recipients increase their earnings creates a significant workforce disincentive by subjecting additional hours to a 55% taper rate. When combined with income tax and National Insurance contributions, this policy imposes an effective marginal tax rate of approximately 68% on low income workers, a level far exceeding the rates applied to high earners. These economic findings carry serious implications for public policy and household well being, demonstrating that reforming the withdrawal taper is essential to eliminate underemployment, alleviate welfare dependency, and provide families with a genuine financial reward for entering the labor market.
The way Universal Credit benefits are withdrawn as recipients increase their earnings is acting as a disincentive to work, according to leading audit, tax, and business advisory firm Blick Rothenberg.
Robert Salter, a director at the firm, said: “When recipients of UC increase their earnings by working a few extra hours each week or receiving a promotion, they may become subject to the UC taper. That is, the benefits they receive are reduced for every pound they earn; at the current taper rate, they lose 55% of their additional income each week.”
He added: “In many cases their income has already been subject to PAYE and National Insurance Contributions (NIC) withholdings. This makes the effective tax rate on these additional hours around 68%, and in some cases even higher. This means there is often little incentive to work extra hours given the financial reward is minimal, especially if the extra hours create additional costs such as childcare.”
The taper applies once a recipient’s earnings exceed a monthly threshold. For 2026–2027, those without housing costs in their claim can earn up to £710 per month before the taper applies. Those receiving housing support through their claim face a lower threshold of £427 per month.
Robert noted: “They may be receiving this support to pay for temporary accommodation because they are homeless.”
The 55% taper rate means that for every £1 earned above the work allowance, Universal Credit payments are reduced by 55p. When combined with income tax and National Insurance, the marginal rate on additional earnings can climb significantly higher for many claimants.
Robert said: “Given that politicians of all parties generally believe that tax rates above 45% or 50% on the highest earners are counter-productive and discourage work and risk-taking, it is easy to understand why many UC recipients may be unwilling to work extra hours, when they can face an effective tax liability which is so much higher than that.”
Robert said: “It would not be easy for the Government to change the UC taper, as it would be reasonably costly in the short term. For example, reducing the UC taper to 35% might cost around £6bn–£7bn per annum. However, if such a step does help encourage more people to work extra hours or accept promotions, because it helps make work pay, it would help minimise the underemployment which economists argue is holding back economic growth and productivity.”
Proponents of reform argue it could yield longer-term gains through higher employment, increased tax revenues from additional work, and reduced welfare dependency.
Universal Credit is the UK’s main means-tested benefit for working-age people, replacing six previous benefits including Jobseeker’s Allowance, Housing Benefit, and tax credits. It is designed to support transitions into work, but critics argue its withdrawal rate can trap people in lower hours or lower-paid roles.
Underemployment remains a concern for the UK economy, particularly for those with childcare responsibilities or living in temporary accommodation, where additional costs further erode any net gain from extra earnings. Blick Rothenberg also points out that while high marginal rates on top earners are frequently debated as damaging to productivity, similarly high or higher effective rates faced by much lower earners receive comparatively little attention, despite affecting a larger number of people seeking to improve their circumstances.
As the government continues to focus on economic growth and increasing workforce participation, the interaction between the tax system and Universal Credit is likely to remain under scrutiny. Making work pay more clearly for those on low incomes could play a key role in addressing skills shortages and improving overall productivity.