What is Universal Credit?
Universal Credit was introduced by the Welfare Reform Act 2012. It replaces some of the benefits and tax credits which Claimants currently receive, such as Housing Benefit, Income Support, Child and Working Tax Credits, Income related Jobseeker's Allowance and Income-related Employment and Support Allowance.
In May 2016 the full Universal Credit service began to rollout nationally (beyond London) and it has been announced that this rollout will complete by September 2018; initially only affecting new Claimants.
Impact of Universal Credit on financial settlements
Universal Credit will have an important effect on financial settlements in divorce proceedings due to how the Universal Credit system works.
By way of example, under the current benefits system of tax credits, any child or spousal maintenance payments the Claimant may be in receipt of is not taken into account when calculating a Claimant’s tax credit entitlement. Therefore if a Claimant is entitled to £600.00 per month in tax credits and they are also in receipt of spousal maintenance of £300.00 per month, the amount of spousal maintenance they receive will have no impact on their tax credit entitlement and they will still receive the full amount; thereby receiving a total of £900.00 per month.
However, under the Universal Credit system, whilst any child maintenance payments the Claimant is in receipt of will continue to be disregarded, spousal maintenance payments will not. This means that spousal maintenance will be deducted on a pound for pound basis when calculating a Claimant’s Universal Credit entitlement. Therefore, using the figures given in the example above, if the Claimant was entitled to Universal Credit of £600.00 per month, however they were also in receipt of spousal maintenance of £300.00 per month, the spousal maintenance would be deducted from their Universal Credit entitlement, meaning they would receive £300.00 per month Universal Credit. Therefore in total the Claimant would receive £600.00 per month, and in comparison to the example above, the Claimant would be £300.00 per month worse off due to the deduction made for spousal maintenance to their Universal Credit entitlement.
It is therefore necessary to consider the impact of Universal Credit on financial settlements in divorce proceedings, and the lower earning spouse may want to negotiate a higher spousal maintenance figure in order to bridge the gap caused by the Universal Credit system.
In respect of financial settlements made prior to Universal Credit being introduced, Orders may have been made when parties would have considered that spousal maintenance payments would have been supported by tax credits, and therefore the amount of spousal maintenance agreed upon may no longer be sufficient.
If you have any queries or concerns with regards to how Universal Credit may impact your current situation or previous financial settlement, then please do not hesitate to contact our experienced family team on 0191 384 2441.