UC replaced six individual forms of benefit including income support, housing benefit, child tax credit and working tax credit. The aim was to streamline the process and make it simpler for recipients, but with the roll-out being delayed and the uncertainty of the on-going pandemic, this meant more people than ever were claiming and the system continues to confuse.
How Universal Credit works
With UC, the recipient will claim a standard allowance and then claim on top of that for other financial needs, such as housing or childcare. Recipients can claim as a couple.
When being assessed for eligibility, your capital and income will be reviewed. A distinction will be drawn between earned income and unearned income. In relation to earned income, for every £1 earned above the designated work allowance, £0.63p is deducted from the total UC received. With unearned income, for every £1 earned over the allowance, £1 is deducted from the total UC received.
Unearned income and spousal maintenance
Under the previous system, any spousal maintenance which a person received as part of their financial agreement would not have been taken into account when assessing the level of benefits they should receive. However, under UC, spousal maintenance is now considered as unearned income, which will result in a pound for pound reduction of your overall UC.
How does a lump sum received on divorce affect Universal Credit?
If you are in receipt of a capital lump sum of £6,000 or less your entitlement to UC will not be affected. If the amount falls between £6,000 and £16,000, then it will be treated as if it is earning ‘income’ at a rate of £4.35 per month for every £250 in savings (if it is not a complete £250, it is rounded up to the next £250.) This would mean that if you had £6,300 in a savings account, £6,000 of it will be ignored and the other £300 will be treated as giving you a monthly income of £8.70, so your UC will be reduced by this amount. If you have capital of over £16,000 then you will not be eligible for UC.
However, there are capital disregards that can be taken into account when calculating your UC eligibility. For example, if you were to receive a lump sum under the terms of a financial agreement which was to be used specifically for a house purchase, then these funds would be disregarded from any UC calculation for six months, or longer if the sale did not complete.
What do I do?
With the strict capital limits and spousal maintenance being classed as unearned income, you will need to carefully consider the terms of the financial agreement reached within your divorce. This might include looking at options with pensions, increasing child maintenance (this is not classed as unearned income), one party directly paying a landlord the recipient’s rent or the paying party furnishing the recipient’s house. You and your solicitor will look at all the available choices to minimise the risk of losing UC when the financial agreement is signed.
Online calculators can be a very useful tool for working out the level of UC you might receive, depending on different circumstances. This will give you an initial starting point from which to work during negotiations. A specialist benefits adviser will also be able to talk you through which benefits you are eligible for and explain the different allowance limits.
If you would like to discuss the possible impact of your divorce on Universal Credit further, please contact Georgia Butterworth or another member of Birketts' Family Law Team.
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at September 2021.