Using one-off payments to settle industrial disputes appears to be a growing trend. In the Autumn it was part of the settlement for the local government pay dispute, with full-time council workers receiving a one-off payment of £1,284 (gross) at the end of November. More recently a one-off payment has been floated as a potential way of settling the government’s current dispute with nurses.

Most nurses probably won’t care about the way the dispute is settled, only how much they will receive at the end of the day. In economic terms, they are said to be indifferent to receiving higher pay each month or a one-off payment.

Similarly, if you look only at the effect of the tax system it makes no difference when a payment is made, as it’s an annual system. However, for people receiving Universal Credit (UC) there can be a difference, because of the way the system captures workers’ earnings.

For a few UC recipients, getting a one-off payment instead of higher monthly pay could make a really big difference to the value of their award.

How could a lump sum payment cause problems for UC claimants?

The issue arises because UC works on a monthly snapshot of income rather than any form of averaging (as occurs naturally in annual systems, like taxation).

When income is going down that’s great, because the system responds by increasing UC the following month, and if there’s a permanent increase in earnings it’s reasonable that support should reduce.

However, if there is a one-off payment there is no way for a claimant to tell the DWP that it’s a temporary increase in earnings. In the UC computer system it just looks like you’ve been very well paid.

What then happens is the additional pay (including any backdated award) is taken into account in the amount of UC someone receives in the following monthly period.

In most cases the result is that UC is reduced by 55p for every extra £1 someone earns after income tax, national insurance and pension contributions. This is unless they are disabled or have children and earn less than the relevant work allowance for their circumstances.

The real problem is if a one-off back payment means someone’s UC falls to zero. As highlighted in my recent Are the Cost of Living payments unfair because they create a ‘cliff edge’? blog, there is a growing phenomenon of UC receipt being used as a ‘passport’ to other benefit entitlements. This inevitably creates a ‘cliff edge’ at the level of earnings where a household’s entitlement to UC falls to zero.

How can backdated pay affect entitlement to the cost of living payment?

As explored in the blog above, the cliff edge problem includes the £900 cost of living payment that people on UC (and other means-tested benefits) will receive in 2023/24.

At the moment, the government hasn’t announced the exact dates the three cost of living payments will be made: we only know they will be in Spring 2023, Autumn 2023 and Spring 2024.

As we saw yesterday, when the Work and Pensions Secretary Mel Stride responded to a letter from the Work and Pensions Committee (pdf), backdated pay isn’t the only example of this issue.

The committee had expressed concern at people losing out on the cost of living payment if they received a nil award of UC in the qualifying period due to fluctuating earnings or sanctions and it had asked the Secretary to consider this position for the 2023/24 payments.

Yesterday he rejected a call for a change and said “Unfortunately, it is not feasible to distinguish between a change to levels of earnings (e.g. seasonal earnings or a new job) and those with temporary fluctuations due to non-monthly earnings.”

Back to the nurses. Should the government and the RCN fail to make an agreement within the current financial year, or Easter at the latest, there is a real danger some nurses on UC will miss out on the next cost of living payment. This will happen if their UC is reduced to £0 when they receive their back-pay and it coincides with the qualifying date for the next payment.

This is a high-profile example but other employees in other sectors may be impacted in the same way.

There are ways workers can get round the problem, of course. For instance, if the back-payment were paid into a pension then net pay would remain the same and the amount of UC awarded would not change. But this seems a long-winded way to ensure that workers on UC do not miss out on their cost of living payment. It’s unfortunate they may end up losing it due to the very act of negotiating a pay increase to help with the increasing cost of living.