In terms of how it affects benefits claimants the most important announcement from Jeremy Hunt didn’t come in today’s Budget but in November’s Autumn Statement, when the government confirmed the 10.1% increase in benefit rates that kicks in next month.

For people who are already claiming benefits April’s increase will mean the amount they receive is finally catching up with rises in the cost of living (though private renters are less generously treated, as discussed below).

As with all benefit increases, an additional effect is that people with earnings that were previously too high to qualify may now be entitled, as from April households can earn more before their award is reduced to zero.

That’s why next month’s increase represents an important opportunity to promote benefit take-up, as it’s worth everyone checking even if their circumstances haven’t changed.

The effect of the benefit increase will be reinforced by another decision that was made in the Autumn Statement but does not come in until April: the freeze in the level of the income tax (and NICs) personal allowance.

In an ideal world, or at least a more rational one, all parts of the benefits, tax and NICs systems would be increased by the same rate (perhaps by inflation or by earnings growth, ideally the latter to keep in step with the labour market). By and large that would mean the relationship between how much you earned and benefit entitlement remaining the same over time, with working claimants moving off and on benefits as their circumstances or work hours changed.

Instead, from this April and continuing for the duration of the allowance freeze, more workers will become entitled to benefits even if their earnings are barely keeping pace with prices. That’s because the tax system is squeezing workers’ net earnings, through the ‘fiscal drag’ created by freezing personal allowances, while benefit levels are going up.

The effects of these changes for a working couple without children

It’s often helpful to look at a ‘typical’ family to see the effect of changes in benefit and tax rates from year to year. In this case we’ve used an example family who do not have unusually high rent or other costs but who represent the group who are mostly likely to be missing out on benefits – people who are in work who mistakenly think their level of earnings puts them above the reach of benefits.

Let’s look at the case of a couple without children who both work and who rent privately at above the maximum rate allowed under the government’s rules (we’ve assumed they live in outer north London, where the rent cap is £230.77 a week for a couple).

At the moment this household qualifies for Universal Credit if, between the two individuals, their gross earnings are under £38,800 (assuming standard tax, NICs and 5% pension contribution at these earnings). Because of the increase in benefit rates from April this cut-off point increases to £39,700. It’s a fairly modest increase but indicative of the direction of travel, with benefit entitlement creeping further up the earnings scale.

There are two important things to note about this case.

The first is that while their UC payment will be close to zero (we have constructed a case that is near the cut-off point), any entitlement at all, even a few pounds a month, means the household qualifies for the cost of living payments worth £900. My blog from last summer discusses how one-off payments make checking for benefits even more worthwhile.

The second point is that the increase is relatively modest because limits on private rents have been frozen, rather than increasing in line with rent levels as the ‘Local Housing Allowance’ system was originally designed to do. The effect is that, for this couple and all other claimants in the private sector paying rent above the limit, April’s increase in benefits will be used up (sometimes in full) by rent increases they have to meet out of their personal needs amount.

In effect, the generosity of this year’s benefit uprating for private renters is much less than implied by the headline rate, which in turn has the effect of slowing down the increase in the level of earnings that qualify for benefits.

The effects of these changes for a working couple with childcare costs

For families renting in the social sector, where rent increases are fully reflected in benefit rules, the increase in the reach of Universal Credit will be a bit higher than the example above. But for families with childcare costs over the existing maximum amount there will be a huge jump in the reach of benefits up the earnings scale.

One of the bigger benefit changes the Chancellor announced was that from July this year the maximum amount Universal Credit claimants can include for childcare costs for one child is going up to £951 a month, from £646 a month at the moment (where it’s been fixed since the inception of UC nearly ten years ago). The amounts for two or more children are £1,630 a month (up from £1,108).

Note though that the limit is not increasing for people who claim Child Tax Credit, even though the cap has been fixed all the way back to 2005 in that system. This unequal treatment means that the financial argument for tax credit claimants with childcare voluntarily moving to UC will be even stronger come July (for most claimants; it's important to note that exceptional circumstances can affect better-off/worse-off calculations).

We can use another worked example to see what the increased limit would means for a family with typical childcare costs, in terms of where the cut-off point for benefit entitlement will fall come July.

Take the case of a couple who own their own home (so do not get support with rent), who both work and who have one child in full-time nursery. We’ve assumed that they pay the national average amount for a full-time nursery place, which according to a survey by the charity Coram amounts to £14,836 per year (which exceeds even the higher cap the Chancellor has introduced).

Running through the numbers shows that, in 2022/23, eligibility for Universal Credit would run out for this couple when their earnings (between the two of them) reached £44,000 a year. However, from July when the childcare cap increases, and including the increase in benefit rates from April, the point where eligibility runs out will be when their joint earnings exceed £57,000 a year. That’s a very substantial increase in the earnings level where benefit entitlement is extinguished.

Means-tested support is growing

Increasing benefits rates is the right thing to do, to prevent the poorest people in society falling ever further behind the rest, and the increase in benefits in April is to be applauded.

Similarly, the benefits system can be a good way of targeting support, in the case of today’s Budget targeting help on families with childcare costs on low(er) earnings. Of course it means more people will qualify for means-tested benefits than would otherwise be the case, but unless the public are willing to pay the price for universal benefits and services then we must accept that extended eligibility is the logical price for the current policy mix.