Labour’s planned welfare reforms could create a two-tier benefits system, the impacts of which will last for “decades”, the Institute for Fiscal Studies (IFS) has warned.
Major changes to universal credit (UC) will see the entitlement cut by almost half from £423.27 to £217.26 for all new claimants from April 2026 and frozen until 2029.
Anyone who applies for the benefit after 6 April next year will only be entitled to the lower rate, meaning they will be paid around £2,500 less than a claimant who applied before this date, who will continue to receive the higher rate.
This threatens to create a two-tier system that lasts into the 2040s and beyond, analysis from the IFS has found.
The influential think tank said that around 500,000 people currently claiming an incapacity benefit, such as UC health, have been in receipt of it for 15 years or longer. Based on this trend, the two levels of entitlement still won’t be phased out by 2040.
Matthew Oulton, research economist at the IFS, said: “Reducing a household’s benefits will always be difficult for those affected. In addition, though, it can be hard for some people to adjust quickly to large falls in income, so there is a case for government to provide transitional support for existing claimants affected by benefit cuts.
“However, it is difficult to justify permanently treating claimants differently based on the precise date they started their claim. The current universal credit health proposals imply that one person could receive less support than another in the 2040s due to the precise date they started their claim in 2026.”
Responding to the IFS analysis, shadow work and pensions secretary Helen Whately said: “Labour’s welfare reforms are a sham. The IFS shows their so-called reforms to Universal Credit health payments are ring-fenced by provisions so generous they will last for decades, costing the taxpayer billions and locking people into the system.”
“These permanent protections embed inequality, discourage work, and destroy the very savings Labour promised. The result is a welfare system that entrenches dependency and drives the black hole in the public finances ever deeper.”
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James Taylor, director of strategy at disability equality charity Scope, said a system that has two disabled people in the same situation getting different levels of support “simply doesn’t make sense”.
He said: “The health element of Universal Credit exists because disabled people often face a double hit on costs. Day-to-day life costs more if you are disabled, and that’s on top of reduced earnings and higher disability related barriers and costs to get into work.
“We’d like the government to pause this move, and start with a genuine review of Universal Credit that involves disabled people, conduct an impact assessment and co-produce any reforms with disabled people.
The changes come alongside yearly above-inflation increases to the standard rate of UC until 2029, beginning with a 2.3 per cent rise in April.
While the reforms to the benefits’ health-related element are expected to save around £1.7bn in 2029/30, the savings will be almost entirely offset by the rise.
Labour says the aim of the rate changes was to “reduce the perverse incentives that trap people out of work” while helping disabled people and those with long-term health conditions into good, secure work.
The government had originally also planned to restrict eligibility for Personal Independent Payments (PIP), a health-related benefit claimed by 3.7 million people.
This was set to deliver the bulk of the savings, at £4.8bn, but ministers changed course after over 100 Labour MPs threatened to vote against the government on the measures.
Liberal Democrat work and pensions spokesperson Steve Darling said: “The government’s ham-fisted approach to welfare reform has seen funding for disabled people and their carers slashed and vital support for hard-working families stripped away.
“The new two-tier system for the universal credit health element uses an Orwellian approach, where some people who are ill or disabled are more equal than others, and that is perverse in the extreme. It punishes current disabled children and anyone who will become disabled in the future.
“Moreover, as the IFS has warned, people will be disincentivised from trying work for fear of having to return to benefits and receiving a lower rate. This is the opposite of what the Government should be pushing for.
A DWP spokesperson said: “We’re fixing the broken welfare system we inherited by rebalancing Universal Credit rates to reduce the perverse incentives that discourage work and fuel inactivity, while ensuring the safety net is always there for those who need it.
“We’re also giving sick or disabled people the support they genuinely need to get into good, secure jobs – backed by our £3.8bn employment support package – as part of our Plan for Change to drive growth and tackle unemployment.”
