The shifting cost of the UK welfare state why Universal Credit is under scrutiny

Sir William Beveridge, architect of Britain’s welfare system, created a plan in 1946 centred on social insurance, with contributions from workers ensuring support during hardship. The system was designed to confront the five evils of want, disease, ignorance, squalor, and idleness, with workers contributing a portion of their income for future security. This original intent was that people must pay in before they could draw benefits, fostering mutual responsibility and support.

Over recent decades, UK welfare has moved sharply towards means-testing, shifting away from contributory principles. Universal Credit, now central to the system, increasingly targets low-income households and gives reduced consideration to those who have paid National Insurance. Academic and policy experts highlight that this shift under successive governments was driven by a desire to better target resources; means-testing offers a direct route to focus funds on the poorest families. However, critics argue that extensive means-testing blunts the link between work, contribution, and entitlement, eroding public support among middle earners who fund a significant share of the system through their taxes.

Welfare payments now predominantly flow to means-tested beneficiaries. Recent data indicates taxpayers provide £1,680 annually per person in means-tested benefits compared to only £209 for work-linked contributions. Four decades ago, the split was more balanced, reflecting a major realignment of priorities. This trend raises concerns that a shrinking contributory strand will weaken the public’s collective stake in welfare.

The current approach has further repercussions. Means-tests penalise savers, property owners, and couples. Any household with savings above £16,000 loses Universal Credit eligibility, a limit unchanged since 2006. Families with over £6,000 see benefits reduced, a threshold that captures more claimants each year due to unchanged caps and shifting economic conditions. Assets such as foreign properties, caravans, and cryptocurrencies are all assessed. For couples, combined financial resources are scrutinised, regardless of whether both individuals qualify for support, introducing further complexity and discouraging prudent financial planning.

Labour has signalled plans to revise the system by enhancing unemployment insurance, with more substantial benefits for jobseekers but subject to strict time limits. This represents a tentative return to contributory principles, marking one of the first significant changes in decades. However, comprehensive reform appears unlikely even as the bill for sickness and disability benefits approaches £100bn annually. Policymakers continue to face the challenge of targeting need without undermining incentives or equity for working and middle-income households.

Universal Credit’s design has also altered work incentives. While part-time work has grown more attractive for many families, especially lone parents, there is now a notable disincentive to progress from part-time to full-time employment. Effective tax rates on increased hours have risen, dampening the rewards for advancing in the workforce and potentially trapping families at lower income levels.

With the cost of the benefits system set to increase, particularly in sickness and disability spending, the structure of state support remains a focal point for public debate. The evolution from Beveridge’s vision leaves many taxpayers questioning their stake in a system whose original principle was that everyone had skin in the game.