More than two million people will be better off if they refuse extra work Under Ian Duncan Smith's flagship reforms to welfare.
Despite David Cameron’s promise to ensure that employment “always pays” more than benefits, the government admitted “there is a risk” that working women will decide they should give up their jobs when Universal Credit is introduced.
Couples with children are likely to be among the hardest hit by the changes to the benefits system, which are being rolled out across the UK from next year, according to the Department for Work and Pensions.
The warnings result from the fact that the more people work, the more they pay in tax and national insurance, and the more they will lose in means-tested benefits under the plans.
The Prime Minister and Iain Duncan Smith, the work and pensions secretary, promised to eradicate the “trap” that means it makes more financial sense for individuals to limit the amount they work and claim higher benefits.
However, the DWP’s new impact assessment for the reforms, warned this would not always be the case.
“There is a risk of decreased work incentives for second earners in couples (primarily women),” the report said.
“Although the number of workless households will reduce, it is possible that in some families, second earners may choose to reduce or rebalance their hours or leave work.”
Officials claimed that the main earner in the household would be better able to support the family as a result of the reforms, meaning couples will have more freedom to “strike their preferred work/life balance”.
One of the key obstacles to work is high childcare costs, which increase as parents return to employment after the birth of children.
The DWP found that 1.8 million main earners in a family will be worse off if they take on extra hours under the reforms than they would be now. Another 300,000 secondary earners will also be penalised for taking on extra work under the scheme.
This means up to 2.1 million people would be better off refusing the offer of extra work under the Universal Credit, 600,000 more than would be better off if they agreed to take on more hours.
The DWP also concluded that couples with children “are more likely to see an increase than a decrease” in financial barriers to taking on extra work. An extra 500,000 working parents who live together with their children will lose between 60p and 80p of every extra £1 they earn under the plans.
The reforms will see a range of working-age benefits and entitlements, such as Jobseeker's Allowance, Income Support and Housing Benefit, paid as a single Universal Credit to simplify the welfare system.
Chris Goulden, head of poverty at the Joseph Rowntree Foundation, said: “The centrepiece of Universal Credit is to make work pay, but these figures show it could hit the strivers it is supposed to help.
It is self-defeating to encourage more people into part-time work, only for them to see their earnings wiped out when they progress into full-time jobs.
“If Universal Credit is to be successful in helping people out of poverty, it needs to ensure work is truly worthwhile and does not punish people who do the right thing try boost their hours and income.”
Labour’s shadow work and pensions secretary, Liam Byrne, said: “David Cameron promised to make work pay, but Britain’s strivers are set to take a hammering because the Chancellor is raiding Universal Credit to cover the cost of his own economic failure.
“This government’s flagship scheme is now set to leave more than two million with less reason to work harder than they have now.”
A DWP spokesman said: "Universal Credit will provide very clear incentives for claimants to move into work - it's a far simpler system that will ensure people are better off in work than on benefits.
"Over 1 million households moving into work will keep more of their pay under Universal Credit and more than 3 million households will be better off."
When he launched the reforms last year, Mr Cameron promised that Universal Credit would mean “it always pays to work”. “Never again will work be the wrong financial choice,” he said. “The more you work, the better off you will be.”