Universal credit: Calculating the transitional element
An overview of transitional protection, including how the transitional element works, can be found on our transitional protection page. This page looks in detail at how the ‘total legacy amount’ and ‘indicative UC amount’ are calculated.
Note: The DWP/HMRC operational migration process is fairly new and is still under development. Further changes may be made as it rolls-out to more people. Some of the information is only available via DWP guidance (sometimes published) but this guidance, and underlying processes, may change without any updates being published. We therefore recommend that for individual cases you check the latest position with DWP before taking or refraining from taking any action.
Although calculations of the transitional element take into account all legacy benefits that UC is replacing, this page focuses on tax credit only claimants.
Broadly, a transitional element is to be included in the calculation of a UC award if the total amount of any awards of existing benefits (the total legacy amount) on migration day is greater than the amount of an award of UC determined in accordance with the regulations (the indicative UC amount) on that day.
It is important to note that the calculation uses an indicative or notional UC amount using various assumptions set out in the legislation – it is therefore possible that the actual UC award in the first assessment period is different.
The process for calculating the transitional element is as follows:
DWP issues migration notice to a tax credit claimant. The tax credit claimant is given a deadline day to make a claim for UC. If they do not make a UC claim by that date (unless the date is extended), their tax credit claim will end. It is possible to still get a transitional element if a claim is made shortly after the deadline day – see our migration process page for more information.
Where a claim is made before the deadline day, the Universal credit claim triggers a stop notice for HMRC to stop tax credits and commence the in-year finalisation process. At the same time, DWP request that HMRC provide a calculation of the claimant’s daily rate of tax credits, calculated on the basis of the information HMRC has about the claimant’s circumstances on migration day, ie the day before the universal credit claim. DWP will then convert this figure into a monthly figure by multiplying by 365 and dividing by 12 as set out in reg.53 of SI.No.1230/2014.
DWP undertake equivalent calculations for any other legacy benefits the person is claiming to reach a total legacy amount.
The benefit cap rules are engaged at this point. Where:
- Existing benefits do not include an award of housing benefit, or they include an award of benefit that has already been reduced to the minimum amount due to the benefit cap; and
- The benefit cap applies in the calculation of the indicative UC amount; and
- The claimant’s total entitlement to welfare benefits on migration day is greater than the relevant amount
Then the total legacy amount is reduced by the excess (minus the amount for childcare costs where applicable) over the relevant amount.
Next, DWP calculate the UC indicative amount. The legislation states that the indicative UC amount is:
‘the amount to which a claimant would be entitled if an award of universal credit were calculated in accordance with Section 8 of the Act (Welfare Reform Act 2012) by reference to the claimant’s circumstances on the migration day, applying the assumptions in paragraph (2)’.
In addition the legislation says that the calculation of the UC indicative amount is ‘to be based on the information that is used for calculating the total legacy benefits, supplemented as necessary by further information or evidence as the Secretary of State requires’.
It is not yet clear the extent to which DWP will ask claimants for supplementary information to help them determine the UC indicative amount nor whether DWP will take account of information provided on the actual UC claim that has been submitted. See below for a further discussion of this issue.
The assumptions listed are:
- If the claimant is entitled to child tax credit, the claimant is assumed to be responsible for any child or qualifying young person in respect of whom the individual element of CTC is payable
- If the claimant is entitled to an award of working tax credit that includes the childcare element, the indicative UC amount includes the child costs element and, for the purposes of calculating the amount of that element, the amount of the childcare costs is equal to the relevant weekly childcare charges included in the calculation of the daily rate (used to calculate the legacy amount) converted to a monthly amount by multiplying by 52 and dividing by 12.
- If the claimant is entitled to an award of tax credits, their earned income is:
The annual amount of any employment income or trading income (As defined by Regulations 4 and 6 respectively of the Tax Credits (Definition and Calculation of Income) Regulations 2002, by reference to which the representative monthly rate of that tax credit is calculated for the total legacy amount, converted to a net monthly amount by dividing by 12 and deducting such amount for income tax and national insurance contributions as the Secretary of State considers appropriate.
- If the claimant would not meet the financial conditions set out in Section 5(1)(b) or 5(2)(b) of the Welfare Reform Act 2012 then they are treated as if entitled to a nil award of UC for the purposes of the indicative amount. If the transitional capital disregard applies, the claimant is considered to meet these conditions.
- The indicative UC amount is to be calculated after any reduction for the benefit cap but before any reduction for higher level or other sanctions. There is no reduction for the benefit cap where the amount of the claimant’s earned income (or in the case of a couple their combined earned income) on the migration day is equal to or exceeds the benefit cap earnings threshold.
Note, however, that the UC indicative amount may not match the actual UC award amount (that is, excluding any transitional element) because they are calculated on different days and using some different rules.
DWP compare the total legacy amount with the UC indicative amount. The initial transitional element amount included in the first UC assessment period depends on whether the UC indicative amount is greater than Nil:
- If the UC indicative amount is greater than Nil, the amount by which the total legacy amount exceeds the UC indicative amount is the initial transitional element amount.
- If the UC indicative amount is nil, the total legacy amount plus any amount by which the income which fell to be deducted in accordance with Section 8(3) of the Welfare Reform Act exceeded the maximum amount.
The second bullet point requires the following steps:
- Take the earnings amount used in the calculation (after deduction of the work allowance and taper) and deduct the maximum UC amount.
- Add on the total legacy amount to calculate the transitional element
It is not clear whether DWP will provide a breakdown of the transitional element calculations. The usual rules about appeals apply to entitlement decisions and so it follows that if a person disagrees with the transitional element or other aspect of transitional protection, the resulting UC award decision can be challenged under the mandatory reconsideration/appeals procedures.
The legislative approach to calculating the indicative amount is explained above. However, it is not clear in practice how DWP are gathering the data needed and how they are interpreting the legislative guidance.
Although the legislation suggests that the claimant’s circumstances on migration day should be used when calculating the UC indicative amount (subject to the stated assumptions), the early guidance documents (see below for links to these documents) used by HMRC and DWP in manually calculating the transitional element suggest that DWP are interpretating this as meaning only those circumstances which were used to directly determine legacy benefits. For example, if a tax credit only claimant pays rent but has not claimed housing benefit then it seems that housing costs will not be taken into account when calculating the indicative UC amount. Similarly, where a tax credit only claimant is a carer, the carer element will not be included in the UC indicative amount as it does not feature in the tax credit award.
There are also other potential issues raised by these early guidance documents (see below for links to the documents). It appears that DWP take the ‘other income’ figure from the tax credit system, presumably to then enter it as unearned income for UC. However this will not lead to an accurate UC indicative amount as it may include things, such as savings interest, that are not taken into account as earned income for universal credit purposes. It may also mean that income disregarded for tax credits but taken into account as unearned income is not included in the calculation of the indicative UC figure, even though it will be deducted as unearned income when calculating the actual UC award in the first (and subsequent) award period.
Some of these processes, even if it can be argued they are departures from the legislation, are potentially beneficial to claimants. Others mean claimants may miss out on transitional protection and their first UC award will be lower than their legacy benefit award with no transitional element to make up the difference. The other concern is the extent to which DWP can later revise the UC award if the transitional element was calculated incorrectly which could potentially lead to overpayments of UC. See our main transitional protection page for further information on revisions of the transitional element.
The route to challenge the amount of a transitional element would be via the usual MR/appeal route to challenge the UC award, on the basis that the UC award (which includes – or doesn’t include – the transitional element) decision is incorrect.
It is possible that claimants may receive a first UC award (for their first assessment period) that is lower than their legacy benefits (when converted to a monthly income) but there is no transitional element included. The Government initially committed that there would be no cash losers at the point of moving to UC (assuming no change of circumstances) and therefore the expectation by those in the managed migration process is that if their UC award will be lower, a transitional element will be included and if it is higher, there will be no transitional element. However, it may be the case that claimants:
- receive a UC first award that is higher than their legacy benefit entitlement but includes a transitional element award
- receive a UC first award that is lower than their legacy benefit entitlement but does not include a transitional element award
This may happen for a number of reasons including:
- Tax credits are an annual benefit and UC is a monthly benefit
- The decision to calculate the transitional element using an indicative UC figure rather than the actual first UC award figure
- The differences in definitions, calculation rules and what counts as income between UC and tax credits (and other legacy benefits).
The following guidance documents obtained via FOI are helpful for advisers in understanding the processes used by DWP and HMRC – however caution must be taken in using them as they may change as the process is developed and automated.
Last reviewed/updated 13 September 2023