Reforming the capital rules in Universal Credit

Overview

It’s high time we revisited the long-neglected capital rules in the benefit system says the Resolution Foundation's new report.

Means-tested benefits in Britain are built on the principle that individuals with significant financial resources should use those before receiving state support. That’s why wealth – as well as income – is assessed when determining eligibility and entitlement levels for means-tested support. Few would argue that people with substantial resources are in equal need of public support as those without.

While income means-testing has been widely studied and debated, capital means-testing has received far less attention. This is an oversight, not least because wealth plays a critical role in living standards.

And despite rising asset values, capital thresholds have remained unchanged in cash terms since 2006. With the Government now reviewing Universal Credit (UC), now is the time to assess if the current rules are fit for purpose.

In this paper the Resolution Foundation take a deep dive into how the capital rules operate, focusing on means-tested support for working-age families, particularly within UC, the main working-age benefit. They examine who they affect and whether the current system is delivering fairness and efficiency. They then explore the shortcomings of the current approach and propose options for reform.

Key Recommendations

- Money saved through Help to Save and LISAs should be excluded from the capital rules.

- The Government should address the declining value of the capital rules’ thresholds by uprating them in line with inflation.

- The Government should also consider removing the ‘cliff edge’ from the upper capital limit.

Conclusion

The report outlines some clear shortcomings with the existing capital rules. But while scrapping them entirely would address these, it would come with a hefty price tag and is not the best way to achieve the Government’s rightly ambitious aims of reducing poverty and improving living standards. It would also create practical difficulties in measuring income from capital within UC’s monthly assessment periods.

But that does not mean the Government should continue to ignore this long-neglected part of the benefit system. Targeted reforms can be used to support long-term savings while preserving fairness in means-testing. Exempting savings in Help to Save accounts and LISAs would give low-to-middle income families greater flexibility to build financial resilience – for both short-term shocks and long-term goals like home ownership or retirement. Indexing the capital thresholds from 2026-27 would help maintain fairness over time, preventing the system from becoming increasingly punitive toward those with modest savings.

More ambitious changes, such as removing the £16,000 upper limit, could further strengthen the system. However, these must be weighed against higher priorities in the benefit system, like the removal of the two-child limit, benefit cap and Local Housing Allowance freeze, and the overall inadequacy of benefit levels. Nonetheless, such reforms should remain part of a long-term strategy for a fairer, more supportive welfare system.