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Three challenges for getting people on incapacity benefits into work

Published on 15 October 2024

and last updated on 22 October 2024

Why do so few people move from incapacity benefits into work? What does this mean for government plans to get more people working?

This comment was edited on 22 October 2024 to better reflect the incentives around moving into work for incapacity benefit recipients.

The government has made getting more people into work a priority with the aim of reaching an employment rate of 80% – up from 75% now. One challenge to achieving this target is the recent increase in people out of the labour market due to ill health – from 4.9% of the working-age population in 2019 to 6.4% in 2023 – and the related increase in the share of the population claiming health-related benefits, from 7.5% of the working-age population in 2019 to 10.0% in 2023.1 More broadly, more people are reporting having a disability of some kind – 19% of the working-age population in 2019 and 24% in 2023. Perhaps with these factors in mind, the Labour manifesto included ambitions to 'support more disabled people … into work', and there have been reports that the upcoming Budget may include reforms along these lines.  

Health-related benefits fall into two categories: incapacity benefits and disability benefits. Incapacity benefits provide additional income for people whose health limits their ability to work. The main incapacity benefit in the UK is the health element of universal credit (UC), a means-tested benefit. Disability benefits are intended to help people with disabilities manage the additional costs of a disability. The main working-age disability benefit in the UK is personal independence payment (PIP), which is not means-tested.2 Since 2019–20, the numbers of working-age incapacity and disability benefit claimants have increased by 28% (to 3.2 million) and 39% (also to 3.2 million) respectively. In this comment, I focus on incapacity benefits claimants as eligibility is directly linked to capacity to work, but some of the lessons carry over to disability benefits claimants (not least as 62% of them also claim incapacity benefits).

Helping more people who are claiming incapacity benefits into work could, if successful, both improve living standards for those moving into work and reduce pressure on public finances. However, there are several reasons this is easier said than done.

First, most incapacity benefit claimants have been out of work for some time. Table 1 shows the employment history for different groups of working-age adults. Only 5% of people receiving incapacity benefits are working,3 and 83% have been out of work for more than two years. Similarly, almost all people who are economically inactive due to ill health have been out of work for more than two years. In comparison, 72% of disabled people who are not receiving health-related benefits are working and 21% have been out of work for more than two years.

Table 1. Share of various population groups by employment history, 2023

Employment history

Incapacity benefit claimants

Disability benefit claimants

All health-related benefit claimants

Inactive due to long-term illness

Disabled but not receiving a health-related benefit

Overall population

Working

5.1

17.7

15.1

0.0

71.8

74.9

Left last job within two years

10.4

6.9

9.0

9.3

6.5

5.2

Left last job between two and five years ago

14.9

10.9

12.8

14.6

5.0

3.7

Left last job more than five years ago

48.9

42.8

42.1

51.6

8.4

6.9

Never had a job

19.2

20.0

19.3

22.5

7.8

8.5

Total not worked in last two years

82.9

73.7

74.2

88.7

21.2

19.2

Total not working

93.4

80.5

83.3

98.0

27.7

24.4

Unknown

1.5

1.7

1.6

2.0

0.5

0.6

Total

100.0

100.0

100.0

100.0

100.0

100.0

Note: Population groups overlap; for instance, most people inactive due to long-term illness claim a health-related benefit. I count universal credit claimants as incapacity benefit claimants if they state the main reason for claiming is sickness/disability. This is an imprecise measure for UC health claimants as people can claim UC for multiple reasons.

Source: Author’s calculations using Labour Force Survey, 2023 Q1 to 2023 Q4, population aged 16-64.

This matters as the longer someone has been out of work, the less likely they are to return. The impacts of this can be seen in Figure 1, which takes all people with a given characteristic who are out of work in one quarter and looks at their probability of moving into work the following quarter, both before and after the pandemic. It shows that less than 2% of out-of-work incapacity benefit claimants enter work in the following quarter, compared with 10% of all out-of-work people.4 These figures suggest a big policy intervention would be required to move significant numbers of claimants into work. 

Figure 1. Share of out-of-work population moving into work in following quarter, 2014-24

Figure 1. Share of out-of-work population moving into work in following quarter, 2014-2024

Note: Population groups overlap; for instance, most people inactive due to long-term illness claim a health-related benefit. I count universal credit claimants as incapacity benefit claimants if they state the main reason for claiming is sickness/disability. This is an imprecise measure for UC health claimants as people can claim UC for multiple reasons.

Source: Author’s calculations using Two-Quarter Longitudinal Labour Force Survey, 2014 Q2 to 2024 Q1, 16-64 population. 'Before pandemic' period is average for 2014 Q2 to 2020 Q1. 'During/after pandemic' period is average for 2020 Q2 to 2024 Q1.

A second reason for caution is that government assessments suggest most incapacity benefit claimants have limited capacity for even preparing for work. Following assessment, if an applicant is not deemed 'fit for work' (in which case they are denied incapacity benefits), they can be assessed as having 'limited capability for work' (LCW) or a 'limited capability for work or work-related activities' (LCWRA). 15% of claimants are in the LCW group; they do not have to actively search for work but are judged to be capable of preparing for work – for example, writing a CV or attending a training course. The vast majority of claimants (83%) are in the LCWRA group. These claimants are judged unable to even engage in these work preparation activities.5 The Work Capability Assessment used to assess eligibility has its critics, and the government plans to reform it. Nevertheless, the fact that most claimants are assessed as being a very long way from the labour market indicates the scale of the challenge for any government hoping to move them into work.

A third and final challenge to bringing incapacity benefit claimants into work is weak work incentives. Just under half of incapacity benefit claimants claim employment and support allowance (ESA). For these claimants, there is a ‘cliff edge’ in their entitlement. If they move into working more than 16 hours a week, or earning more than £9,568 a year, they lose all their entitlement to ESA (on average about £8,000 a year6). This acts as a strong disincentive to moving into work above these thresholds.

The other half of incapacity benefit claimants claim UC, where work incentives are more complicated but still weak.7 For these claimants, there are two ways that someone in the LCWRA group of UC may lose benefits income as they move into work. First – as with all UC claimants – for every £1 of after-tax earnings above a work allowance,8 their entitlement falls by 55 pence. Second, the DWP can reassess health-related UC claimants. If someone has moved into work at the time of their reassessment, this is likely to affect the DWP’s assessment of their abilities, and they could – though will not automatically – lose the UC health element (£4,994 a year).9 It is also worth noting that, for many, there is a ‘cliff edge’ for those already in work considering applying for the health element of UC: they cannot be assessed for it unless they stop working or their earnings are below the equivalent of 16 hours a week on the National Living Wage.10

An example demonstrates the work incentives of incapacity benefit claimants on UC. If a typical UC claimant receiving the UC health element started working 35 hours on the National Living Wage (earning £20,821 a year) and kept their status as LCWRA, they would receive £11,000 more in (after-tax-and-benefit) income than if they were not working.11 This means they face an effective tax rate of 47%. If, after moving into work, they were reassessed and lost their LCWRA, they would only receive £3,350 more income (after tax and benefits) than if they were not working. This is equivalent to an effective tax rate of 84%.12 The risk of facing such a high effective tax rate is likely to dissuade claimants from moving into work.

So, what does this mean for government policy?

First, the government should weigh the costs to claimants and government against the potential benefits of any measures. For instance, increasing job search requirements for incapacity benefit claimants will likely encourage some claimants to work, but it comes at an administrative cost to government and makes life more difficult for claimants who are not able to work. Similarly, additional programmes to help incapacity benefit claimants find work that suits them come at a cost, and so there is a question as to whether they will increase employment enough to be worth it. Recent evaluations of employment support programmes find modest positive employment effects for some programmes in certain contexts.13

Second, if the government wants to encourage incapacity benefit claimants to work, it could consider ways to improve their financial incentives to do so. The previous government announced (but did not implement) a plan to break the link between assessed capacity for work and getting the UC health element, which would (for some) strengthen work incentives.14 Similarly, the Labour Party’s Back to Work plan suggests the government might want to strengthen the incentive to work by allowing claimants to try work out temporarily without a risk of being reassessed. Neither of these sorts of plans is without cost – indeed, they would mean that increases in employment would create less fiscal savings than currently – but they could help get more people into work.

Finally, if the goal is simply to increase employment (rather than reduce the health-related benefits bill), the government need not limit its attention to those currently claiming these benefits. We estimate that two in five people reporting a disability are claiming health-related benefits.15 This leaves another three in five people with a disability who do not currently claim a health-related benefit. As Table 1 shows, this group is far more likely to be in work or to have recently left work than health-related benefit claimants. It may be that there are more people in this group who are at the margins of employment and so are responsive to interventions to help them into work or stop them falling out of work.

One can entirely understand why the government is looking at how it can help people with disabilities work, but there are unlikely to be quick or easy solutions. If the government wants to design effective interventions in this area, doing more research to understand why there has been such a dramatic recent rise in health-related benefit claims is vital. 

Endnotes

  1. 1

    This figure relates to England and Wales as it is only in those countries of the UK that statistics on the number of people claiming either incapacity or disability benefits are available. Other figures in this paragraph use data from the Labour Force Survey and are for the population aged 16-64 in the UK overall. 

  2. 2

    The Scottish Government has recently replaced PIP with Adult Disability Payment in Scotland, following the devolution of disability benefits to Scotland in 2022.

  3. 3

    Although incapacity benefits are aimed at those with health conditions that limit their capability to work, claimants are under some circumstances allowed to do some paid work.

  4. 4

    Administrative data suggest a higher rate of flows into employment for UC health claimants of 3% (see chart 3.14 in OBR Welfare Trends Report October 2024). I report the Labour Force Survey based estimates here as the estimates also include employment and support allowance (ESA) claimants and I have comparable estimates for other groups. 

  5. 5

    Author’s calculations using DWP Stat-Xplore, February 2024 data. Includes both ESA and UC health claimants. ESA claimants in the support group are counted as equivalent to UC health LCWRA claimants and those in the WRA group are counted as equivalent to UC health LCW claimants. Excludes people with a live fit-note pre-assessment. Figures do not sum to 100% as claimant group is unknown for some claimants. 

  6. 6

    Author’s calculation using DWP Stat-Xplore, February 2024 based on mean ESA weekly award. 

  7. 7

    There are a small number of claimants still claiming legacy benefits such as income support or incapacity benefits. 

  8. 8

    For someone in a household with someone assessed as having limited capability for work or work-related activity, this is equivalent to £4,848 a year if they receive support for housing costs or £8,076 a year if they do not. 

  9. 9

    If someone in the LCWRA group of UC moves into work with sufficiently high earnings that their full UC award is tapered away so they are ineligible for UC altogether, they can return to UC within the following six months and remain in the LCWRA group. This means that a claimant could try work and subsequently return to an unchanged entitlement out of work, if they do so within six months.  

  10. 10

    This is the rule for those not already on disability benefits. Claimants of disability benefits earning more than 16 hours a week on the National Living Wage can apply for the LCWRA element. 

  11. 11

    This example claimant is single without children, receives the health element of universal credit and the housing element of universal credit to support the cost of renting a one-bed flat privately for £125 a week (the median of local housing allowance rates for one-bed flats).

  12. 12

    Losing the LCWRA status reduces their income for two reasons. First, they lose the UC health element, which is equivalent to £4,994 a year. Second, they lose their work allowance so now the universal credit taper applies to all of their earnings rather than to their earnings net of the work allowance. In this example, this means a further loss of £2,663 a year. Without the LCWRA status, this example individual would receive no universal credit if they worked 35 hours a week. Claimants with children are entitled to a work allowance even if they are not in the LCWRA or LCW group, so this second effect only impacts households without children. If the claimant owned their own house rather than renting, they would lose a larger work allowance so they would lose more income if they lost their LCWRA status. 

  13. 13

    See paragraphs 3.27 to 3.31 in OBR Welfare Trends Report October 2024.

  14. 14

    See discussion in Ray-Chaudhuri and Waters (2023).

  15. 15

    Author’s calculations using DWP Stat-Xplore and Labour Force Survey; see Latimer, Pflanz and Waters (2024)