Impact of changes to Local Housing Allowance from 2011
Introduction
In the Emergency Budget on 22 June 2010, the Government announced the following changes to the Local Housing Allowance:
From April 2011 we will:
- remove the five bedroom Local Housing Allowance rate so that the maximum level is for a four bedroom property.
- introduce absolute caps so that Local Housing Allowance rates cannot exceed:
- £250 for a one bedroom property,
- £290 for a two bedroom property,
- £340 for a three bedroom property,
- £400 for a four bedroom property.
In addition, the £15 weekly excess that some customers can receive under the Local Housing Allowance arrangements will be removed. This change was first announced by the previous administration in Budget 2009 but they subsequently decided to defer it until April 2011.
From October 2011 we will:
- set LHA rates at the 30th percentile of rents in each Broad Rental Market Area rather than the median.1
The Coalition Government has also announced that it will triple its contribution to local authorities’ funding for Discretionary Housing Payments. This is currently £20 million a year, and will increase to £30 million in 2011/12 and then to £60 million a year from 2012/13. In discussion with local authorities, we intend to target these resources to give extra support to areas where the impacts are greatest. It will give authorities more flexibility to provide additional support where it is most needed. For example, this could provide either a transitional safety net for customers who need to find alternative accommodation or longer term support for customers who are less able to move.
The Government also announced the inclusion of an additional bedroom within the size criteria used to assess Housing Benefit claims in the private rented sector where a disabled person or someone with a long term health condition has a proven need for overnight care and this is provided by a non-resident carer(s).
Reasons for the changes
The measures announced will provide a fairer and more sustainable Housing Benefit scheme by taking steps to ensure that people on benefit are not living in accommodation that would be out of the reach of most people in work, creating a fairer system for low-income working families and for the taxpayer. It will avoid the present situation where Housing Benefit recipients are able to live in very expensive properties in areas that most working people supporting themselves would have no prospect of being able to afford.
Housing Benefit expenditure has ballooned in the past 10 years, from £11 billion in 1999/2000 to £20 billion in 2009/10, in cash terms. Within this total, expenditure on working age recipients has increased from £7 billion to over £14 billion. Without reform, total expenditure is forecast to reach £25 billion by 2015/16, a further rise of 24 per cent. This is unsustainable in any economic climate, but the need to tackle the record deficit makes reform even more pressing.
The Government is clear that the overall cost of Housing Benefit must be controlled and constrained. The package of measures being introduced for the Local Housing Allowance in 2011/12, including the removal of the £15 excess planned by the previous administration, will achieve savings of around £1 billion by 2015/16. The other changes to Housing Benefit announced in the June Budget are estimated to save a further £1.1 billion in 2015/16. Overall, this represents a reduction of nine per cent in the total 2015/16 expenditure on Housing Benefit.
Housing Benefit expenditure, with and without reforms, in cash terms
The reforms will also begin to address poor incentives to work inherent in the current system. The average Housing Benefit award for Local Housing Allowance cases is over £9 per week more than for customers still on the previous scheme in the private-rented sector.
More specifically, in London some rates are excessively high. For example, Local Housing Allowance rates for five bedroom properties in central London have risen as high as £2,000 per week (at July 2010 rates). However, even rates for two-bedroom properties can exceed £300 per week in some London areas.
A couple with one child spending a third of their gross income on accommodation would need a household income of over £45,000 a year to afford a rent of £290 a week, and would be in the top third of the household income distribution. More strikingly, a similar family would need an income of over £156,000 to afford a rent of £1,000 a week, and they would be in the top two per cent of the income distribution. What these reforms mean is that people receiving Housing Benefit may not be able to live in expensive city centres, but the same applies to most working families who do not receive benefit.
From April 2011, the overall caps on Local Housing Allowance rates will address excessively high Housing Benefit levels. At the same time the removal of the five bedroom rate will bring the housing choices of larger families more in line with those who do not claim Housing Benefit. Reducing all rates to the 30th percentile rather than the median should help bear down generally on the rental values being met through Housing Benefit from October 2011, whilst still making around 30 per cent of private rented properties affordable to Housing Benefit recipients. This again much more closely aligns the housing available to Housing Benefit recipients with that affordable to low-income working families not on benefit.
The £15 excess which allows tenants to receive more benefit than they need is not justifiable in the current fiscal climate. The previous administration had already decided to withdraw it from 2011. Although the aim of the excess was to give tenants an incentive to shop around for properties below the Local Housing Allowance rate, there is little evidence that this has had a big effect in practice.
In the March 2010 Budget, the previous administration also announced that they planned to address high rates of Local Housing Allowance by taking the highest one per cent of rents (nationally) out of the market evidence of rents collected by the rent services. This complex formula would have:
- led to distortions in the evidence collected for some bedroom sizes;
- left the problem unresolved (rents of over £1000 a week would still have been paid under the Local Housing Allowance); and
- lacked transparency.
The Government has replaced this measure with straightforward caps on the highest rates.
The Government is also responding to concerns that the criteria used to determine the size of property a customer requires only take account of people who live in the customer’s dwelling as their home. Therefore a paid carer who resides with the customer is reflected in the size criteria but no allowance is made for carers who provide overnight care but who normally live elsewhere.
In recent years, local authorities have increasingly been asking for advice as they have come under pressure to include an extra room for the use of non-resident carers. This has led to inconsistency in treatment of non-resident carers. In some areas, the additional cost of a sleep-over room has been met by social services. Elsewhere the local authority has met the cost through a Discretionary Housing Payment but, on other occasions, the customer has had to meet the shortfall themselves. The Budget measure to fund an additional bedroom for non-resident carers puts right this unacceptable position.
Impacts of the changes
We have completed an initial Equality Impact Assessment - Changes to the Local Housing Allowance arrangements and Housing Benefit size criteria for people with non-resident overnight carers. Taking all the measures together, this does not show a disproportionate impact on any one group.
We will be working with Communities and Local Government, the Welsh Assembly Government and the Scottish Government, along with local authorities, to assess the wider impacts on their housing functions. We will also publish a full impact assessment when legislation is laid before Parliament.
As part of this work, we have already looked at the impacts on:
- various groups, for example, by dwelling size, client group.
- local authorities.
- the affordability of accommodation.
- households affected by the one to four bedroom caps and removal of five bedroom Local Housing Allowance rate by local authority and Government Office region.
- households affected by 30th percentile.
The Impacts of Housing Benefit proposals: Changes to the Local Housing Allowance to be introduced in 2011-12 is produced in three parts. The first shows the impact compared to now of the Local Housing Allowance measures that the previous administration had decided to implement:
- removing the £15 excess, and
- taking out the top one per cent of rents at a national level from the market evidence database.
The second shows the impact compared to now of the measures which are being introduced in 2011/12, including those announced by the Government in the Budget on 22 June.
And the third part considers the additional impact of the measures contained in the June Budget compared to those announced by the previous administration.
The changes already announced by the previous administration would have made 49 per cent of Housing Benefit recipients assessed under the Local Housing Allowance worse off by an average of £12 a week. Together with the package announced in the June Budget, the overall impact of the changes which are being introduced would be to reduce Local Housing Allowance entitlements by an average of £12 a week, based on current rent levels and accommodation choices. However, the purpose of reform is to influence rent levels and housing choices, which is likely to mitigate the impact of these measures.
- Impacts of Housing Benefit proposals: Changes to the Local Housing Allowance to be introduced in 2011-12 (3.93MB)
- Impacts of Housing Benefit proposals: tables (907KB)
Footnotes
1 The changes will apply to new customers from the date they come into effect and to existing customers from the anniversary of their claim unless they have a change of circumstances which requires the local authority to re-determine their claim sooner.
