Work Allowances 2025/26
| Situation | Work Allowance |
|---|---|
| With housing costs element | £404/month |
| Without housing costs element | £673/month |
What This Means in Practice
If you receive the housing costs element, you can earn £404/month before any reduction. After that, UC reduces by 55p for every £1 earned. This means on £1,000/month earnings, your UC reduces by about £328.
The effective marginal tax rate for UC claimants is very high: 55% UC taper + 20% income tax + 8% NI = up to 63% combined marginal rate. This creates a significant disincentive to increase hours, known as the "poverty trap."
Universal Credit and Employment
Universal Credit (UC) is the UK's main means-tested benefit, replacing six legacy benefits including Tax Credits and Housing Benefit. The standard allowance for a single person aged 25+ is £393.45 per month (2025/26), with additional elements for housing costs, children, disability, and caring responsibilities. Importantly, UC is designed to always make work pay — the taper rate means you keep 45p of every £1 you earn above your work allowance.
The work allowance is the amount you can earn before UC starts reducing. If you have housing costs covered by UC, the work allowance is £404/month. Without housing costs in your UC, it is £673/month. Above these thresholds, your UC reduces by 55p for every £1 of net earnings. This creates an effective marginal tax rate of approximately 70% when combined with income tax and NI — meaning a £1 pay rise only puts roughly 30p in your pocket. Understanding this interaction is essential for financial planning at lower income levels. See our salary breakdown pages for take home calculations at every income level.