Putting work rehabilitation at the heart of welfare reform

The government urgently needs to restructure the UK’s social security system to stop pushing people with long-term health conditions out of the labour market. The UK’s longstanding health employment gap reflects social security and employment policy structures that are not fit for purpose. 

Rising ill health in the working-age population is exacerbating this persistent policy failure. Poor health is restricting the number of people able to participate in the workforce, reducing the productivity of people who can work, and placing pressure on the public finances. The nature of health conditions affecting people’s ability to work has changed, with more people reporting mental health conditions, but our already ineffective welfare system has stood still. 

In contrast to the UK, social security systems in many European countries have a stronger emphasis on active rehabilitation. These approaches are often built on contributory principles that reward individuals who have paid into the system, and prioritise keeping people connected to the labour market during periods of ill health. 

The UK government has tended to focus on supporting people back into work, rather than keeping them in work. For people with health conditions this means resources are concentrated where it is hardest to improve outcomes for them. The longer people are out of work, the more likely their health will deteriorate and less likely that they will return to work.

We have seen how this approach pushes away people with health-related barriers to work, rather than helping them stay in work or quickly return. A new contributory benefit, in line with proposals in the 2025 Pathways to Work green paper, could be a key component of wider changes in policy structures and employer practices that would enable a shift to a preventative system. 

This briefing, building on the recommendations of the Commission for Healthier Working Lives, sets out how to shape a new contributory benefit, and the system it sits within, to help people stay healthy and in work for longer.

The welfare system remains in the spotlight because the economic costs of health-related benefits for working-age people continue to increase. The government has most recently projected this will rise from £29bn in 2019/20 to £65bn a year by 2029/30, and there are widespread calls for reform of the system. 

There are currently two main types of benefit that provide financial support to people with long-term health conditions or disabilities:

• Disability benefits: the Personal Independence Payment (PIP) provides non-means-tested financial support to help disabled people meet the extra costs of living with a disability, regardless of employment status, in England, Wales and Northern Ireland (in Scotland, Adult Disability Benefit replaced PIP from 2022 onwards).
• Incapacity benefits: the health element of Universal Credit (known as UC health) provides means-tested income support for people in the UK unable to work due to a health condition. The New Style Employment and Support Allowance (NS-ESA) is paid at a flat rate, with similar health-related eligibility criteria. But it is dependent on past National Insurance contributions, rather than being means-tested. There is no time limit on claims where a person’s health condition is assessed as preventing them from being able to prepare or look for work. Where health is less of a barrier, claims are limited to 365 days.

A review of PIP is underway, led by Stephen Timms MP (Minister of State for Social Security and Disability), following a failed attempt at reforms to cut entitlements. But while that is happening, it is crucial that momentum is not lost for the necessary and positive reforms that can prevent the personal and societal cost of people increasingly being left out of work, in poverty and with poor health.

Two key areas for welfare reform

The current system of incapacity benefits leads to people with health conditions becoming out of work long-term due to two key issues: a lack of timely practical support and poor financial incentives.

New UC health applicants wait on average 4 to 5 months to have their ability to work assessed (through the work capability assessment), after already being off work for up to 6 months (statutory sickness absence). After a lengthy wait, if applicants are found to have ‘limited capacity for work or work-related activity’, there is little further active engagement, and no routine offer of practical rehabilitation or employment support.

Incentives within the system also push people out of the labour market. The standard element of Universal Credit is up to £400 a month for a single person, which doesn’t cover basic living costs, even accounting for additional support available for housing. So people with health conditions are incentivised to seek a higher level of financial support from UC health (an additional £423 a month, falling to £217 a month from April 2026). UC health also offers an escape from a harsh conditionality regime with reduced (or no) work search and preparation requirements placed on recipients. Once claiming UC health, the perceived risk of losing entitlement to this extra money (due to an improvement in capability to work) can therefore put people off seeking to return to work.

To address these issues, there needs to be a much stronger focus on providing rehabilitative support once a person is first unable to work due to a health problem, when it can be most effective. People should receive a level of financial support that can sustain an acceptable living standard and enable them to participate in work-related support. 

This is where introducing a new time-limited contributory benefit for recent work leavers would help – as the Commission for Healthier Working Lives argued. Focusing on rehabilitation straight after someone leaves work would align the UK with best practice from abroad (see next section). Seamlessly providing access to better financial support based on work history, using the existing mechanism of National Insurance contributions, could also help people stay connected to the labour market. 

The March 2025 Pathways to Work green paper acknowledged that the current welfare system ‘does not encourage and enable disabled people and people with health conditions to engage with the labour market or thrive in employment’. 

Despite this, the proposed reforms present a mixed picture in strengthening the support and incentives in the welfare system. On the plus side, allowing existing recipients to move into work (and potentially back out again) without losing their health benefit entitlement should encourage more people to try work. Proposals to halve the rate of the Universal Credit health element and to align eligibility with PIP also help to reduce financial incentive problems – but under these plans some people will inevitably lose out, which means there’s a risk of worsening financial hardship and the health of those affected.

Removing the work capability assessment for future claims (and replacing it with PIP eligibility) will mean that UC health becomes an income top-up for people with long-term health conditions expected to last for at least a year. This will reinforce the existing gap in proactive support for the newly affected, ie people who have just left work with a health condition. 

That’s why an ‘unemployment insurance’ (UI) benefit is a promising proposal. This would merge existing contributory benefits New Style Jobseeker’s Allowance and New Style Employment and Support Allowance. It would provide time-limited financial support without a health assessment, and would be paid at a rate equivalent to the higher amounts available through New Style ESA (£609 a month).

Under government plans, eligibility for new work leavers would depend on their recent work history, via their National Insurance contribution records. As it would not be subject to a health assessment, the UI benefit would provide better and more timely financial support to people with less severe and shorter term health conditions, and particularly mental health conditions. This would be an improvement on the current system, which sees people experiencing lengthy waits to go through the work capability assessment before receiving any financial or practical support. In the new system some of this group will lose access to UC health entirely if they do not qualify for PIP. Enabling access to adequate and timely financial support will be key to successful rehabilitation.

With the time-limited nature of the UI benefit, the UK could move closer to European welfare models that embed vocational rehabilitation (work-focused support to help individuals with health problem overcome barriers to employment). In these systems, contribution- or insurance-based transitional schemes provide stronger financial and practical support when people are moving between employment and economic inactivity. Crucially, in many of these systems people are only moved onto long-term incapacity benefits once all options to support their return to work have been fully explored.

To make the most of the opportunity created by restructuring contributory welfare payments, the UI benefit would need to:

• provide sufficient income replacement
• maintain association with work
• support people until they recover
• protect the most vulnerable
• enable rapid access to appropriate financial support
• require active engagement. 

Provide sufficient income replacement

An adequate level of income replacement can help to protect people’s health by reducing stress and anxiety created from a sudden fall in income, or an inability to afford essentials while rehabilitating. It can also give people more time to find a better quality role that is less likely to negatively affect their health.

The Commission for Healthier Working Lives recommended payments covering 60–80% of usual income, capped at the median wage, in line with international best practice and the furlough scheme introduced during the COVID-19 pandemic. This would mean, based on 2024 earnings data, the top rate of time-limited UI payment (eg for a median earner working full time) would equate to between £1,893 and £2,524 per month before tax, compared with the current proposed flat rate of £609.

Maintain association with work 

Similarly to the COVID-19 furlough scheme – which protected health better than being unemployed – these UI payments could be made through employers instead of through the benefit system, to maintain labour market attachment (ie help people still feel connected to the workplace). This could also enable a more flexible payment scheme where people who may need to gradually return to work are able to supplement part-time wages with a contributory benefit top-up. This could be particularly beneficial for people with mental health conditions, which can fluctuate in severity. Rebranding the scheme so that it is seen as a form of ‘rehabilitation pay’ rather than an out-of-work benefit, could also reinforce a sense of connection to work. 

Support people until they recover 

People who have recently left work for health reasons may need an extended period of time to recover their health before moving back into work. The proposed 12-month maximum duration should be sufficient for many claimants.

The UI benefit would also remove perverse financial incentive to seek out health-related support by paying a single rate to all who have recently left work regardless of their health. However, the group entitled to the new contributory benefit will include people who have recently left employment for non-health reasons, for whom a shorter payment period may be more appropriate. As the Resolution Foundation has pointed out, paying a higher rate of benefit can help people find better quality work. But doing this for too long (suggested to be over 3 months) risks increasing unemployment, which is strongly associated with poor health.

Therefore, as in other countries, eligibility to receive UI for a longer period due to health could be established if people have left employment after an extended period of sickness absence – for example, a minimum of 4 consecutive weeks of qualifying for statutory sick pay prior to leaving employment. For others, the higher payment rates could be tapered away after an initial period, to reduce sharp income shocks. 

Protect the most vulnerable

Currently NS-ESA recipients with more severe health conditions that prevent them from working at all have no time limit on their benefits. But under the government’s proposals, people with savings or household income that make them ineligible for Universal Credit and UC health will lose out on UI. This could affect 228,000 people, or 37% of NS-ESA recipients (based on recipient data from December 2024 to February 2025).

The Institute for Fiscal Studies has pointed out that applying a 12-month time limit to existing NS-ESA claimants would cut annual benefit spend on this group by £2.1bn (based on 2025/26 benefit amounts and claimant numbers). To mitigate against risks from not financially supporting people with long term-health conditions, people qualifying for the contributory UI benefit after leaving work, who also claim PIP or have severe conditions, could eventually move on to a longer term flat rate with no time limit applied to their award.

Enable rapid access to appropriate practical support

The government has yet to set out how a practical support offer would be developed around the UI benefit. There is a proposal to introduce a mandatory ‘support conversation’ between the recipient and a work coach, to determine employment search activities. However, this will bring with it negative associations with Jobcentre Plus, and risks remaining an ‘out-of-work’ conversation. 

For people moving onto the UI benefit, a step change from current provision is required. International experience suggests that quick access to appropriate help, through a caseworker model of support (discussed below) is key to the success of a rehabilitation approach. 

In general, the aim should be a more flexible support offer available to all claimants, which can identify health (or other) barriers to work as well as providing practical assistance. Health-specific support should be offered where appropriate, without creating a separate pathway. Such an approach would let people focus on the real obstacles faced in returning to work, rather than framing barriers only in strict medical terms.

Require active engagement

In a trusted system with a flexible support offer, it is reasonable to expect some engagement with support as a condition of a higher rate of benefit payment. The aim, however, would be to take a different approach to current conditionality and claimant engagement. If integrated with a supportive caseworker model, as in countries such as Denmark, expectations could be tailored to individual circumstances, encouraging progress towards work at a sustainable pace. This may be light-touch for people with few barriers to working. Alternatively, it could include an initial focus on returning to good health or building confidence before work becomes a realistic goal. 

Where claimants do not engage, a structured process should be in place to understand the reasons, re-establish contact and offer appropriate help before any sanctions are considered. 

Success will depend on the strength of trust within the system. Independent health professionals and caseworkers should be a key part of decision making, and their support should be provided outside of Jobcentre Plus (in line with plans in Get Britain Working to devolve employment and skills support).

Experience from other countries shows a transitional rehabilitation benefit is most effective as part of a wider system of support geared towards active rehabilitation and work returns. This support system is currently very limited, or else simply not available, for most UK workers. We must build the required structures and capability for rehabilitation to be a success – and here’s how.

A central role for caseworkers

Early, joined-up action is critical to preventing job loss and long-term economic inactivity. It also helps people remain healthier and more socially and economically engaged over the long term. In contrast to many European peers, the UK offers little support when people first begin to experience health challenges at work. Government programmes tend to focus on people already economically inactive for some time, and the vocational rehabilitation and occupational health services provided by employers is much weaker in the UK than in other countries.

A caseworker model would support early intervention with people at risk of leaving work. The role of a caseworker is to provide ongoing contact and health coaching, liaise with employers to advise on adjustments, and connect individuals to other services such as health care, housing, debt advice, employment or training. Caseworkers take a holistic ‘problem-solving’ approach to address the real issues preventing people from staying in work and reaching their potential.

Elements of caseworker approaches exist in pockets, such as recent WorkWell pilots or through private insurance and vocational rehabilitation providers. However, comprehensive and joined-up access is rare. Both the Commission for Healthier Working Lives and the Keep Britain Working review identify caseworker approaches as a missing link in embedding early intervention and rehabilitation in the UK’s approach.

A comprehensive caseworker offer would allow a rehabilitation-focused benefit to operate far more effectively, with caseworkers providing seamless support starting in the workplace (and continuing when people leave work, through to a work exit and rehabilitation). Caseworkers could also play a role in determining benefit eligibility. Alongside a multidisciplinary team (including a health care professional and employment adviser), they could assess entitlement to an extended duration of contributory benefit, and/or consider whether a move to long-term incapacity benefit would be more appropriate.

A stronger and clearer role for employers

Employers have a critical role in determining whether people with health challenges remain in or return to work, and therefore in shaping pressures on the welfare system. But there is not a consistent or standardised approach in the UK. The statutory minimum requirements provide inadequate income replacement – up to 6 months of £118.75 a week – and there are low levels of expectation on employers to proactively help employees return. This flawed combination reinforces people being pushed out of the labour market, particularly for workers in lower paid and insecure roles.

While some employers offer strong preventative support and proactivity when health issues arise, most employers are reactive – stepping in only once problems have developed. The Commission for Healthier Working Lives found that employers often cite a lack of clarity about their responsibilities and best practice as a key barrier to action, alongside cost and capacity pressures.

The Keep Britain Working review (led by Sir Charlie Mayfield) has also set out the case for improving employer practice. Echoing the Commission for Healthier Working Lives, it has identified the management of sickness absence as a priority issue. The Commission recommended two key moves to do so:

• increasing statutory sick pay to within the range of 60–80% of replacement earnings, capped at the median wage
• clear, reciprocal obligations on both employers and employees to agree return-to-work plans, with caseworkers or occupational health experts advising on adjustments and rehabilitation plans. 

A reformed sickness absence system could be integrated with a rehabilitation benefit and the caseworker model of support set out above. The government could continue paying the enhanced rate of statutory sick pay through a contributory benefit, and paying through employers could minimise disruption for individuals while reinforcing connection with work. As with entitlement to the enhanced contributory benefit rates, payment of enhanced sick pay should be conditional on the worker engaging with caseworker-led support, accompanied by a clear responsibility for employers to support a return to work.

This approach would bring the UK closer to international best practice, while addressing the financial incentives that can lead some workers to exit the labour market. Although such a model would increase employer costs, analysis suggests these would be manageable over time, particularly if combined with a rebate system for strong performers. A phased implementation approach, for example starting with larger employers, could further reduce disruption.

How many people with health challenges would a new UI benefit support?

To estimate the potential caseload and costs of a rehabilitation-focused benefit, the Health Foundation undertook modelling with the Resolution Foundation, using data on individual’s health and work history in the Labour Force Survey and Family Resources Survey. This analysis assumes a new benefit is introduced into the current system, with a contributory scheme for recent work leavers with health limitations (and dependent on recent National Insurance contributions).

Based on this modelling, we estimate the point-in-time caseload to be around 70,000 people – but because of flows in and out of work, the total number of people receiving the benefit in a year would be higher. Assuming people receive 60% of previous earnings (capped at the median wage), additional in-year spending on the benefit would be around £0.9bn.

However, this does not take into account potential savings from reducing inflows onto long-term incapacity benefits from focusing on rehabilitation, with rapid practical support targeting work returns. Based on previous OBR estimates, for each person that moves from being healthy in work to economically inactive with a long-term health condition, there is an annual cost to the government of more than £17,000 per year due to foregone taxes, higher benefit spend and increased health service usage. With the exception of those who are very close to state pension age, for every person who is instead supported to return to work, the government will be able to recoup the costs of 12 months higher benefit payment within a year.

There is also potential for savings by reducing the numbers of people falling out of work to begin with. Initial modelling for the Commission for Healthier Working Lives found that a scaled caseworker model reducing employment exits due to long-term sickness absence by just 2 percentage points could, even after accounting for the costs of delivering support, generate over £1bn in net savings over 5 years. These savings derive from preventing people moving onto long-term incapacity benefits and would build over time, reflecting that people rarely return to work once receiving incapacity benefit.

While this may appear ambitious, even larger reductions were achieved in the Netherlands, which implemented major reforms in the early 2000s to curb flows into long-term economic inactivity.

The UK’s labour market and welfare system face major headwinds. An ageing population, rising levels of ill health and a higher state pension age all increase the pressure to support people to remain in good health and work for longer. The type and nature of health conditions has changed over time: a greater share of people leaving the labour market with mental health conditions reinforces the need for a different approach in supporting people to remain in employment. 

But successful labour market and welfare reform often takes time. In the UK, for example, stronger maternity rights (which have driven rising female participation in the workforce) were introduced gradually over decades. Similarly, countries like the Netherlands that have managed to build robust systems to support people with health challenges did so through many years of development and iteration.

Although improvements might not appear overnight, the current policy opportunity is significant. The Timms review, expected to report next year, will consider how to place disability benefits on a fair and sustainable footing. And the forthcoming proposals from the Department for Work and Pensions are expected to strengthen the contributory elements of the welfare system and introduce a time-limited contributory benefit for recent work leavers. This UI benefit offers an important chance to embed rehabilitation within the UK welfare system. In the medium term, building the structures needed to provide intensive, time-limited financial and practical support would better orient the system towards helping people make timely returns to work and lay the foundations for a stronger, more sustainable welfare model.