What it means
Most means tests have two parts: an income test and an assets test. The income test looks at what comes in over a defined period, while the assets test looks at what is owned, and in many schemes the applicant must pass both to qualify.
The reason means testing exists is cost control. Universal payments are simple to administer but expensive, so governments and institutions target limited money at the households that need it most, accepting more administration in exchange.
Applying a means test usually involves a taper rather than a cliff edge. Above a free area, the benefit reduces by a set amount for each extra dollar of income, which avoids the situation where earning one more dollar removes the entire payment.
Definitions do most of the work, and they vary between schemes. Some tests count gross income, others net; some ignore the family home and retirement savings, others include them; and many look at household rather than individual resources, so a partner's earnings can decide the outcome.
The recognised drawbacks are administrative cost, low take up because the process is intrusive or complex, and effective marginal tax rates. A taper of 50% combined with income tax can mean a household keeps very little of each extra dollar earned, which is why scheme design gets so much political attention.
In practice
Real-world examples.
Example
A local authority means tests home care contributions, leaving residents with income below $1,400 a month paying nothing and charging a rising share above that. A resident on $1,900 a month contributes $250, calculated on the excess rather than the total.
Example
A private school offers fee remission on a sliding scale, with full remission below $45,000 of household income and no support above $110,000. A family on $70,000 with two children in the school receives roughly 60% off the second child's fees.
Example
A personal bankruptcy system uses a means test to decide which procedure applies. A debtor whose income is below the regional median qualifies for full discharge, while one above it is directed into a repayment plan lasting several years.
Formula
Calculation
Benefit payable = Maximum benefit - ((Assessable income - Free area) x Taper rate), with a minimum of zero
A support payment has a maximum of $800 a month, a free area of $1,200 a month and a taper rate of 50%, plus an assets limit of $25,000 excluding the family home.
An applicant earns $2,000 a month and holds $18,000 in savings.
Assessable income above the free area = $2,000 - $1,200 = $800
Reduction = $800 x 0.50 = $400
Benefit payable = $800 - $400 = $400 a month
The assets test is passed because $18,000 is below the $25,000 limit. The cut out point, where the benefit reaches zero, is the income at which the reduction equals $800: $800 / 0.50 = $1,600 of excess income, so $1,200 + $1,600 = $2,800 a month. If the same applicant instead held $30,000 in savings, they would fail the assets test and receive nothing, even though the income test alone would still have produced $400.Case study
Seen in the real world.
The following is an illustrative and entirely fictional example. The Ardenmoor Trust, an invented charitable foundation, offered $6,000 apprenticeship grants and was overwhelmed with 3,400 applications for 200 places. Its original rule was a simple cut off at $40,000 of household income, which produced two problems: applicants just above the line missed out entirely, and several successful applicants turned out to own substantial savings.
The trustees redesigned the test. Full grants of $6,000 went to households below $30,000, with a 40% taper above that, so a household on $40,000 received $6,000 - (($40,000 - $30,000) x 0.40) = $6,000 - $4,000 = $2,000. The grant reached zero at $30,000 + ($6,000 / 0.40) = $45,000. A separate assets limit of $50,000, excluding the family home and a single vehicle, was added.
In its first year under the new rules the fictional trust supported 310 apprentices rather than 200 with the same $1,200,000 budget, because partial grants stretched further than a smaller number of full ones. Administration cost rose from about $18,000 to $46,000, which the trustees judged worthwhile, though they noted the classic means testing complaint: several eligible families never applied because the paperwork asked for three months of bank statements.
Watch out
Common mistakes.
- Assuming a single income figure decides the outcome, when most schemes also apply an assets test that can override a passing income result.
- Reading a threshold as a hard cliff when the scheme actually tapers, so applicants slightly above the free area give up without applying.
- Using gross pay when the scheme assesses net or adjusted income, which produces the wrong answer in both directions depending on the rules.
Questions
People also ask.
Does the family home usually count in the assets test?
In many schemes it is excluded or partly excluded, but this varies enough between programmes that it should always be checked in the specific rules.
What is a taper rate?
The rate at which support reduces for each extra dollar of income above the free area, so a 50% taper removes 50 cents of benefit per additional dollar earned.
Why do some people qualify on income but still receive nothing?
Because they fail the assets test, hold income from a source the scheme treats differently, or are assessed at household level where a partner's earnings are counted.
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