Universal Credit When You’re Self-Employed

Update 20 March 2020 – the Minimum Income Floor has been temporarily scrapped. If you are self-employed and claim universal credit, you will now receive an amount equal to Statutory Sick Pay.

Claiming Universal Credit When You’re Self-Employed could provide you with some much needed financial support:

  • While you build up your business income;
  • If your income takes a dip (like during the coronavirus crisis for example).

Universal credits help by topping up your income and then get reduced as you begin to earn more.

The DWP has a different way of working out what sole traders are entitled to because their income can vary month to month.

This means if you are accepted into the UC Scheme, the amount you receive each month will vary.

What Are Universal Credits

Universal Credit is a form of financial support, generally paid monthly.

For most Universal Credits are paid at a fixed rate, with additional amounts if you have children or health costs.

It is reduced if you or your partner has up to £16,000 in savings, whether you employed or self-employed.

With all individuals becoming ineligible once they or their partners have over £16,000 saved (more below).

The current standard UC amounts, before any adjustments, are:

Your circumstancesMonthly Allowance
Single and under 25£342.72
Single and 25 or over £409.89
In a couple and you’re both under 25£488.59 (for you both)
In a couple and either of you are 25 or over£594.04 (for you both)

I’ve written a detailed Guide to Universal Credits where I go into more detail how to work out how much you can claim according to your circumstances

Update 20 March 2020 – the Minimum Income Floor has been temporarily scrapped. If you are self-employed and claim universal credit, you will now receive an amount equal to Statutory Sick Pay.

How Does Universal Credit Work if You’re Self-Employed?

Universal credit payments are based on income.

But when you are self-employed your income will tend to fluctuate from month-to-month.

That means when it comes to working out your UC you need to agree with DWP an amount you know you can commit to earning each month.

This is known as the Minimum Income Floor.

How to Calculate the Minimum Income Floor

Here’s the information you need to know to calculate the minimum income floor:

  • the National Minimum wage for your age group;
  • how many hours you are expected to work (adjusted if you have children);
  • an estimated deduction for your tax and national insurance.

An Example of Calculating the Minimum Income Floor

Sam is a self-employed Uber driver over 25 with no children.

Sam is expected to work a 35 hour week and is entitled to national minimum wage of £8.21.

Sam’s minimum income floor is £1,245..18 per month worked out:

  • 35 x £8.21 = £287.35 per week
  • £287.35 x 52 weeks = £14,942.20 per year
  • £14,942.20 ÷ 12 = £1,245.18 per month.

Who is Exempt from Using the Minimum Income Floor Method

The Minimum Income Floor doesn’t apply to everyone.

If you’ve been self-employed for less than 12 months, you may be able to claim for a ‘start-up period’ when it comes to calculating your universal credit.

During the start-up period, your actual monthly earnings are used to work out your Universal Credit and the Minimum Income Floor won’t apply.

You’ll also get support from a work coach who’s trained to work with the self-employed to help you grow your business.

You’ll also be excluded from using minimum income floor if you are too sick to work and can provide evidence of your illness, such as a doctors letter.

Savings and Universal Credit

Savings, either held by you or your partner, will affect your universal credit when you’re self-employed as they’re considered a source of income.

If you have:

  • less than £6,000 you claim will not be affected;
  • between £6,000 and £16,000 in savings your claim will be tapered;
  • over £16,000 in savings you cannot claim Universal Credit.

You’ll have £4.35 of income added to your earnings per £250 of savings between £6,000 and £16,000.

Example

If you have £8,500 in savings you’ll have £43.50 added to your monthly earnings (£8,500 – £6,000 = £2,500; £2,500/£250*£4.35).

An Example of Calculating Universal Credit When You’re Self-Employed

Susan is 27 years old, self-employed and has one child.

Susan earns £1,000 per month (£12,000 per year) and has £8,000 in savings.

Under the standard UC rules Susan would be entitled to a monthly Universal Credit of £1,241.25 as follows:

  • Standard monthly allowance £317.82
  • An Extra amount for children £277.08 
  • Childcare costs £646.35

As Susan is self-employed an adjustment needs to be made to this amount to reflect her savings and to work out her minimum income lever.

Her minimum income level is calculated as £889.42 (25 hours x £8.21).

Since her actual income is higher than the minimum income level, her actual earnings will be used for calculating universal credits.

As Susan has £8,000 in savings, her notional income will be increased by £4.35 per £250 over the £6,000 exemption. That’s £43.50.

Her adjusted income for calculating universal credits is £1,043.50.

As Susan has a child she is eligible for the work allowance, so can earn a little extra before her UC is affected. This is £503 a month.

This is £399.74 worked out as:

  • £1,043.5 – £503 = 540.50
  • 540.5 x 63p = £340.52

Susan will receive universal credits of £901.73 (£1,242.25 – £340.52)

Proving to DWP You Are Self-Employed

You’ll need to provide evidence that you are truly self-employed as part of your universal credit application process.

This is known as being ‘Gainfully Self-Employed‘.

How to Prove You Are Gainfully Self-Employed

You will be asked for various bits of information to demonstrate that you are self-employed.

These are things like:

  • Tax returns;
  • Accounts;
  • Your UTR number to prove you are registered as self-employed;
  • Details of your expenses like stock, travel and equipment;
  • Details of your customers;
  • Marketing materials.

Proving you are gainfully self-employed is important since it exempts from job search responsibilities and lets you concentrate on growing your business and earnings.

If you’re not gainfully self-employed, you’ll need to look for other work, but you can ask to be reassessed at a later date.

UC If You’re Employed and Self-Employed

When you’re employed and self-employed you UC payment will be based on the higher of your:

  • Combined earnings or
  • Minimum Income Floor

Reporting Changes in your Personal Circumstances

If your personal circumstances change you need to DWP know in case they need to reassess whether or not you are gainfully self-employed.

Changes include if you:

  • close your business;
  • start a new business;
  • find a permanent job;
  • are no longer able to work.

Reporting Your Earnings to the DWP

You’ll need to report your earnings each month to the DWP.

They won’t remind you! You’ll need to contact them with your figures.

If you don’t report your earnings DWP may stop your Universal Credit Claim.

So if you can’t submit your figures, contact them to discuss your situation and the reasons why on the phone number below.

What Does Earnings Mean?

The DWP will expect to see an income and expenditure statement. That’s a summary of everything you earned with a deduction for your:

  • Business expenses like home office, insurance, interest costs
  • Income tax
  • National insurance contributions
  • Pension contributions

These would be the figures you ultimately need to include on your tax return.

Universal credit is not a taxable benefit, but some government benefits are taxable and need to go onto your tax return.

Which State Benefits are Taxable?

Wrapping Up

Universal credits are very difficult to estimate and will vary person-to-person.

For that reason you should contact the DWP to discuss your application on:

Universal Credit helpline
Telephone: 0800 328 5644
Monday to Friday: 8am to 6pm

For more advice on self-employment and taxes, join my free Facebook Group.

Anita Forrest
About Anita Forrest

Anita Forrest is a Chartered Accountant, spreadsheet geek, money nerd and creator of www.goselfemployed.co - the UK small business finance blog for the self-employed community. Here she shares simple, straight-forward guides to make self-employment topics like taxes, bookkeeping and banking easy to understand.