Head of LITRG Low Incomes Tax Reform Group/CIOT
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Universal Credit: Get the details right

Victoria Todd gives a brief outline of how Universal Credit works particularly for self-employed people who need to make a claim.

7th Apr 2020
Head of LITRG Low Incomes Tax Reform Group/CIOT
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Universal Credit and the self employed - LITRG guide
iStock_Empty wallet_Zhonghui Bao

The current coronavirus situation means that some self-employed individuals have seen a significant fall in income with many unable to work at all at the present time.

On 20 March, in his first major speech on support for businesses, the Chancellor said that every self-employed person can now access, in full, Universal Credit (UC) at a rate equivalent to Statutory Sick Pay (SSP) for employees.

Not surprisingly, this is a simplification of the rules. To help practitioners get to grips with the UC system, AccountingWEB asked me to put together an introductory overview.

What is UC?

UC is a means-tested benefit that was introduced in 2013 to replace six ‘legacy’ benefits:

  • Working Tax Credit
  • Child Tax Credit
  • Housing Benefit
  • Income Support
  • Income-based Jobseeker’s Allowance
  • Income-related Employment and Support Allowance.

Roll-out of UC was expected to be complete by 2014 with existing legacy benefit claimants moved across by 2017. Unfortunately, that timetable changed considerably and, before the current situation emerged, legacy benefit claimants were expected to transfer between November 2020 and December 2024.

This delay is important because it means we currently have two systems running alongside each other – UC and the old legacy benefits system.  

What do I need to know about UC?

  • As with most means-tested benefits, UC takes into account circumstances and income of the claimant and their partner (if they have one). We have seen some self-employed claimants apply for UC in the expectation they would get an amount equivalent to SSP, but their partner’s income is too high to receive any payment.
  • UC is for those of working age. Broadly, those who have reached state pension age cannot claim unless they are part of a ‘mixed age’ couple where their partner is under state pension age. They may be able to claim pension credit instead.
  • It has a capital limit of £16,000. If the claimant has capital above that amount, they won’t be entitled to UC no matter their income. Between £6,000 and £16,000, capital will produce a tariff income that will be used in the calculation.
  • UC is designed to cover those who are out of work as well as those in work. It usually has work-search requirements attached to the claim for those who are required to look for work or increase their hours. This is called conditionality and is enforced via a claimant commitment. These requirements have been somewhat relaxed during the Coronavirus outbreak.
  • It is administered mainly online and (usually) via face-to-face appointments. During the current crisis, most of the process is either online or dealt with by phone. There are currently some delays on the phone lines and with identification checks for claims.
  • UC is based on monthly assessment periods. These are generally based on the date of claim (unless in the last few days of a month). So if a claim is made on 20th April the first assessment period will be 20 April to 19 May and period 2 from 20 May to 19 June.
  • Payment is usually made seven days after the end of the assessment period. This means that most people have to wait five weeks for their first payment. They can ask for an advance when they claim, but it will have to be repaid - usually by reducing future UC payments.
  • UC has amounts within it – called elements – that cover housing costs (rent), childcare, children, disability and carers. These are in addition to the basic standard allowance. The Government announced a one-year increase to the basis standard allowances of £20 a week as part of the coronavirus support package. Circumstances of the claimant and their partner dictate which elements are awarded in any assessment period. These elements are added together to create a maximum amount. Earned income above certain thresholds (work allowances) reduces the maximum by 63p for each £1. Unearned income reduces the maximum amount £1 for £1.
  • There is no specific agent authorisation process. UC works based on explicit consent which must be provided in writing, on the telephone or face to face.

New claims

It is no longer possible for most people to make claims for any of the legacy benefits. They will need to claim UC instead.

There are some exceptions for frontier workers and those who receive (or have recently received) a severe disability premium in certain benefits. Those two groups can make new claims for legacy benefits – everyone else needs to claim UC.

Existing benefit claimants

Anyone already claiming one of the legacy benefits will remain on those benefits until one of the following happens:

  1. They need to make a claim for another benefit that UC has replaced – for example a tax credit claimant has a fall in income and needs to claim help with their rent. They can no longer claim housing benefit and so will need to make a UC claim. Once a UC claim is made all legacy benefits will terminate.
  2. They have a change of circumstances that ends their legacy benefit claim – for example a single tax credit claimant moves in with a partner. Their tax credit claim will end and they will need to claim UC if they require continued support.
  3. They choose to claim UC. Some people will be better off on UC than they are under legacy benefits, others will be worse off. UC works very differently to the old legacy benefits, especially tax credits; claimants must be sure before choosing to make a UC claim as for most people there is no going back to the old system.

Most other changes of circumstances can still be reported without triggering a move to UC. For example, a tax credit claimant can report a decrease in income or can add a child to their claim. If unsure, we suggest people seek specialist welfare rights help.

How does UC work for the self-employed?

As explained above, UC is based on monthly assessment periods. Earnings from self-employment must be reported usually within 14 days after the end of the assessment period. UC uses the cash basis – there is no choice about this. There are also specific rules about allowable expenses and the treatment of losses.

The most controversial part of UC for the self-employed is the minimum income floor (MIF). After 12 months, anyone not earning above their individual threshold (broadly 35 hours x national minimum wage – although it may be fewer hours depending on claimant circumstances) will be treated as if they are and have their UC calculated on that basis. The MIF has been temporarily suspended for all UC claimants from 6 April as one of the Covid 19 support measures.

The grant from the Self-Employment Income Support Scheme (SEISS) will be treated as earned income for UC. It is not yet clear whether it will be treated as income in the assessment period it is received. If so, it could potentially trigger the complex surplus earnings rules – which means any excess income is carried forward to a future assessment period and treated as income in that period.

Directors of limited companies are also treated as self-employed for UC purposes. The UC Regulations contain ‘look-through’ rules so that where a claimant has a company that is analogous to that of a sole trader, they are treated for UC purposes as being a sole owner or partner. See the RevenueBenefits.org.uk guidance for more information. LITRG are yet to hear about how these rules are applied in practice.

In summary

If your clients find themselves in need of financial support, there are a number of things to check before making a new UC claim. Remember that there are non-means tested benefits that might also be applicable – for example the new-style employment and support allowance.

It is very important to get advice before making a UC claim if they are already in receipt of any of the legacy benefits that UC replaces because as soon as the UC claim is made the legacy benefit claim will terminate.

The following websites provide more detailed information:

You can also use the following calculators to help identify what help might be available:

Victoria Todd will be answering questions about Universal Credit in an AccountingWEB Coronavirus Q&A at 9am on Wednesday 8 April. Join her and Rebecca Benneyworth for an in-depth discussion of how the business support and benefits systems will work for the self-employed in the months ahead. The session will be available to view on demand for a week afterwards.

Replies (7)

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bike
By FirstTab
07th Apr 2020 22:11

Very helpful. Thank you.

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bike
By FirstTab
07th Apr 2020 22:11

Very helpful. Thank you.

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By clark.hall
08th Apr 2020 10:42

One to bookmark. Helpful article, thanks

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By Coopers Willy
09th Apr 2020 21:16

Thank you Victoria, handy article. I note certain directors are treated for UC purposes as self-employed and so this presumably means that such UC claimants need to be reporting their company profits (on a cash basis) each month, rather than reporting salaries/dividends actually drawn. Does this really mean a company director could be drawing a salary, but so long as overall the company is making a loss before deducting the cost of this salary then the income for UC purposes is nil?

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Replying to Coopers Willy:
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By clark.hall
14th May 2020 08:38

Just looking into this myself. The link to revenuebenefits.org is useful but I'd say it's currently much more of a grey area than reporting profits on a cash-basis. In my opinion, if say husband and wife directors are drawing most profits as salary/dividends and leaving reasonable working capital in the company - I don't think those amounts of retained profits would be reportable under UC.
But, I'm just thinking out loud.

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Morph
By kevinringer
16th Apr 2020 13:55

Thanks Victoria. I've been dealing with Tax Credits for years but have very few clients on UC so haven't got involved with them. Your article is really helpful. Can you clarify whether business assets are part of the £6000 and if so is that only cash (because income is cash based) or also debtors and creditors?

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Replying to kevinringer:
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By clark.hall
14th May 2020 08:30

Last time I looked into this it was the share capital at cost that was treated as Capital and which if total capital > £6,000 will give rise to "Tariff Income".

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