Self-employment: Calculating income from self-employment

General rules
Actual receipts
Permitted expenses
HMRC cash basis
Digital service areas

Calculating income from self-employment for UC is very different to tax credits where claimants simply take the figure used for their tax return and enter it on to the tax credits forms.

Income from self-employment will be taken into account regardless of whether the person is found to be in gainful self-employment or not.

Alert: There are variations to the income rules which apply to universal credit claims in ‘digital service’ areas

General rules

Earnings that are not employed earnings and are derived from a trade, profession or vocation are self-employed earnings.

Self-employed earnings must be calculated for the claimant’s monthly assessment period.

The basic calculation is:

GROSS PROFITS minus INCOME TAX, NATIONAL INSURANCE AND PENSION CONTRIBUTIONS

Whilst this seems a straightforward calculation, there are some important points to bear in mind:

Actual receipts

Any payment actually received during the assessment period is included as an actual receipt, regardless of when is it earned. -

Actual receipts include

The ADM Chapter H4160 onwards provides further details about each of these payments, together with some examples.

Permitted expenses

Permitted expenses are amounts paid in the assessment period in respect of expenses wholly and exclusively incurred for the purposes of the trade, etc, or an identifiable business proportion of any expenses incurred for more than one purpose. In principle, DWP will deduct from the actual receipts any business expense that

The ADM Chapter H4197 lists allowable expenses and provides more details about these conditions..

Flat-rate deductions are allowed as follows:

For a car or van

for the first 833 miles

45p per mile

 

thereafter

25p per mile

For a motor cycle

 

24p per mile

Note that for a car, the only deduction allowed for the cost of acquiring or running the vehicle is the flat rate deduction. In the case of a motor cycle or van, the claimant may choose between the flat rate deduction (above)or the actual cost of acquiring and running the vehicle under the permitted expenses rules.

At least 25 hours but no more than 50 hours

£10

More than 50 hours but no more than 100 hours

£18

More than 100 hours

£26

Expenses not allowed include:

HMRC cash basis

Claimants will be asked to provide evidence of their self-employed earnings. As accounts are generally prepared using accounting principles, they will often show different information to that required for UC purposes and claimants may therefore be asked to provide additional supporting evidence, such as bank statements, purchase receipts or indeed expenses from a different assessment period, to support their claim.

Providing self-employed income calculated on a cash basis for UC purposes present complications for claimants as there are key differences between the accounting mechanisms for income tax purposes and those for UC purposes, outlined below:-

 

Accounting under Universal Credit

Accounting under HMRC’s cash basis

Reporting time frame

Monthly reporting.

Annually by January 31 after the end of the tax year

Mandatory or optional use of accounting basis

There is no choice on how the monthly accounts are prepared for DWP – they must conform to the Universal Credit regulations.

The cash basis is optional and businesses can elect to use it on an annual basis. Alternatively businesses can use the ‘accruals basis’ (generally accepted accountancy practice).

Thresholds

There are no thresholds – all self-employed Universal Credit claimants must use the same accounting basis.

Universal Credit claimants must leave the cash basis if their annual turnover is greater than £154,000 (twice the VAT registration limit)

Transitional rules

There are no transitional rules; when completing their self-assessment tax returns Universal Credit claimants must adjust their annual accounts to ensure that income and expenses are only declared once.

On switching to the cash basis (and from it to the accruals basis), transitional rules ensure that income and receipts are accounted for only once.

Carry forward of losses

There is currently no facility to carry forward losses from one assessment period to another.

Business losses may be carried forward to set against the profits of future years but not carried back or set off ‘sideways’ against other sources of income

Digital Service Areas

Surplus earnings and losses: In digital service areas, it is expected that the UC rules will introduce a surplus earnings and loss policy in respect of income (The Universal Credit (Surpluses and Self-employed Losses) (Digital Service) Amendment Regulations 2015). These surplus earnings and self-employed losses rules were due to come into force from April 2016 for those claiming in digital UC areas but DWP delayed the changes until April 2017 (The Universal Credit (Surpluses and Self-employed Losses) (Change of coming into force) Regulations 2016). On 20 July 2016, a further delay was announced and the changes will now not be implemented until April 2018.

The basic principle is that if someone has a UC award terminated (for example because their income goes up due to a new job) a calculation will be done to work out their ‘surplus earnings’ for that month and the following five months. Surplus earnings are essentially the amount of income they have above the point at which their UC would reduce to nil plus a £300 de minimis. If the person then needs to reclaim UC within that period, say because they lose their job after four months, the surplus earnings for those four months will be applied to their new claim as income. This means they will receive either a reduced UC award or a Nil award and that will continue until the surplus earnings are used up. These surplus earnings will apply to both employed and self-employed claimants.

For self-employed claimants, some recognition for losses will also be introduced. The rules mean that a loss from the previous 11 months can be carried forward and used in an assessment period. However, the loss can only reduce income down to the level of the minimum income floor and it cannot take account of any pension contributions.

Updated 26 July 2016