Self-employment: Minimum income floor
The amount of the MIF is, very broadly, equivalent to the statutory hourly pay-rate for each hour that the claimant is expected to work – usually 35 hours a week. Initially, this meant the relevant rate of national minimum wage but, from April 2016, this is the relevant national minimum/living wage hourly rate relating to the age of the claimant. From that is deducted a notional amount to reflect the income tax and national insurance for which the claimant would be liable if they had earned income of that amount. Note however that there is currently no deduction allowed from the MIF for pension contributions meaning that those who are subject to the MIF in reality will not get a true deduction for their pension contributions as their employed counterparts will.
Jack is a 30 year old window cleaner who works full time in his trade. His individual earnings threshold (ie the minimum wage for the number of hours the claimant is expected to work) is based on the national minimum wage of £7.20 an hour for a 35 hour week:
£7.20 x 35 = £252.00 per week
His minimum income floor for any assessment period, using current figures, should therefore be:
(£252.00 x 52)/12 = £1,092.00 minus notional tax and NI (say £86) = £1,006.00
Where a claimant is a member of a couple, and the claimant’s gross profit for an assessment period is lower than the MIF, then the MIF only applies to the extent that the earnings of the couple taken together do not amount to the couple’s combined earnings threshold. The earnings threshold, broadly, is the number of hours both members of the couple are expected to work times the national minimum wage. Where the couple’s earnings exceed the couple’s earnings threshold, the MIF for the self-employed partner is reduced or eliminated accordingly.
Jack’s self-employed earnings for assessment period A are £600. His wife Jill is employed full-time in a bank and earns £15,000 a year (say, net earnings of £1,113.93 a month). The combined earnings threshold of the couple for a month is, say, £2,012.00 (35 hours a week each at the NMW of £7.20 an hour, less tax and NI)
Their actual combined earnings are £600 + £1,113.93 = £1,713.93
Applying Jack’s MIF of £1,006.00, their combined earnings for the month would be £1,006.00 + £1,113.93 = £2,119.93, which exceeds their combined earnings threshold by £2,119.93 - £2012.00 = £107.93.
Jack’s MIF is therefore reduced as follows: £1,006.00 - £107.93 = £898.07
The MIF, and other aspects of the way self-employed earnings are calculated for UC, potentially present several problems for those who are starting out in business.
- Because the ‘start-up’ period is set at 12 months, where a business takes longer than 12 months to become profitable, the MIF will distort its results, particularly when combined with the prohibition on carrying forward losses from one assessment period to the next.
- The deduction of a notional amount of tax and NI each month to arrive at the MIF conflicts with the fact that tax on self-employed earnings is actually paid twice a year. HMRC do offer a Budget Payment Plan for people to pay their self-assessment bills, however there are certain rules attached to this. More information can be found on the HMRC website.
- Unless a business is very profitable, the tax bill when paid each January and July could by itself depress earnings in those assessment periods, to the extent that the MIF is applied when it might not otherwise have been.
- The above point also applies in any month in which an annual or one-off debt/bill was paid (such as an insurance premium) and deducted from one month’s trading receipts.
- Businesses will have to account each month for their ‘profits’ on a cash basis in line with UC rules, which differs in key respects to the more familiar cash basis accounting rules introduced for the year 2013/14 for tax purposes, necessitating two sets of accounts. This could potentially deter would-be entrepreneurs from claiming universal credit, or from pursuing the self-employed option at all.
There are three situations in which the MIF does not apply at all:
- where the assessment period in question is in or overlaps with the beginning or end of a start-up period (broadly, the first 12 months of trading, of which a claimant is allowed only one every five years (reg 63)), or
- where the claimant is subject to no work-related requirements (ie they are not required to work rather than have sufficient income to put them in this group), or is subject to a work-focused interview requirement or a work preparation requirement only.
- where the claimant is not gainfully self-employed
More information about the Minimum income floor, together with examples, can be found in ADM Chapter H4060.
Updated 6 September 2016