Self-employment: Summary of differences between tax credits and UC

There are several notable differences between the established tax credits system and the new Universal Credit system in the treatment of claimants who are self-employed. Many of these differences will mean claimants who have become familiar with tax credits will need to particularly pay close attention to the rules for UC, to ensure they receive the correct award and can consider making their own provision to support them through some of the more restrictive changes.

The table below outlines the main distinctions -

 

 

Tax Credits

 

 

Universal Credit

 

Treatment of losses

Losses can be offset against the total household income in the first year and any remaining loss not used up this way can be offset against income from the same trade or profession in subsequent years

No deduction is allowed for losses.

Reporting timeframe

Based on annual income, reported annually, by 31 January after the end of the tax year (optional – can be done more frequently if wide fluctuations anticipated on figure already held)

Income must be reported every month, within 14 days of the end of the assessment period

Allowable expenses

Purchase costs of motor car allowed and interest on business loans. Reasonable Business entertainment expenses allowed.

Income Tax and National Insurance are not allowable expenses

Interest on business loans only allowed up to £41 in any assessment period. Purchase cost of motor car not allowable expense.

No business entertainment expenses allowed.

Income Tax and National Insurance are allowable expenses within the monthly assessment period in which they are paid.

Other income, including property income

Income from property is treated as other income and subject to the ‘Other Income’ £300 disregard

Income from property included, no specific disregard other than permitted expenses

Minimum Income Floor

Only actual income earned, calculated annually, is taken into account as trading income and losses are taken into account.

If income is below the individual threshold (including where the business makes a loss) in a monthly period then this artificial income level applies to those who are gainfully self-employed (after the 12 month start-up period).

Thresholds

Claimants must leave the cash basis if their annual turnover is greater than £300,000.

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

Mandatory or optional use of accounting basis

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).

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

Income

Income receipts do not include refunds of income tax and national insurance.

Income receipts include refunds of income tax, national insurance and VAT.

Updated 17 May 2017