Universal credit: What is income for UC?
Income for Universal Credit purposes will be treated as earned income or unearned income. If it is not specifically included as either of these then it will be disregarded.
The importance of determining whether income is earned or unearned can be seen in the calculation of UC entitlement. Earned income is subject to a 63% taper whereas unearned income reduces UC maximum entitlement pound for pound.
- Earned income
- Notional earned income
- Employed earnings
- Self-employed earnings
- Unearned income
- Reporting income
- Digital service areas
Earned income (see digital service areas)
Earned income for UC is defined as:
1. The remuneration or profits derived from -
a. Employment under a contract of service or in an office (including elective office)
b. A trade, profession or vocation (self-employed earnings)
c. Any other paid work
2. Any income treated as earned income for the purposes of UC
The regulations also include provision for ‘notional earned income’ – this is where a claimant has deprived themselves of earned income, or whose employer has arranged for them to be deprived, for the purposes of securing entitlement to UC or an increased amount of UC. Where this is the case, the person will be treated as having the earned income.
It will be treated as being for the purposes of securing or increasing entitlement to UC if in fact, entitlement was given or higher as a result and this was a foreseeable and intended consequence of the deprivation – in the opinion of the Secretary of State.
Similar notional income rules apply in relation to services provided where no payment is received – the UC claimant can be treated as having the earned income that be reasonable for the provision of the service.
The general rule is that earned income for an assessment period should be based on the actual amount received in that period. There are some exceptions to this general rules that are explained in ADM Chapter H3.
For many employees, DWP will receive these employed earnings figures directly from the HMRC RTI (Real Time Information) system. We have a dedicated RTI section which explains how RTI data feeds into UC and how it is used by DWP.
Employed earnings are defined as any amounts that HMRC treat as ‘general earnings’ (as defined in Section 7(3) ITEPA 2003) leaving out any amounts treated as earnings under the benefits code (Chapters 2 to 11, Part 3 ITEPA 2003) and amounts exempt from income tax under Part 4 ITEPA 2003 (such as approved mileage allowance reliefs, work-related training, no-cash vouchers etc….).
General earnings includes wages, salary and fees. It also includes payments of statutory sick pay, statutory maternity pay, ordinary statutory paternity pay, additional statutory paternity pay and statutory adoption pay. Some other payments are also included as employed earnings, a full list of these can be found in Paragraph H3072 (ADM Chapter H3).
As noted above, certain amounts are also excluded from being employed earnings. In the early stages of UC, benefits in kind (which HMRC would normally treat as earnings) will NOT be treated as income for UC purposes. A full list of benefits in kind not yet treated as earnings can be found in Paragraph H3081 (ADM Chapter H3).
Deductible expenses under Chapter 2, Part 5 of ITEPA 2003 are disregarded in calculating employed earnings. This ensures any allowable expenses reimbursed by an employer are not taken into account as income.
One point that should be noted is that the Regulations do not seem to contain any provision that allows expenses incurred by an employee which are not reimbursed by an employer to be deducted from earned income. The current benefits and tax credits systems do allow such deductions to be made.
Deductions from employed earnings
UC is generally based on net income and therefore from the claimant’s employed earnings can be deducted:
- Any relievable pension contributions made to a registered scheme
- Income tax or national insurance contributions paid in the assessment period in respect of those employed earnings
- Any sums withheld under a payroll giving scheme under Part 12, ITEPA 2003.
Full details of employed earnings can be found in ADM Chapter H3.
Self-employed earnings are those which derive from a trade, profession or vocation. The claimant does not need to be classed as ‘gainfully self-employed’ for such earnings to be taken into account. We explain self-employed earnings in more detail in the self-employment section.
Unearned income broadly includes the following types of income:
- Retirement pension income
- Certain benefit income
- Foreign benefits
- Spousal maintenance
- Student income
- Employment and training payments paid as a substitute for UC or as living expenses
- Sports awards
- Certain insurance payments
- Income from an annuity
- Income from a trust
- Income deemed to yield from capital (called ‘tariff income’)
- Capital treated as income
- Any other income which is taxable
- Any income which the claimant is treated as having (notional income)
Generally employed earnings will be reported to DWP by HMRC under the Real Time Information (RTI) system.
The general rule is that where a claimant is, or has been, engaged in an employment in respect of which their employer is a ‘real time information employer’:
- The amount of their employed earnings for that assessment period is to be based on the information which is reported to HMRC for PAYE purposes and is received by the Secretary of State from HMRC in that assessment period
- Where no information is received in an assessment period from a real time information employer - the amount of earnings is to be treated as nil.
However this general rule does not apply:
- In respect of any assessment period where the Secretary of State considers that the information from the employer is unlikely to be sufficiently accurate or timely or
- In respect of any assessment period where:
- No information is received from HMRC and DWP consider this is because of a failure of the employer to report the information to HMRC or a failure of the HMRC computer system or
- DWP considers that the information received from HMRC is incorrect, or fails to reflect the definition of employed earnings in the UC regulations, in some material respect
Where any of these exceptions apply, DWP must make a decision as to the amount of the person’s employed earnings for the assessment period in accordance with the UC regulations using such information or evidence as the DWP thinks necessary.
When this is done, DWP can treat a payment of employed earnings received by the person in one assessment period as received in a later assessment period. This might happen where DWP have received the information in that later period or would, if RTI had worked correctly, have expected to receive information from HMRC in that later period.
If the same earnings are then notified at another point by HMRC after they have already been taken into account due to the operation of these exceptions, the regulations allow DWP to ignore the HMRC information.
It is not yet clear how this will work in practice, particularly in relation to the exceptions.
Self-employed claimants will be required to submit details about their earnings each month using an online system. More information about this can be found in our self-employed section.
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 rules were due to come into force in 2016 for those claiming in digital UC areas but were then postponed until April 2017 (see the Universal Credit (Surpluses and Self-employed Losses) (Change of coming into force) Regulations 2016). However it was announced on 20 July 2016 that these changes would be delayed further and would now be implemented from April 2018.
You can find out more about what counts as a digital area in our timetable section.
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 20 April 2017