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 65% taper whereas unearned income reduces UC maximum entitlement pound for pound.
Alert: There are variations to the income rules which apply to universal credit claims in ‘digital service’ areas.
- 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 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.
This is the case even if there is some dispute about the amount of money paid by an employer. For example, if someone is paid £400 in their assessment period and believes that they have been overpaid because they worked fewer shifts that normal that month, that is irrelevant for UC. £400 will be used as earned income as that is the amount received during the assessment period.
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.
- A person has employed earnings in respect of which deductions or repayments of income tax are required to be made under the PAYE regulations (Pay as You Earn) AND
- The person required to make those deductions or repayments is a Real Time Information employer
The UC regulations make it clear that where these two requirements are met the amount reported by the employer to HMRC via the RTI system is the amount that the UC claimant is to be treated as receiving in that assessment period.
This has a number of consequences for UC claimants. In brief these are:
- If the figure reported under RTI is wrong, UC will be calculated on this incorrect amount
- If the employer is late sending in their RTI return (called an FPS), so that it is sent in the next assessment period (whereas the payment was made in the earlier period) the payment will be treated as received in that later assessment period rather than the one in which it was actually received. This can lead to spikes in UC entitlement for people who are paid the same each month, depending on when their employer submits their RTI figures to HMRC. It can also lead to claimants missing out on work allowances for a given month
- There appears to be no mechanism for correcting incorrect RTI data
The Regulations do make some provisions for reporting income other than by RTI. Where an employer is not required to report through RTI or fails to report (note this is a total failure to report rather than incorrectly reporting) the earnings to HMRC then DWP will ask the claimant to self-report their figures. This will be done through a self-reporting earnings tool online. The claimant may also be asked to produce verification of those earnings (for example by providing a payslip).
Once earnings have been self-reported, they should not be taken into account again if the employer then reports those earnings through RTI.
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 26 July 2016