Self-employment: Calculating income from self-employment
Calculating income from self-employment for UC is very different to tax credits where claimants simply (in most cases) take the figure used for their tax return for the appropriate tax year and enter it on to the tax credits forms.
Income from self-employment will be taken into account as earned income for the purposes of calculating UC regardless of whether the person is found to be in gainful self-employment or not.
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.
Where the claimant is in their first assessment period and a determination is needed before the end of that period about whether they meet the financial conditions for UC (set out in Section 5 of the Welfare Reform Act 2012) – an estimate of the amount received or to be received may be used.
In subsequent assessment periods, DWP say claimant’s should report their self-employed earnings by the end of the assessment period. If the claimant has not reported their self-employed income by the end of the assessment period, they will receive a message at the end of an AP telling them that they will not receive any UC until they have reported their earnings. If self-employed earnings are not then reported within 14 days, the claimant will receive another notification that payment of UC is suspended and that their claim will be closed if they don’t report within a further calendar month. However, the legislation also suggests that DWP may have some discretion to use an estimate (reg 54(2)): Where a claimant fails to report their income for an assessment period and the decision maker makes their own determination as to the amount of earned income in that assessment period, then the amount of earnings for that assessment period may be based on an estimate of the amount received or to be received.
Otherwise, the following steps need to be carried out:
Step 1: For each trade, profession or vocation that the claimant is engaged in calculate the person’s profit or loss. This is found by taking actual receipts (in that assessment period) minus permitted expenses (in that assessment period).
Step 2: Add together the amounts in Step 1 for each business (if there is more than one)
Step 3: Deduct amounts paid in the assessment period for income tax and national insurance. If the amount left is Nil or a negative amount - then the claimant's self-employed earnings are Nil. If the amount is greater than Nil, move on to Step 4. Note that where a negative amount is created, this can be 'banked' as an unused loss to be used at a later date under Step 5.
Step 4: Deduct any relievable pension contributions made by the person in the assessment period unless those same contributions have already been deducted in calculation their employed income.
If the amount left is Nil or a negative amount, then the claimant's self-employed earnings are Nil. If the amount is greater than Nil, move on to Step 5. The ordering of these steps mean that pension contributions cannot be used to create or increase a loss.
Step 5: Deduct any unused losses, taking the oldest first. If the amount left is greater than Nil - that is the amount of the person's self-employed earnings in respect of the assessment period. If it is Nil or a negative amount, their income from self-employment is Nil.
DWP guidance (ADM Chapter H4503) states that it is the level of earnings that is calculated after the application of the surplus earnings or unused losses rules that should be used to determine whether the MIF applies. If a self-employed claimants has a loss in any assessment period, the level of earnings for that AP will be nil and the MIF will be applied (where relevant).
There are some important points to bear in mind:
- According to DWP guidance (Chapter H4123), the income tax that can be deducted is the actual amount paid to HMRC in the UC assessment period in respect of the trade, profession or vocation. This is based on a strict reading of the Regulations means that only tax due on income from that particular trade, profession or vocation can be deducted. In practice this will be impossible to calculate for claimants who have more than one source of income that is dealt with through self-assessment without further guidance from DWP.
- National insurance contributions paid in the UC assessment period can be deducted, again under the legislation these must be paid in respect of the ‘trade, profession or vocation’.
- Pension contributions must be ‘relievable’. This means they must be paid to a registered pension scheme by or on behalf of a member of the scheme. The contribution must be paid by a ‘relevant UK individual’ and certain contributions as specifically excluded. More details can be found in Paragraph H4124 onwards of the ADM. The same pension contributions may not be deducted from self-employed earnings if a deduction has already been made in calculating the claimant’s employed earnings.
Where the claimant belongs to a partnership, the amount of profit or loss taken into account is the amount attributable to their share in the partnership.
Any payment actually received during the assessment period is included as an actual receipt, regardless of when is it earned.
Regulations that came into force on 21 May 2020, state that any payment from HMRC under the Self-employment Income Support Scheme (SEISS) is to be treated as an actual receipt in the assessment period in which the claimant receives that payment.
Also from 21 May 2020, payments to a self-employed claimant from the job retention scheme (for any employees they have) are ignored as income. However, there is an equivalent restriction on treating the wages then paid to the employee as a permitted expense.
Our understanding is that the other coronavirus business grants – such as the small business grant and retail/leisure grant are disregarded as income for UC purposes but see below for how they are dealt with as capital.
John is a painter. His month assessment period for UC runs from 10th of one month to the 9th of the following month. On 31 May, John carries out some painting work for a client for the agreed price of £300. The client pays John the £300 on 15 June.
For UC purposes the £300 will count as an actual receipt for his assessment period 10 June to 9 July even though he did the work and the money was earned in the previous assessment period.
Actual receipts are not defined in legislation but DWP guidance gives examples of the following items which are receipts:
- Any payments for goods and services provided – cash, cheque and credit card payments received in return for goods and services
- Earnings payable abroad – money that is due to be paid to a business in a country outside the UK should be included when it is received by the business
- Personal drawings – if personal drawings have been deducted from the amount shown as an actual receipt, the amount should be added back in
- Sale of certain business assets – where the purchase of an asset has been deducted as an expense in any assessment period and in a later assessment period it is sold or ceased to be used in the business the proceeds of the sale (or the market value if it is ceased to be used) are to be treated as a receipt in the subsequent assessment period. Where only part of the expense was allowable (part business/part personal) the same percentage will be used when calculating the amount of receipt when the item is sold
- Tips and gratuities – where received in response to the service being provided, these should be included as actual receipts but not where they are made as a gift on personal grounds and unconnected to the self-employment
- Payments in kind – DWP will decide an equivalent monetary value to include in the actual receipts
- Any VAT receipts
- Refund or repayment of income tax or national insurance contributions relating to the trade, profession or vocation.
It should be noted that capital receipts do not form part of the actual receipts of the business. For example, funds introduced by the owner of the business in order to finance the business or loan capital borrowed from third parties for financing purposes should not be counted as actual receipts.
For VAT, claimants have a choice of how they deal with receipts. The claimant can either report earnings inclusive of VAT and then deduct a VAT payment as an expense when it is paid to HMRC. Alternatively they can report the earnings exclusive of VAT and so no permitted expense would be allowed when payment is made to HMRC.
The ADM Chapter H4160 onwards provides further details about each of these payments, together with some examples.
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
- as paid out wholly and exclusively for the purposes of the business, and
- was paid out during the assessment period, and
- was reasonably incurred, and
- is an allowable expense.
Again, only expenses that are paid out during the assessment period can be deducted from the actual receipts even if the money is due to be paid in a different assessment period.
The ADM Chapter H4197 lists allowable expenses and provides more details about these conditions. Some examples of allowable expenses include:
- regular, day to day costs of the business such as rent, wages, cleaning of premises, accountancy fees, stationery, advertising, phone bills. There is a list in the ADM Chapter H4214 which gives further examples.
- purchase of stock
- utilities, phone and travel costs (provided it is not specifically excluded – see below)
- expenditure on the purchase, lease or acquisition of tools and equipment
- VAT (See above for further explanation about how VAT can be treated)
A deduction can be made for a payment of interest in relation to a loan taken out for the purposes of the trade, profession or vocation, however this deduction cannot exceed £41 in the assessment period. This is a cumulative figure and covers the total interest payable across all relevant loans. This also includes interest on credit cards and overdraft interest and charges if the original expense related to the trade.
The wages and associated costs of any staff that a claimant employs can usually be deducted as expenses. However, where a claimant received a grant from the coronavirus job retention scheme (JRS), no deduction can be made for any wages paid to an employee in so far as those wage expenses are covered by a CJRS payment.
No deductions are allowed for:
- Expenditure on non-depreciating assets (including property, shares or other assets held for investment purposes)
- Repayment of capital in relation to a loan taken out for the purposes of the trade, profession or vocation
- Expenses for business entertainment
- Any expenses that were incurred unreasonably
- Expenditure on the purchase, lease or acquisition of a car (see below for details of flat rate expenditure that can be deducted)
- Losses from earlier assessment periods
In some cases, instead of deducting the actual expenses incurred in relation to the acquisition or use of a motor vehicle or expenses incurred using your home for business purposes, certain flat-rate deductions are allowed instead. The claimant can choose which method to use (Except in the case of cars as explained below) but if flat rate expenses are deducted, the actual expenses cannot also be deducted as follows:
- for acquisition and use of a motor vehicle, based on mileage per assessment period for the purposes of the trade, profession or vocation:
For a car or van or other motor vehicle apart from a motor cycle
for the first 833 miles
45p per mile
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 shown in the table above. In the case of a motor cycle or van, or other motor vehicle other than a car, the claimant may choose between the flat rate deduction (above) or the actual cost of acquiring and running the vehicle under the normal permitted expenses rules.
The definitions of car and motor cycle are taken from the Capital Allowances Act 2001. For these purposes a car means a mechanically propelled road vehicle but not a motor cycle, or vehicle designed mainly for the movement of goods or burden or any description or vehicle of a type not commonly used as a private vehicle.
A motor cycle is defined as a mechanically propelled vehicle, not being an invalid carriage, with less than four wheels and the weight of which unladen does not exceed 410 kgs.
- for the use of the claimant’s home for business purposes, depending on the number of hours spent in an assessment period on ‘income generating activities’ relating to the trade, etc
At least 25 hours but no more than 50 hours
More than 50 hours but no more than 100 hours
More than 100 hours
According to DWP guidance (H4224) income generating activities include:
- providing services to a customer
- general business administration essential for day to day running of the business (such as stocktaking, invoices, receipts)
- action to secure business (sales and marketing)
It does not include:
- using the home for storage
- time spent on completing tax returns for HMRC
- being on call or available to undertake work
- where premises are used by the claimant mainly for the purposes of their business, but are also occupied by them for person use, then they can deduct actual expenses under the normal permitted expenses rules but reduced by the following amounts according to the number of people occupying the premises for their personal use:
- £350 where only one person is occupying the premises partly for personal use
- £500 for two persons
- £650 for three or more persons
Two examples from DWP guidance explain how this works in practice:
Fred is S/E and works from home as a music teacher. He uses the downstairs of the house as a music studio and lives upstairs. When reporting his income for the purposes of his award of UC, Fred says that he incurred S/E expenses relating to the home of £800 in his most recent assessment period. Fred shares his home with his civil partner, Andre. Andre is not involved in Fred’s business. Fred claims £800 in permitted expenses and reduces this amount by £500 as both he and Andre occupy the premises.
Victoria is a pub landlord. The downstairs of the building where she lives is the pub and she lives upstairs with her husband and two children. When reporting her expenses for her award of UC, Victoria reports expenses of £3,500 for the latest assessment period. Victoria decides that trying to apportion these expenses between the pub and home upstairs is not possible but is not sure what to claim. The DM decides that the permitted expenses should be reduced by £650 because there are three or more people occupying the premises.
Repayment of SEISS grants:
DWP have confirmed to us that where a claimant repays part or all of a SEISS grant in an assessment period, that repayment should be treated as a business expense in the assessment period in which the repayment is made to HMRC. DWP won’t revise previous awards of Universal Credit, as they correctly reflected a claimant’s earnings at the time the SEISS grant was originally received.
Claimants may 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.
It cannot be assumed that an expense allowed for tax purposes will be allowed for universal credit.
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
Annually by January 31 after the end of the tax year (although this may change under HMRC’s proposed digital strategy).
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 eligible businesses can elect to use it on an annual basis. However, certain trades are not allowed to use the cash basis and there is also a turnover ‘exit’ threshold (see below). Alternatively, businesses can use the ‘accruals basis’ (generally accepted accountancy practice).
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 £300,000
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
|Carry forward of losses to future assessment periods is possible subject to the Minimum Income Floor. See our surplus earnings and losses page for more information.
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 (which is possible when using the accruals basis of accounting)
|As well the requirement that the business expenses is wholly and exclusively incurred for the business, there is an additional condition that only those business expenses that are reasonably incurred can be deducted as an expense
|The value of business expenses that are wholly and exclusively incurred for the business can be deducted – there is no condition that they are also reasonable.
The surplus earnings and losses rules apply.
A person has an unused loss if there is a negative amount left after Steps 1 to 3 of the income calculation set-out above. This is after deduction of tax and NI contributions, but before any deductions are made for pension contributions.
A loss is no longer an 'unused loss' once it has been extinguished in a subsequent assessment period. This means that no amount of the loss remains after it has been deducted in Step 5 of the income calculation.
When a UC award ends, unused losses will normally be lost. However, the rules do allow the person to continue to carry forward their losses, and potentially accrue new losses, if they claim UC again within 6 months.
If a claimant was previously entitled to UC and the last day of entitlement in that (old) award fell within 6 months before the first day of entitlement in respect of the new award then the DWP can treat:
- The assessment periods under the previous awards; and
- Any months between that award and the current award in respect of which a claim has been made
as assessment periods under the current award. This seems to allow unused losses from an old claim to be used in a new claim as long as the gap is no more than 6 months. It also allows any losses from months between the old and new award to be used as long as a claim for UC has been made. This would appear to require a person to continue making claims for UC (even if they may be entitled to nil) to protect any losses accrued in that 6 month period.
The Regulations state that this 6-month joining rule applies only if the person provides such information as the DWP require.
Savings (or capital) over a certain amount will be included when working out how much, if any, UC is payable. We explain how the capital rules work in our entitlement section.
Two specific points are worth noting for self-employed claimants:
DWP has confirmed that money put aside for the purpose of paying a tax bill for a business will be disregarded if it is in a business bank account or you can provide evidence to show why it put aside. This is based on the rule that business assets can be disregarded as the claimant’s personal capital.
In addition, regulations introduced from May 21 2020, introduce a disregard for any payment made to a claimant carrying on a trade, profession or vocation:
- In relation to a furloughed employee under the job retention scheme; or
- By way of a grant or loan to meet the expenses or losses of the trade, profession or vocation in relation to the outbreak of coronavirus
Such payments can be disregarded in the calculation of the claimant’s capital for a period of 12 months from the date on which it is received. However, the rules also state that business assets are disregarded capital and there could be occasions where these rules need to be explored further, for example where the claimant still has the coronavirus-related business grant at the end of the 12 months blanket disregard.
Last reviewed/updated 23 May 2023