Self-employment: Minimum income floor
This page explains how the Minimum Income Floor (MIF) works.
During the Coronavirus pandemic, the MIF was suspended temporarily for all UC claimants. Legislation has been passed which re-introduces the MIF from 1 August 2021.
How the MIF works
Couples and the MIF
Problems with the MIF
Exceptions to the MIF
For UC purposes, if a person is in gainful self-employment in an assessment period, and their earned income (ie their profit from self-employment along with any employed earnings) in that assessment period amounts to less than their individual earnings threshold (the minimum income floor, MIF), they are treated as having earned income equal to the MIF. This MIF amount will be used when calculating their universal credit award.
The MIF only applies to claimants who are placed in the all-work related requirements group (or who would be disregarding the operation of the MIF). Those who are in the no work related activity group (from 3 October 2019, excluding those in this group due to their level of income), the work focused interview group or the work preparation group are not be subject to the MIF.
The MIF does not apply during a start-up period. A start-up period is a period of 12 months which starts from the beginning of the assessment period in which the DWP determine that the claimant is in gainful self-employment. DWP can terminate a start-up period if they determine the claimant is no longer in gainful self-employment or they are no longer taking steps to increase their earnings from the activity to the level of their individual threshold.
If the MIF is applied to a claimant, then they will fall into the no work related activity group and so will cease to have any conditionality applied.
The amount of the MIF is, very broadly, equivalent to the national minimum wage for each hour that the claimant is expected to work. For most people that will be 35 hours a week, however a lesser number of hours should be used if the person meets certain requirements (for example is a carer, foster parent, responsible for a child under the age of 13 or has a physical or mental impairment).
This is then converted to a monthly amount by multiplying by 52 and dividing by 12. From that amount is deducted a notional amount to reflect income tax and national insurance – the amount to be deducted is ‘as the Secretary of State considers appropriate’.
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.
Example
Jack is a 30 year old window cleaner who works full time in his trade. His individual earnings threshold (i.e. the minimum wage for the number of hours the claimant is expected to work) is based on the national minimum wage of £11.44 an hour for a 35 hour week:
£11.44 x 35 = £400.40 per week
His minimum income floor for any assessment period, using current figures, should therefore be:
(£400.40 x 52)/12 = £1,735.07 minus notional tax and NI (say £192.37) = £1,542.70
A couple will have their individual thresholds added together to create a couples threshold. Where a self-employed claimant is a member of a couple, and their self-employed earnings for an assessment period are lower than the MIF and the couples combined earnings are less than the couple threshold, then the MIF applies to the self-employed earnings but it is reduced by any amount by which their combined earned incomes would exceed the couple’s threshold. This is complicated and is perhaps better explained by way of some examples:
Example
Jack’s self-employed earnings for assessment period A are £800. His wife Jill is employed full-time in a bank and earns £1600 net per month. The combined earnings threshold of the couple for a month is, say, £3,085.40 (35 hours a week each at the NMW of £11.44 an hour, less tax and NI). Their actual combined earnings are £800 + £1,600 = £2,400
Jack’s individual threshold/MIF level is £1,542.70. As his earnings are only £800 – he would be treated as having earnings of £1,542.70 (i.e. an extra £742.70 ). Combined with Jill’s earnings, their total earnings would be treated as £3,142.70
As this is above their couples threshold of £3,085.40 by £57.30 , Jack’s MIF will be reduced by that amount. So instead of a MIF of £1542.70 his MIF will become £1,485.40
The practical impact of this is that the couple are not, overall, required to earn more than their couples threshold. This is achieved by reducing Jack’s MIF level to take account of the excess income that his wife has over her own individual threshold.
If the self-employed claimant has earnings above their individual threshold/MIF amount then no further adjustment is needed. If the couple both have earnings under their individual thresholds, the self-employed claimant will be treated as having income equal to their individual threshold/MIF. Their partner will likely be subject to conditionality requirements because their earned income is lower than DWP expect it to be.
Problems with the MIF
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.
- 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 usually 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.
- The MIF does not take account of pension contributions, so a low-income self-employed person will not get a full deduction of pension contributions in some cases as their employed counterparts will.
- 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.
- Under the rules for calculating income from self-employment, any unused losses must be deducted at Step 5 of the calculation where there is a positive amount remaining at Step 4. This appears to lead to a situation where a carried forward loss is used up to reduce profit in the current assessment period but if it brings that profit below the MIF, the MIF will then apply – effectively wasting the loss.
There are several 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), or
- where the claimant is subject to no work-related requirements (i.e. 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
- where the claimant has been moved over to universal credit from legacy benefits under the formal managed-migration exercise, the minimum income floor is not applied for the first 12 months (rule applies from 24 July 2019)
- from 23 September 2020, all gainfully self-employed who make a new claim for UC will have a 12 month grace period before the minimum income floor will be applied.
From 1 August 2021 to 31 July 2022, DWP can decide not to apply the MIF where the claimant’s business remains affected by the coronavirus but this easement is limited to no more than two assessment periods on each occasion and not for more than six assessment periods in total.
Technically, the suspension of the MIF under the coronavirus easement is brought about by varying the threshold to a lesser amount or to nil. And the rules re-introducing the MIF adopt the same approach, so that in cases where DWP agree to continue applying the easement between 1 August 2021 and 31 July 2022, they have the flexibility to vary the MIF threshold to a lesser amount or to nil.
More information about the Minimum income floor, together with examples, can be found in ADM Chapter H4090
Last reviewed/updated 27 June 2024