Self-employment: Minimum income floor
For UC purposes, if a person is in gainful self-employment in an assessment period, and their earned income (ie their gross profits 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.
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.
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.
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 £8.21 an hour for a 35 hour week:
£8.21 x 35 = £287.35 per week
His minimum income floor for any assessment period, using current figures, should therefore be:
(£287.35 x 52)/12 = £1,245.18 minus notional tax and NI (say £103.65) = £1,141.53
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 fairly complicated and is perhaps better explained by way of some examples:
Jack’s self-employed earnings for assessment period A are £600. His wife Jill is employed full-time in a bank and earns £1200 net per month. The combined earnings threshold of the couple for a month is, say, £2,283.06 (35 hours a week each at the NMW of £8.21 an hour, less tax and NI). Their actual combined earnings are £600 + £1,200 = £1,800
Jack’s individual threshold/MIF level is £1,141.53. As his earnings are only £600 – he would be treated as having earnings of £1,141.53 (i.e. an extra £541.53). Combined with Jill’s earnings, their total earnings would be treated as £2,341.53.
As this is above their couples threshold of £2,283.06 by £58.47, Jack’s MIF will be reduced by that amount. So instead of a MIF of £1,141.53 his MIF will become £1,083.06.
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, particularly when combined with the prohibition on carrying forward losses from one assessment period to the next.
- 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 actually 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.
There are three 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
More information about the Minimum income floor, together with examples, can be found in ADM Chapter H4060.
Last reviewed/updated 19 September 2019