Self-employment: Summary of differences between tax credits and UC

There are several notable differences between the established tax credits system and the new Universal Credit system in the treatment of claimants who are self-employed. Many of these differences will mean claimants who have become familiar with tax credits will need to particularly pay close attention to the rules for UC, to ensure they receive the correct award and can consider making their own provision to support them through some of the more restrictive changes.

The table below outlines the main distinctions -

	Tax Credits	Universal Credit
Treatment of losses	Losses can be offset against the total household income in the first year and any remaining loss not used up this way can be offset against income from the same trade or profession in subsequent years	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.
Reporting timeframe	Based on annual income, reported annually, by 31 January after the end of the tax year (optional – can be done more frequently if wide fluctuations anticipated on figure already held)	Income must be reported every month, within 14 days of the end of the assessment period
Allowable expenses	Purchase costs of motor car allowed and interest on business loans. Reasonable Business entertainment expenses allowed. Income Tax and National Insurance are not allowable expenses	Interest on business loans only allowed up to £41 in any assessment period. Purchase cost of motor car not allowable expense. No business entertainment expenses allowed. Income Tax and National Insurance are allowable expenses within the monthly assessment period in which they are paid. Only expenses which are reasonably incurred are allowable.
Minimum Income Floor	Only actual income earned, calculated annually, is taken into account as trading income and losses are taken into account.	If income is below the individual threshold (including where the business makes a loss) in a monthly period then this artificial income level applies to those who are gainfully self-employed (after the 12 month start-up period). Note - there are some exceptions to the MIF.
Mandatory or optional use of accounting basis	The cash basis is optional and businesses can elect not to use it on an annual basis (for the 2024/25 tax year onwards). However, certain trades are not allowed to use the cash basis. Alternatively businesses can use the ‘accruals basis’ (generally accepted accountancy practice).	There is no choice on how the monthly accounts are prepared for DWP – they must conform to the Universal Credit regulations.
Income	Income receipts do not include refunds of income tax and national insurance.	Income receipts include refunds of income tax, national insurance and VAT.

Last reviewed/updated 27 June 2024

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