Self-employment: Surplus earnings and losses

The surplus earnings and loss rules apply from April 2018. These are very complex rules and we have written this guidance to help advisers understand the rules. At present, the ‘de minimis’ is set at £2,500, with the intention to reduce it to £300. This means that it will be rare for surplus earnings to be triggered in usual times. However, due to the Coronavirus pandemic, many more people have claimed UC, including self-employed individuals who are likely to qualify for the self-employment income support grant. The grant will trigger surplus earnings for some people. See our income page for more information.

Background to the surplus earnings and loss rules

The general rule for calculating earned income (employed and self-employed) in respect of an assessment period is that it is to be based on the actual amounts received in that period.

However, DWP were concerned that this would allow both employed and self-employed UC claimants the ability to change their earnings patterns to increase their UC awards. For example, an employee could agree with their employer to be paid all of their salary in month 1, followed by no payments for the next 11 months (and so a maximum award of UC paid in those 11 months) and then repeat that in the following year.

As a result, the surplus earnings and loss rules were introduced. In order to allow for automated systems to be introduced to deal with the surplus earnings, the de minimis level was set at £2,500, much higher than the original proposal of £300. It is expected that it will reduce to £300 at some point in the future and that as a result more UC claimants will be affected.

Who do the surplus earnings and loss rules apply to?

The surplus earnings rules apply to both employed and self-employed claimants with earned income. The loss rules, naturally, only apply to self-employed claimants.

When will the surplus earnings rules apply?

The surplus earnings rules are most likely to apply where someone has an increase in earned income in an assessment period that reduces their UC award to nil and so terminates the claim. However, the rules can also be triggered where there is no change in income, but circumstances change so that elements are removed from the award meaning that their UC is reduced to nil.

If someone in either of these situations, then makes a new claim for UC and they (or either of the claimants in a joint claim):

If all three of these bullets are met, the DWP will carry out a surplus earnings calculation and those surplus earnings will be treated as earned income (meaning any work allowance and the 63% taper will be applied against them) when deciding whether the person is entitled to a new award of UC and, if they are, how much they will get. In other words, surplus earnings from an old claim can reduce the amount paid on a new claim if it is made within 6 months of the old claim ending.

The six month rule

As explained above, the rules only kick-in where the old award of UC terminated in the 6 months prior to the new UC claim. If there is a gap of more than 6 months, then the rules will not apply and UC will be calculated as normal.

Example 1

Lucy claims UC on 18 October 2019. Her first assessment period runs from 18 October to 17 November. At the end of January 2020, Lucy moves to a much higher paid job and her UC award ends on 17 February.

Unfortunately, Lucy's job ends after 4 months and on 3 June, she makes a new claim for UC. The surplus earnings rules will apply because the old UC award terminated in the previous 6 months (looking back from the first day of the new claim).

Example 2

Jason claims UC on 18 October 2019. His first assessment period runs from 18 October to 17 November. At the end of January 2020, Jason moves to a much higher paid job and his UC award ends on 17 February due to the level of his earnings.

Jason's job ends after 8 months on 3 October 2020 and he makes a new claim for UC. The surplus earnings rule does not apply because Jason does not have an old award of UC that terminated within 6 months before the first day of his new claim.

Calculating surplus earnings - single claimants

If the surplus earnings rules do apply, then the next step is to calculate the amount of surplus earnings that will be included.

The amount that will be added depends on how many claims the claimant (or their partner in a joint claim) has made since the termination of the old award.

Before explaining this, it is useful to understand some definitions:

Old award An award of universal credit that terminated within the 6 months ending on the first day in respect of which the (new) claim is made
Original surplus Total earned income for the month that would have been the final assessment period of the old award (had it not terminated) minus the relevant threshold for that assessment period
Total earned income Is the earned income of the claimant, or if they are a member of a couple, the couple's combined earned income. Note that it does not include any earnings the claimant is treated as having due to the minimum income floor if they are self-employed.
Nil UC threshold                                                       

This is the amount of total earned income above which there would be no entitlement to UC. It is the amount of income needed to reduce the UC award to Nil. It is calculated as follows:

1. Find the maximum amount of the UC award (add up all of the relevant elements)
2. Deduct any unearned income
3. Divide the figure in step 2 by 63 and multiply the result by 100
4. Add the amounf of any applicable work allowance (this may be Nil)

Relevant threshold This is Nil UC threshold + the De minimis amount
De minimis amount This is currently £2,500 but will reduce to £300 at some point in the future.

First claim since the old award terminated

If this is the first claim made since the old award terminated, the surplus earnings are calculated as follows:

  1. Work out the total 'earned income' in the month that would have been the final assessment period of the old award (had it not been terminated)
  2. Deduct the 'relevant threshold' for the month that would have been the final assessment period of the old award (had it not been terminated) from the figure in Step 1.

This amount is known as the 'original surplus'. This amount will be added to the new claim as earned income.

Second claim since the old award terminated

If this is the second claim made since the old award terminated, the surplus earnings are calculated as follows:

  1. Work out the 'original surplus' (as above)
  2. Add the 'total earned income' for the month that would have been the first assessment period in relation to the first claim to the figure in Step 1
  3. Deduct the 'relevant threshold' for the month that would have been the first assessment period in relation to the first claim to the figure in Step 2.

This amount is known as the 'adjusted surplus'. This amount will be added to the new claim as the earned income.

Third claim since the old award terminated

If this is the third claim made since the old award terminated, the surplus earnings are calculated as follows:

  1. Work out the 'adjusted surplus' from the second claim (explained above)
  2. Add the 'total earned income' for the month that would have been the first assessment period in the second claim to the figure found in Step 1
  3. Deduct the 'relevant threshold' for the month that would have been the first assessment period in relation to the second claim to the figure found in Step 2.

The amount will be added to the new claim as earned income.

Fourth claim since the old award terminated

If this is the fourth claim made since the old award terminated, the surplus earnings are calculated as follows:

  1. Work out the 'adjusted surplus' from the third claim (explained above)
  2. Add the 'total earned income' for the month that would have been the first assessment period in the third claim to the figure found in Step 1
  3. Deduce the 'relevant threshold' for the month that would have been the first assessment period in relation to the third claim to the figure in Step 2.

This amount will be added to the new claim as earned income.

Fifth claim since the old award terminated

If this is the fifth claim made since the old award terminated, the surplus earnings are calculated as follows:

  1. Work out the 'adjusted surplus' from the fourth claim (explained above)
  2. Add the 'total earned income' for the month that would have been the first assessment period in the fourth claim to the figure found in Step 1
  3. Deduct the 'relevant threshold' for the month that would have been the first assessment period in relation to the fourth claim to the figure in Step 2.

This amount will be added to the new claim as earned income.

Calculating surplus earnings - couples

Where a couple have an award that terminates and they go to make a new claim within 6 months together, surplus earnings are calculated in the same way as for single people (above).

However, there are special rules that deal with situations where couples form or separate. We are currently working on guidance for this part of the rules.

How the rules work in practice

The following examples show how the rules work in practice. In reality, this is likely to be complicated because change of circumstances which lead to changes to maximum entitlement can affect calculations, as can income changes in the intervening months.

Mo is a single father with two children. He has housing costs and his maximum UC is £1500.00. Mo has been out of work for 6 months but in June 2020 he starts a new job. Mo’s earnings are £2,200 a month but he continues to receive £297.96 a month UC. In August, due to how his pay dates fall and how his employer reports information to HMRC, DWP treat Mo as receiving two pays in one assessment period. In addition, Mo worked some overtime as a one-off and so his total earnings are £6,000 and his UC is reduced to nil and his award ends.

Mo re-claims UC. As he had an award that terminated within 6 months and the other conditions are met, DWP will calculate surplus earnings. As this is the first claim since the old award terminated the surplus earnings are calculated as follows – we have shown the amounts in Mo’s case in bold after each step:

  1. Work out the total 'earned income' in the month that would have been the final assessment period of the old award (had it not been terminated

    His total earned income in the final assessment period of his old award was £6,000
     
  2. Deduct the 'relevant threshold' for the month that would have been the final assessment period of the old award (had it not been terminated) from the figure in Step 1.

    First, calculate his nil UC threshold:
     
    • Step 1: Find the maximum amount of the UC award (£1,500)
    • Step 2: Deduct any unearned income from figure in Step 1 (Mo has no unearned income)
    • Step 3: Divide the figure in Step 2 by 63 and multiply by £100 (1,500/63 x 100 = 2,380.95)
    • Step 4: Add any applicable work allowance (Mo’s work allowance is £292 so 2,380.95 + 292 = 2,672.95

Mo's Nil UC threshold is £2,672.95. To this we add the de minimis amount (currently) £2,500 to make a relevant threshold of £5,172.95.

His total earned income was £6,000 - £5,172.95 = £827.05.

This amount of £827.05 is known as the 'original surplus'. This amount will be added to the new claim as earned income along with his earnings of £2,200. As a result, he will receive no UC.

Mo claims again the following month. As this is the Second claim since the old award terminated the surplus earnings are calculated as follows:

  1. Work out the 'original surplus' (as above)

    His original surplus is £827.05.
     
  2. Add the 'total earned income' for the month that would have been the first assessment period in relation to the first claim to the figure in Step 1

    His earned income in the first assessment period was £2,200 – added to the surplus of £827.05 makes a total of £3,027.05.
     
  3. Deduct the 'relevant threshold' for the month that would have been the first assessment period in relation to the first claim to the figure in Step 2.

    The relevant threshold, as shown above, is £5,172.95. As the £3,027.05 is lower than the relevant threshold figure, there are no surplus earnings to be added as earned income for this claim and he will receive his usual UC entitlement based on his earnings of £2,200.

If the figure calculated at step 2 had been higher than the relevant threshold - the amount is known as the 'adjusted surplus'. This amount would then be added to the new claim as surplus earnings.

Reducing the surplus – making a new claim

Prior to 21 May 2020, in some cases claimants needed to claim UC in each subsequent month (after the assessment period in which their old award ended) in order to use up the surplus, even though they would not receive any UC. Not doing so could be to their detriment as the following shows:

Mary is a single parent with three children. She is self-employed and before the pandemic she did not qualify for UC due to the level of her earnings. In March 2020, due to the loss of some work, her self-employed earnings reduced to £1500 for March and subsequent months. Mary claimed UC on 20 March and so her assessment periods run from 20th of each month to the 19th of the following month. During her assessment period 20 May to 19 June, Mary receives a self-employment income support grant from HMRC of £7,500.

Prior to claiming the grant, Mary’s UC payment was £540.36. In her assessment period 20 April to 19 May her UC is reduced to Nil due to the grant plus her £1500 income. This ends her claim. Mary makes a new claim for UC the following month (20 May to 19 June) HMRC calculate her surplus as £4142.29. This is added to her actual self-employed earnings of £1,500. This means her earned income for the assessment period is £5,642.29 and so her UC award is nil.

Mary claims UC again the following month (20 July to 19 August). As this is the second claim since her old award ended, DWP calculate her ‘adjusted surplus’ as £784.58. This is added to her income from self-employment of £1,500. This means her earned income for the assessment period is £2,284.58 and she is awarded £46.08 UC.

Mary’s UC claim continues the following month (20 August to 19 September). All of her surplus earnings have been used up and so she is awarded £540.36.

However, some claimants may assume there is no point in re-claiming UC initially because their surplus means they won’t get anything. If Mary had done that and not made a claim for UC for the 20 May to 19 June period or 20 July to 19 August period but instead, she claimed again for 20 August to 19 September period – she would have received nil for that period (instead of £540.36 in the example above). This is because she needed the two claims in between to use up some of her surplus, by not claiming in those months, the whole of the surplus is treated as income when she did make her first claim following the ending of her old award.

From 21 May, new regulations have been introduced that allow the DWP, subject to any conditions they consider to be appropriate, to treat the claimant (or joint claimants) as making a claim on the first day of each subsequent month, up to a maximum of 5. This applies where a claim is made but no award is made because the income condition is not met or entitlement to UC ceases because that condition is not met. As this is discretionary, it is not clear how and when DWP will apply it and whether it will be done automatically.

In addition, in a small number of cases, the opposite is also true. The example above shows a claimant who is better off making claims each month to reduce their surplus than waiting a couple of months and then reclaiming. But the opposite can also be true where it is better to wait a couple of months and then reclaim. That happens where someone has an increase in income such that their surplus increases in the intervening months.

For example, assume Mary in the example above received a large tax refund in the period 20 May to 19 June (first new claim period) and received a large amount of additional self-employed income in the period 20 June to 19 July (second new claim period) and then returned to her £1,500 self-employed earnings in the period 20 July to 19 August. The table below shows what would happen if Mary claimed vs what happens if she doesn’t. In this particular example, it is only a small difference, but when the de-minimis level decreases this may well be more significant.

Period

Income

Amount of UC - if she re-claims UC from first AP after termination of award

Amount of UC - Position if she waits to re-claim UC

20 April to 19 May (old award terminates)

9,000 (including HMRC grant of 7,500)

Nil

Nil

20 May to 19 June

6,000 (including large tax refund)

Nil

Nil

20 June to 19 July

4,000 (including one-off self-employed income increase)

Nil

Nil

20 July to 19 August

1,500 (self-employed earnings)

Nil

Nil (reclaims in this period)

20 August to 19 September

1,500 (self-employed earnings)

Nil

£46.08

20 September to 19 October

1,500 (self-employed earnings)

£540.36

£540.36

Exceptions

Surplus earnings will not apply where the claimant has, or had at the time the old award terminated, recently been a 'victim of domestic violence'.

The UC regulations 2013 already contain a definition of domestic violence that is already used in UC and the same definition applies here. More detailed information is set out in the DWP ADM guidance - section J3187 onwards.

Self-employed losses

At the same time as introducing the surplus earnings rules, DWP introduced rules allowing self-employed claimants to carry forward any unused losses from earlier assessment periods. There is no time limit on carrying forward the losses (subject to some rules about breaks between claims). See the calculation of self-employed earnings page for more information. 

Losses brought forward from an earlier period can reduce self-employed earnings in a subsequent period which, in turn, can lower any surplus created in a particular month.

Interaction with the capital rules

Some claimants may face a double hit when the surplus earnings rules are applied. That is because once any income has been treated as income in a particular assessment period, it is then added to the claimant’s capital for future assessment periods (assuming it is not spent and assuming it is not disregarded as capital). As UC has capital rules, it can mean that when the person reclaims UC, in addition to having surplus earnings taken into account as earned income, they may have tariff income taken into account due to the capital.

Tariff income from capital is unearned income and is relevant when calculating the Nil UC threshold (See above). Ultimately this means the threshold figure is reduced and consequently the surplus income increased.

Further guidance

The DWP guidance on surplus earnings and losses can be found in Chapter H4.

Last reviewed/updated 4 June 2020