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. We will be working over the coming weeks to add examples to help advisers understand how the rules work in practice and to cover the rules in further detail.

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. They were originally due to commence in April 2016, but instead were introduced in a slightly different form from April 2018 in full service UC areas. At present, it is unlikely that they will affect many claimants because the De minimis level is temporarily set at £2,500 but it is expected this will reduce to £300 in the future at which point the rules will likely affect more UC claimants.

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 in a full service area 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 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.

These rules only apply where the old award terminates after 11 April 2018.

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 2018. Her first assessment period runs from 18 October to 17 November. At the end of January 2019, Lucy moves to a much higher paid job and her UC award ends on 17 February (her final assessment period being 18 January to 17 February_ due to the level of her earnings.

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 2018. His first assessment period runs from 18 October to 17 November. At the end of January 2019, 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 2019 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 added as earned income in the first assessment period of the new claim.

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 final assessment period of the old award minus the relevant threshold for that assessment period
Total earned income Is the earned income of the claimant, or if they are a 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. Note that in calculations on this page we have used the £300 level.

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 final assessment period of the old award
  2. Deduct the 'relevant threshold' for the final assessment period of the old award 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'
  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.

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.

Further guidance

The DWP guidance on surplus earnings and losses can be found in ADM 11/18.

Last reviewed/updated 31 July 2018