Universal credit: What is income for UC?
Income for Universal Credit purposes will be treated as earned income or unearned income. If it is not specifically included as either of these then it will be disregarded.
The importance of determining whether income is earned or unearned can be seen in the calculation of UC entitlement. Earned income is subject to a 55% taper whereas unearned income reduces UC maximum entitlement pound for pound. (note: For assessment periods ending before 24 November 2021, the taper rate was 63%)
- Earned income
- Notional earned income
- Employed earnings
- Self-employed earnings
- Unearned income
- Reporting income
- Surplus earnings
- Homes for Ukraine
Earned income for UC is defined as:
1. The remuneration or profits derived from -
a. Employment under a contract of service or in an office (including elective office)
b. A trade, profession or vocation (self-employed earnings – including some limited company directors)
c. Any other paid work
2. Any income treated as earned income for the purposes of UC
It also includes surplus earnings.
The regulations also include provision for ‘notional earned income’ – this is where a claimant has deprived themselves of earned income, or whose employer has arranged for them to be deprived, for the purposes of securing entitlement to UC or an increased amount of UC. Where this is the case, the person will be treated as having the earned income.
It will be treated as being for the purposes of securing or increasing entitlement to UC if in fact, entitlement was given or higher as a result and this was a foreseeable and intended consequence of the deprivation – in the opinion of the Secretary of State.
Similar notional income rules apply in relation to services provided where no payment is received – the UC claimant can be treated as having the earned income that be reasonable for the provision of the service.
The general rule is that earned income for an assessment period should be based on the actual amount received in that period. There are some exceptions to this general rules that are explained in ADM Chapter H3.
For many employees, DWP will receive these employed earnings figures directly from the HMRC RTI (Real Time Information) system. We have a dedicated RTI section which explains how RTI data feeds into UC, how it is used by DWP and when earnings are taken into account. Earnings which are not reported under RTI will generally be taken into account in the period they are received by the claimant.
Employed earnings are defined as any amounts that HMRC treat as ‘general earnings’ (as defined in Section 7(3) ITEPA 2003) leaving out any amounts treated as earnings under the benefits code (Chapters 2 to 11, Part 3 ITEPA 2003) and amounts exempt from income tax under Part 4 ITEPA 2003 (such as approved mileage allowance reliefs, work-related training, no-cash vouchers etc….).
General earnings includes wages, salary and fees. It also includes payments of statutory sick pay, statutory maternity pay, ordinary statutory paternity pay, additional statutory paternity pay and statutory adoption pay, shared parental pay and statutory parental bereavement pay. Some other payments are also included as employed earnings, a full list of these can be found in Paragraph H3072 (ADM Chapter H3).
As noted above, certain amounts are also excluded from being employed earnings. The rules to date (2022) mean that benefits in kind (which HMRC would normally treat as earnings) will NOT be treated as income for UC purposes. However, DWP say they are considering the best solution to reflect benefits in kind in future. A full list of benefits in kind not yet treated as earnings can be found in Paragraph H3081 (ADM Chapter H3).
Deductible expenses under Chapter 2, Part 5 of ITEPA 2003 are disregarded in calculating employed earnings. This ensures any allowable expenses reimbursed by an employer are not taken into account as income.
It is also possible for claimants to deduct any allowable work expenses they incur, which are not reimbursed by their employer, from their earned income. This will reduce their income for UC purposes. This was confirmed via a parliamentary question in 2018. However, the process for doing this is not clear. We advise that claimants put a note in their journal for their work coach and if DWP refuse to make the deduction then a mandatory reconsideration should be requested (for each assessment period affected) as the first stage of an appeal.
Repayments of income tax and national insurance contributions received by a person from HMRC in respect of a tax year in which the person was in paid work are also treated as employed earnings (unless they are already accounted for as self-employed earnings)
Deductions from employed earnings
UC is generally based on net income and therefore the following can be deducted from the claimant’s employed earnings:
- Any relievable pension contributions made to a registered scheme. There are practical considerations depending on the type of scheme and whether the claimant pays contributions via their employer's payroll or direct to the pension provider. There are two ways in which deductions can be made, depending on the pension scheme. Contributions to ‘net pay arrangements’ are paid gross (before deduction of tax), but contributions to 'relief at source arrangements' are paid net of basic rate tax (with the pension scheme reclaiming the basic rate tax relief from HMRC and adding it to the claimant’s pension pot).
Our understanding of the legislation is that it is the gross amount of the pension contribution that is to be deducted from earnings for UC purposes, so contributions made under relief at source arrangements should be grossed up before they are deducted. We understand, however, that DWP in practice deduct the net-of-basic-rate-tax amount and claimants may need to appeal a UC decision if they wish to challenge this point. Some scenarios are given below -
- Pension contributions taken from the claimant’s pay by their employer under net pay arrangements: We understand that the pension contributions should already be deducted from the claimant’s earnings figure that HMRC get and then send to DWP for UC.
- Pension contributions taken from the claimant’s pay by their employer under relief at source arrangements: We understand that HMRC send DWP the claimant’s taxable earnings figure, before deduction of pension contributions, but also send details of the pension contributions made via the payroll for the DWP to deduct the pension contribution amount from the claimant’s earnings figure. Our understanding of the legislation is that it seems to allow a deduction for the grossed-up pension contribution So, the claimant’s contribution should be multiplied by 1.25 to arrive at the gross deduction. However, as noted above, we understand that DWP’s standard practice is to deduct the net contribution paid by the claimant. This is something that would need to be considered and ruled upon by a Tribunal.
- Pension contributions made by the claimant outside of an employer scheme to an approved private or personal pension (including self-invested personal pensions - SIPPs): We understand the legislation allows these contributions to be deducted from the claimant’s employed earnings (or self-employed earnings, unless they are otherwise deducted as a business expense). The claimant should report those contributions to DWP directly, for DWP to make the appropriate deduction. These contributions are usually made under relief at source arrangements – net of basic rate tax. Our understanding of the legislation is that it seems to allow a deduction for the grossed-up pension contribution figure that should be deducted from earnings for UC. So, the claimant’s contribution should be multiplied by 1.25 to arrive at the gross deduction. However, as noted above, we understand that DWP’s standard practice is to deduct the net contribution paid by the claimant. This is something that would need to be considered and ruled upon by a Tribunal.
- Pension contributions to an older-style retirement annuity scheme: These plans were set up prior to the more modern personal pension schemes.. The claimant will need to check with the scheme whether their contributions are net of basic rate tax (relief at source) or gross. Where relievable contributions are paid gross, if the claimant claims the tax relief directly from HMRC, they may need to declare the repayment of tax as employed earnings for their universal credit award.
- Income tax or national insurance contributions paid in the assessment period in respect of those employed earnings (note that although the legislation states only tax and NI in respect of the employed earnings can be deducted, in practice any tax that is paid is deducted even if it does not relate directly to the employment)
- Any sums withheld under a payroll giving scheme under Part 12, ITEPA 2003.
Full details of employed earnings can be found in ADM Chapter H3.
Self-employed earnings are those which derive from a trade, profession or vocation. The claimant does not need to be classed as ‘gainfully self-employed’ for such earnings to be taken into account. Claimants who are director of their own limited company may also be treated as having self-employed earnings where they stand in a position analogous to that of a sole owner or partner in relation to a business that is carrying on a trade or a property business. See our self-employment section for further information.
We explain self-employed earnings in more detail, including how to treat the SEISS grant, in the self-employment section.
Unearned income broadly includes the following types of income:
- Retirement pension income
- Certain benefit income
- Foreign benefits
- Spousal maintenance
- Student income
- Employment and training payments paid as a substitute for UC or as living expenses
- Sports awards
- Certain insurance payments
- Income from an annuity
- Income from a trust
- Income deemed to yield from capital (called ‘tariff income’)
- Capital treated as income
- Any other income which is specifically listed in the regulations as income
- Any income which the claimant is treated as having (notional income)
Further detail about what counts under each heading can be found in ADM Chapter H5. Student income detail can be found in ADM Chapter H6.
Employed earnings
Claimants must provide such information and at such times as DWP require for the purposes of calculating their earned income.
However, in the majority of cases, this will happen automatically as employed earnings will be reported to DWP by HMRC under the Real Time Information (RTI) system. Where the employer does not report RTI earnings to HMRC, the claimant will have to report earnings directly to DWP.
We look at how RTI information is sent to DWP and how it is taken into account for UC purposes in our RTI section.
Self-employed earnings
Self-employed claimants will be required to submit details about their earnings each month using an online system. More information about this can be found in our self-employed section.
Rules from 11 April 2018 that mean some claimants - both employed and self-employed - will be treated as having additional earned income known as 'surplus earnings'.
See our surplus earnings and losses page for more information.
Last reviewed/updated 15 October 2024