Calculating self-employed earnings for Universal Credit

Hello! I can certainly help explain how Universal Credit works out self-employed earnings. It is a little different from how things worked under the old tax credits system, as Universal Credit looks at your earnings on a strict monthly basis.

How they calculate your monthly profit:

Every month, at the end of your assessment period, you will need to log into your Universal Credit account and report exactly how much money your business brought in and how much it spent on allowable business expenses. Universal Credit uses a cash basis for this. This simply means they look at what money actually landed in your bank account and what you actually paid out during that specific month, rather than when you sent an invoice or placed an order. Your business profit for the month is your total income minus your allowable expenses, minus any income tax or National Insurance contributions you paid.

The gainful self-employment test:

When you declare that you are self-employed, you will have an interview with a work coach to decide if you are in gainful self-employment. They will look at whether your self-employed business is your main occupation, if you work at it regularly, if it is organised, and if you expect to make a profit.

What happens if you are in gainful self-employment:

If the Department for Work and Pensions decides you are gainfully self-employed, they will apply a rule called the Minimum Income Floor. This is an assumed level of earnings, usually based on the National Minimum Wage for the number of hours you are expected to work each week minus assumed tax and National Insurance.

How the Minimum Income Floor affects your Universal Credit:

1. If your actual monthly profit is higher than your Minimum Income Floor, Universal Credit will use your actual profit to work out your benefit payment.

2. If your actual monthly profit is lower than your Minimum Income Floor, Universal Credit will pretend you earned the Minimum Income Floor amount. This is very important to know, as it means your Universal Credit payment will be calculated as if you earned more than you actually did, making your payment lower than you might expect.

The start-up period:

If your business is less than a year old and you are found to be gainfully self-employed, you will usually get a 12-month grace period called a start-up period. During these 12 months, the Minimum Income Floor does not apply. Universal Credit will base your payments entirely on your actual monthly profit, even if you make a loss or earn very little. This is designed to give your business time to grow. You generally only get one start-up period.

If you are not gainfully self-employed:

If your work coach decides your self-employment is more like a hobby or an occasional side earner, you will not be classed as gainfully self-employed. In this case, the Minimum Income Floor will not apply to you. Universal Credit will just use your actual profits every month to calculate your payment. However, because this is not classed as your main job, you will usually be expected to look for other employed work to keep receiving your Universal Credit.

Practical tips:

Keep a careful, ongoing record of everything you earn and spend. Because you have to report your figures every single month, keeping an up to date spreadsheet or ledger on a weekly basis will save you a lot of stress when your reporting day arrives. Also, make sure you keep your receipts and statements for all your business expenses, as the Department for Work and Pensions can ask to see evidence of what you have claimed.