Universal Credit – how does it work
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The Chancellor has announced that self-employed individuals can apply for Universal Credit in full at a rate equivalent to Statutory Sick Pay. While we are unable to apply for UC on behalf of clients we have prepared the following guidelines to help our clients if they intend to apply for UC as well as where to go for additional help and advice.
Whats is UC?
UC is a means-tested benefit that was introduced in 2013 to replace six ‘legacy’ benefits including:
- Working Tax Credit
- Child Tax Credit
- Housing Benefit
- Income Support
- Income-based Jobseeker’s Allowance
- Income-related Employment and Support Allowance.
The process of replacing the old benefits is not complete so in effect, we have 2 systems. Applications to UC will replace these legacy benefit and as such may not be beneficial so we advise clients to obtain specific advice if they are currently in receipt of the legacy benefits (see the end of this post for links to websites).
What do I need to know about UC?
As with most means-tested benefits, UC takes into account circumstances and income of the claimant and their partner (if they have one). We have seen some self-employed claimants apply for UC in the expectation they would get an amount equivalent to SSP, but their partner’s income is too high to receive any payment.
UC is for those of working age. Broadly, those who have reached state pension age cannot claim unless they are part of a ‘mixed age’ couple where their partner is under state pension age. They may be able to claim pension credit instead.
It has a capital limit of £16,000. If the claimant has capital above that amount, they won’t be entitled to UC no matter their income. Between £6,000 and £16,000, capital will produce a tariff income that will be used in the calculation.
UC is designed to cover those who are out of work as well as those in work. It usually has work-search requirements attached to the claim for those who are required to look for work or increase their hours. This is called conditionality and is enforced via a claimant commitment. These requirements have been somewhat relaxed during the Coronavirus outbreak.
It is administered mainly online and (usually) via face-to-face appointments. During the current crisis, most of the process is either online or dealt with by phone. There are currently some delays on the phone lines and with identification checks for claims.
UC is based on monthly assessment periods. These are generally based on the date of claim (unless in the last few days of a month). So if a claim is made on 20th April the first assessment period will be 20 April to 19 May and period 2 from 20 May to 19 June.
Payment is usually made seven days after the end of the assessment period. This means that most people have to wait five weeks for their first payment. They can ask for an advance when they claim, but it will have to be repaid – usually by reducing future UC payments.
UC has amounts within it – called elements – that cover housing costs (rent), childcare, children, disability and carers. These are in addition to the basic standard allowance. The Government announced a one-year increase to the basis standard allowances of £20 a week as part of the coronavirus support package. Circumstances of the claimant and their partner dictate which elements are awarded in any assessment period. These elements are added together to create a maximum amount. Earned income above certain thresholds (work allowances) reduces the maximum by 63p for each £1. Unearned income reduces the maximum amount £1 for £1.
How does UC work for the self-employed?
UC is based on monthly assessment periods. Earnings from self-employment must be reported usually within 14 days after the end of the assessment period. UC uses the cash basis – there is no choice about this. There are also specific rules about allowable expenses and the treatment of losses.
The most controversial part of UC for the self-employed is the minimum income floor (MIF). After 12 months, anyone not earning above their individual threshold (broadly 35 hours x national minimum wage) will be treated as if they are and have their UC calculated on that basis. The MIF has been temporarily suspended for all UC claimants from 6 April as one of the Covid 19 support measures.
The grant from the Self-Employment Income Support Scheme (payable in June we understand) will be treated as earned income for UC. It is not yet clear whether it will be treated as income in the assessment period it is received. If so, it could potentially trigger the complex surplus earnings rules – which means any excess income is carried forward to a future assessment period and treated as income in that period.
Directors of limited companies are also treated as self-employed for UC purposes. The UC Regulations contain ‘look-through’ rules so that where a claimant has a company that is analogous to that of a sole trader, they are treated for UC purposes as being a sole owner or partner.
The following websites provide more detailed information:
- LITRG coronavirus guidance
- RevenueBenefits.org.uk (LITRG’s website for advisers)
- AdviceLocal.uk – directory of local welfare rights specialists
You can also use the following calculators to help identify what help might be available:
Extracted from an article originally published by AccountingWeb by Victoria Todd (Head of LITRG)
Author ProfileI'm the owner and Managing Director of Mollan & Co Accountants. I'm a skilled and efficient accountant with more than 20 years of experience in the industry.
I developed valuable skills in commercialisation through my work in the science and technology department at the Scottish University. Then, in 2002, I formed my own internet-based marketing company, producing and distributing 360° virtual reality tours for the Scottish tourism sector.
I now use my commercial skills, expert tax knowledge and first-hand experience to help other businesses grow and flourish through strong accounting practice.
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