The relationship between Universal Credit and the self-employed is complicated.
If you’re self-employed and apply for Universal Credit, the government assesses your application using an assumed level of earnings called the minimum income floor. This is based on what the government would expect an employed person to receive in similar circumstances.
If your income is above the minimum income floor, you will be expected to look for alternative employment or use up any savings you have.
The minimum income floor requirement was suspended during the pandemic, but it is now being enforced again.
How is Universal Credit calculated for the self-employed?
In order to receive Universal Credit, you must prove that you are ‘gainfully self-employed’. This involves keeping and submitting records of your business, such as invoices, receipts and evidence of marketing.
How many hours should you work?
Universal Credit assumes that self-employed people earn the equivalent of the National Minimum Wage for employed people in their age group. You are expected to work or look for work on a full-time basis, which is 35 hours per week.
If you are a carer or look after a child under 13 years old, your hours and your minimum income floor will be lower. You can also combine employed work with self-employed work.
How much should you earn?
A self-employed single person over 23, with no caring responsibilities, is expected to earn at least £8.91 per hour – at least £1351.35 every month. Universal Credit will only top up from there. This is the minimum income floor, and there are quite a few trap doors in it.
Universal Credit calculates a couple’s entitlement together, which can result in a lower minimum income floor. This reinforces the ability of couples to survive financially, but leaves single people, including single parents, clinging on by their fingernails.
Holidays are cancelled. The calculations are based on all 52 weeks of the year.
An amount is deducted from the Minimum Income Floor for tax and National Insurance, but not pension contributions.
If in any month, you earn less than your allocated minimum income floor (which will be based on your individual circumstances) there will be no extra Universal Credit to cover the shortfall.
How does Universal Credit work for new businesses?
If you have a new business, there is no need to worry about the minimum income floor to begin with. There is a start-up period of up to a year when Universal Credit payments will be based on your actual earnings (if any) and not on the minimum income floor. The government paused the start-up period for new businesses during the pandemic, but it has now restarted.
If your new business does not succeed, it is unlikely that you will get a new start-up period on Universal Credit for a different business. Currently, there is a limit of one start-up period every five years.
Universal Credit supports people who want to become self-employed, but you need to be sure that you will be earning the minimum income floor within a year. For many kinds of business, that seems more like a glass ceiling. Combining self-employment with regular work as an employee could be a safer bet.
Can you avoid the cracks in the minimum income floor?
When applying for Universal Credit as a self-employed worker, it’s important to remember that you are in a lose-lose situation. If you earn less than the minimum income floor in one month, Universal Credit doesn’t go up. If you earn more than the Minimum Income Floor the next month, Universal Credit goes down.
Effectively, the government takes money away from a good month but doesn’t give it back to cover a bad one.
The self-employed on Universal Credit must report their income every month. They are denied the opportunity to average out income over several months, which is second nature to many people who work for themselves.
Aim to space out invoicing, or even work, so that all your income doesn’t come in at once. This is a challenge for seasonal businesses and those whose profit arrives intermittently in big doses.
It would be wise to put excess income from high earning months into a savings account. This is particularly important now that the £20 pandemic uplift to Universal Credit has been removed.
Should you avoid Universal Credit?
If you are on a legacy benefit, such as Working Tax Credit, don’t be in a hurry to switch to Universal Credit, even though the minimum income floor won’t apply straight away.
If you’re a sole trader, keeping your business as a side hustle could be a safer bet for now.
The post Universal Credit: are you falling through the minimum income floor? appeared first on The Motley Fool UK.
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