Self-employment can be challenging, especially during slow periods or when dealing with illness, as it can significantly impact your finances.
Universal Credit is an option for self-employed individuals, but there are specific regulations regarding declaring income and expenses that can be confusing. These rules differ from those of a standard tax return.
Applying for Universal Credit as a self-employed worker follows the same process as for those unemployed or earning low incomes from PAYE jobs. The initial claim is made online, followed by an in-person visit to the local Job Centre for the first appointment.
During this visit, you must demonstrate that you are “gainfully self-employed,” meaning you earn a reasonable income relative to the hours and effort you put into your work.
There are exceptions to this rule. If you are in your first year of self-employment, you are exempt from proving gainful self-employment status for the initial 12 months. Another exception is if you are on extended sick leave but need your business to continue operating during that time.
The necessity of being categorized as gainfully self-employed is tied to the concept of the Minimum Income Floor. This floor establishes a minimum expected income based on the hours worked, unless you are in your first year of business or on sick leave, or if you receive the health component of Universal Credit.
Monthly income reporting is crucial, with assessment periods determined from the date of claim submission. Reporting should be based on actual cash received in your bank account, in contrast to invoiced amounts. This differs from HMRC’s tax return processes, where you can choose between cash basis and traditional accounting methods.
Certain income sources, like Personal Independence Payment or foster carer income, do not need to be reported, while others such as pensions, annuities, or property-related income must be declared.
A critical aspect of reporting self-employed income is understanding what qualifies as an allowable expense, which can differ between HMRC and the DWP. The DWP is more stringent in assessing allowable expenses and less open to interpretation.
Universal Credit expenses must be deemed “reasonable” and directly related to the business. The DWP scrutinizes expenses monthly, potentially questioning high or unusual costs.
It is advisable to maintain separate records for monthly Universal Credit reporting and annual tax returns, particularly for businesses with turnovers exceeding £50,000. This practice aids in accurately reporting expenses to each organization and streamlines the process for future reference.