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Universal Credit (UC) is gradually replacing tax credits, and some other social security benefits. Universal credit is now available across the UK and HMRC state that it is no longer possible for anyone to make a brand-new claim for tax credits. The only exception is for certain people who are granted refugee status. Instead, people are expected to claim UC or pension credit depending on their circumstances.  Currently, existing tax credit claimants can continue to renew their tax credits and/or add extra elements to their claim. See our existing tax credit claimants page for more information. Our understanding is that the majority of existing tax credit claimants will move to either universal credit or pension credit by the end of the 2024/25 tax year. You can find out more about this in our universal credit section. 

Updated on 6 April 2024

Income and universal credit

Your income, or both claimants’ combined income in joint claims and certain single claims, can affect how much your universal credit award is. Some income is taken into account in full when calculating your universal credit award, other ignore is ignored. This page explains more about the income rules.

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Income that is taken into account for your universal credit award is treated as either earned income or unearned income. Unearned income reduces your maximum universal credit award amount pound for pound but only 55% of earned income is used to reduce your maximum award.

Earned income is further separated into employed earnings and self-employed earnings.

Earned income

Earned income for universal credit is generally earnings you get from paid work, for example salary or wages or profits from a trade or profession.

It also includes something called surplus earnings, which is basically where you have excess earnings that are carried forward from previous assessment periods.

There are also rules which cover notional earned income. This is where DWP decide you have deprived (or arranged to be deprived) yourself of earned income for the purpose of being entitled to universal credit (or an increased amount of universal credit). If this applies, DWP will include a notional amount of earned income, equivalent to the amount of deprived earnings.

Employed earnings

The general rule is that earned income for an assessment period should be broadly based on the actual amount you received in that period, although there are some exceptions to this.

For most people who are employees, DWP get your employed earnings figures directly from the HMRC RTI (Real Time Information) system. This information is provided to HMRC by your employer, usually on or before each time they pay you. There is more information about this in our universal credit and employee pay section. Wages and salaries which are not reported under RTI will generally be taken into account in the period you receive them, but you will need to report these directly.

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 DWP’s staff guidance on the GOV.UK website (Chapter H3).

As noted above, certain amounts are also excluded from being employed earnings. For example, to date, items such as benefits in kind (which HMRC would normally treat as earnings) are NOT treated as income for universal credit. Although it is expected that in the longer term, benefits in kind will count as income.

Expenses that are deductible for tax purposes are disregarded from employed earnings. This means that expenses that are allowable for tax which are reimbursed by an employer are not taken into account as income.

You can also deduct any other work expenses you incur, which are allowable for tax and which are not reimbursed by your employer, from your earned income. There is no published information about how to formally report these expenses but you can put a note in your universal credit journal for your work coach and if DWP refuse to make the deduction then you can request a mandatory reconsideration (for each assessment period affected) as the first stage of an appeal if you think their decision is incorrect.

Repayments of income tax and national insurance contributions that you receive from HMRC in respect of a tax year in which you were in paid work are also treated as employed earnings (unless they are already accounted for as self-employed earnings). You will need to report these via your journal in most cases.

Deductions from employed earnings

The following amounts can be deducted from the gross earnings figure:

  • Pension contributions to a registered pension scheme where they attract tax relief. In some cases, pension contributions are already deducted from the earnings figure that DWP receive from HMRC so you should take care that the correct amount is deducted.
  • Payments of income tax or national insurance contributions in the assessment period in respect of the earnings.
  • Gift aid sums withheld under a qualifying payroll giving scheme.

Full details about employed earnings are available in DWP’s staff guidance on the GOV.UK website (Chapter H3).

Self-employed earnings

Self-employed earnings are earnings which are from a trade, profession or vocation. You do not need to be classed as ‘gainfully self-employed’ for self-employed earnings to be taken into account.

If you 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, for example you are a director of your own limited company, you may also be treated as having self-employed earnings. See our self-employment and universal credit section for more information.

Unearned income

Unearned income 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)

There is more information about unearned income in DWP’s staff guidance available on the GOV.UK website (Chapter H5).

Reporting income

If you are an employed worker, in the majority of cases your employed earnings are reported to DWP by HMRC under the Real Time Information (RTI) system. If an employer does not report earnings to HMRC, you will have to report your earnings directly to DWP.  There is more information in our universal credit and employee pay section.

If you have self-employed income, including directors who are treated as having self-employed income, you should report your receipts and expenses each assessment period, usually via your online universal credit journal. There is more information about this in our self-employment and universal credit section.

Surplus earnings

Surplus earnings are broadly an amount of excess earnings (both employed and/or self-employed) that is carried forward from a previous assessment period. Surplus earnings are treated as earned income. There is more information about this in our self-employment and universal credit section.

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