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Published on 23 November 2023

Wage increase for employees could negatively affect low-income self-employed

Whilst welcoming yesterday’s announcement that the national living wage will increase to £11.44, the Low Incomes Tax Reform Group (LITRG) are highlighting that some self-employed universal credit claimants may be negatively impacted by the rate increase - even though they are not entitled to it.

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This is because the artificial income figure sometimes used to work out a self-employed person’s entitlement to universal credit, known as the minimum income floor (MIF), is directly linked to the minimum wage.

Self-employed universal credit claimants who are found by the DWP to be gainfully self-employed1 may be subject to the MIF2. If the MIF applies, the claimant’s actual earnings from self-employment are ignored and instead their universal credit is calculated based on a higher deemed income (their MIF)3. The MIF is calculated based on the number of hours the claimant is required to work for universal credit purposes multiplied by the national minimum wage rate for their age4. The increase in the national living wage to £11.44 means that the MIF will increase, so a higher deemed income figure will be used to calculate the person’s universal credit where the MIF applies.

Victoria Todd, Head of LITRG, said:

“Self-employed workers are not entitled to the minimum wage so today’s announcement that the national living wage will rise by over 9.8% from 1 April 2024 may well have passed them by. However, it may have an impact on them, because it is used to set the level of the minimum income floor for some self-employed universal credit claimants.   

“If the minimum income floor applies to a self-employed worker claiming universal credit, this will also increase from April 2024 as a direct result of the minimum wage increase.

“The MIF is effectively substituted for the person’s actual self-employed earnings and, as income rises, the amount of universal credit awarded usually reduces. This may well be detrimental for those self-employed workers who cannot simply increase their income in response to a minimum wage increase.

“A higher MIF may also apply to more people, given that the top minimum wage rate will extend to 21 and 22 year olds from April 2024.

“While one of the headlines from yesterday is about national insurance cuts for the self-employed, it is important not to forget that any such cuts benefit those on low incomes less than those on average to high incomes. This is because increasing net income reduces any means-tested benefits that are based on net income. According to the Government the NI changes will result in ‘an average self-employed person on £28,200 saving £350 in 2024/25’5. However self-employed people in receipt of universal credit may only benefit from this cut by £157.50 not £350.

“Claimants may be used to these basic types of interactions, but the MIF increase based on the national minimum wage is an overlooked, complicated interaction between the various systems that could really catch people unawares.’’

Notes for editors

  1. Gainful self-employment means a UC work coach will review whether the claimant is carrying out their activity as their main employment, whether earnings from it are self-employed earnings and whether it is organised, developed, regular and carried on in expectation of profit. The MIF can only potentially apply if the claimant is first found to be gainfully self-employed.
  2. The MIF doesn’t affect all self-employed universal credit claimants – some may not be gainfully self-employed, some may have sufficiently high earnings which means the MIF does not apply and some will be exempt from the MIF under various rules, at least temporarily. For example, the MIF does not usually apply in the first 12 months of self-employment.
  3. One impact of the MIF is that if a self-employed claimant earns a low amount in a particular assessment period, for example because they had less work or because they had a large business expense to pay, their universal credit will not increase to reflect their full fall in actual income. Where actual income falls below the MIF level, the MIF amount will be used instead of their actual earnings when calculating the amount of UC.
  4. The MIF is usually set at 35 hours multiplied by the relevant national minimum wage rate but not always as it depends on the circumstances of the claimant. To work out the level of MIF for an individual you need to multiply the minimum wage for their age group by the number of hours that they are expected to work. Some people may be expected to work less than 35 hours so their MIF will be lower. A notional amount of tax and national insurance, the amount of income tax and national insurance they would be expected to pay on this level of income, is deducted to arrive at the person’s MIF. If their actual earnings are below the level of their MIF, the MIF will be used instead of their actual earnings when calculating their UC award. 
  5. See https://www.gov.uk/government/publications/autumn-statement-2023 Paragraph 3.12

 

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