How do I work out my profits for universal credit?

What is universal credit?

Universal credit (UC) was introduced in 2013 and is gradually replacing six other working-age means tested payments: housing benefit, income-based jobseeker’s allowance, income-related employment support allowance, income support, child tax credit and working tax credit. UC is normally paid in arrears, seven days after the end of your monthly assessment period (although alternative payment arrangements are available) and based on your circumstances in that assessment period.

If you are already claiming tax credits and you make a claim for UC, your tax credits claim will end even if you are not entitled to UC. Like tax credits, the amount of UC you get depends on your household circumstances (ie including those of your partner/spouse if you are part of a couple) but UC is not a like for like benefit and there are different rules about things like capital and income.

For most people, HMRC state it is no longer possible to make a brand new claim for tax credits. Instead, people will need to claim universal credit or pension credit (depending on their age and circumstances). Existing tax credit claimants will eventually be moved across to UC (or pension credit) under a managed migration exercise (‘Move to UC’). HMRC and DWP expect most tax credit claimants to have moved over to UC by the end of 2024. In the meantime, tax credit claimants can move to UC if they choose to do so, need to claim another benefit which UC has replaced (such as housing benefit) or have a change in circumstances that ends their tax credit award and they cannot make a new claim for tax credits but need to continue claiming support. It is important to get advice before claiming UC if you are already claiming tax credits. 

For further information see our universal credit section.

I am self-employed, what information will I need to provide to claim universal credit?

If you are self-employed as either a sole trader or partner in a partnership, you will have to calculate and report your monthly profits to claim universal credit (UC). The rules for establishing whether you have earnings from self-employment will generally follow tax law (although DWP can make a different decision to HMRC) but you will also need to meet the UC gainful self-employment test to be classed as self-employed for UC purposes. It is possible for DWP to decide that you have earnings from self-employment, but that you are not gainfully self-employed.

Gainful self-employment means that your UC work coach will review whether you are carrying out your activity as your main employment, whether the earnings from it are self-employed earnings and whether it is organised, developed, regular and carried on in expectation of profit.

Whether you are in gainful self-employment for UC purposes is important because it may have an impact on your work-related requirements and it also determines whether the minimum income floor will be applied in calculating your UC award.

You will need to provide information about your self-employed earnings to the Department for Work and Pensions (DWP) each month. Broadly speaking, UC looks at cash in and cash out of your business in each assessment period. An assessment period is a calendar month – the start and end date of each assessment period will depend on the date you first claimed UC. The rules for calculating profit for UC are not exactly the same as the cash basis for tax purposes. Whether you use the accruals basis or cash basis for tax, the figures you need to report for UC are likely to be different so you should follow the UC guidance carefully.

You must report your monthly earnings to DWP between the period of seven days before to 14 days after the end of your assessment period.

Your income from self-employment will be taken into account as earned income when DWP calculate your UC award, regardless of whether they decide you are in gainful self-employment or not.

How do I work out my monthly profits for universal credit?

Step 1

For each trade, profession or vocation that you are engaged in you need to calculate actual receipts minus permitted expenses.

Step 2

Add together the amounts in Step 1 for each business (if there is more than one)

Step 3

Deduct amounts paid in the assessment period for income tax and National Insurance. If the result is Nil or a loss, then self-employed earnings are Nil for that assessment period. Any loss can be ‘banked’ as an unused loss to be used at a later date under Step 5. If the result shows a profit, then move on to Step 4.

Any payments or repayments of income tax, National Insurance contributions (NIC) (Class 2 and Class 4) and VAT must be included in the month in which you make or receive them. The tax and National Insurance should, strictly speaking, relate to your self-employment, however in practice it is not possible to separate tax out in this way.

For example, your income tax, Class 2 and 4 NIC payments in January and July will be deducted as a business expense in those months. So if you pay your tax bill on 20 January, you will include it as an expense in the UC assessment period that contains the 20 January.

Step 4

Deduct any relievable pension contributions you have made in the assessment period (unless you have already deducted these from your employed income). If the result is Nil or a loss, then self-employed earnings are Nil for that assessment period. If the result shows a profit, then move on to Step 5.

Step 5

Deduct any unused losses from earlier assessment periods, taking the oldest first. We explain more about how to use losses below. If the result is Nil or a loss, then self-employed earnings are Nil for that assessment period. See below for further information on losses. If the result shows a profit, then that amount is your self-employed earnings for the assessment period.

Actual receipts

Any payment actually received during the assessment period is included as an actual receipt, regardless of when is it earned. 

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Example

John is a painter. His month assessment period for UC runs from 10th of one month to the 9th of the following month. On 31 May, John carries out some painting work for a client for the agreed price of £300. The client pays John the £300 on 15 June.

For UC purposes the £300 will count as an actual receipt for his assessment period 10 June to 9 July even though he did the work and the money was earned in the previous assessment period.

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Actual receipts are not defined in legislation but DWP guidance gives examples of the following items which are receipts:

• Any payments for goods and services provided: cash, cheque and credit card payments received in return for goods and services
• Earnings payable abroad: money that is due to be paid to a business in a country outside the UK should be included when it is received by the business
• Personal drawings: if personal drawings have been deducted from the amount shown as an actual receipt, the amount should be added back in
• Sale of certain business assets: where the purchase of an asset has been deducted as an expense in any assessment period and in a later assessment period it is sold or ceased to be used in the business the proceeds of the sale (or the market value if it is ceased to be used) are to be treated as a receipt in the subsequent assessment period. Where only part of the expense was allowable (part business/part personal) the same percentage will be used when calculating the amount of receipt when the item is sold
• Tips and gratuities: where received in response to the service being provided, these should be included as actual receipts but not where they are made as a gift on personal grounds and unconnected to the self-employment
• Payments in kind: DWP will decide an equivalent monetary value to include in the actual receipts
• Any VAT receipts
• Refund or repayment of income tax or National Insurance contributions relating to the trade, profession or vocation.

Capital receipts do not form part of the actual receipts of the business. For example, funds introduced by the owner of the business in order to finance the business or loan capital borrowed from third parties for financing purposes should not be counted as actual receipts.

DWP have confirmed that money that has been put aside to pay a tax bill can be disregarded from personal capital (and so won’t count towards the £16,000 capital limit). They may ask for evidence of this, especially if the money is not held in a business bank account. This is because business assets are disregarded from personal capital.

For VAT, you can choose either to report your earnings inclusive of VAT and then deduct a VAT payment as an expense when it is paid to HMRC or you can report the earnings exclusive of VAT and so no permitted expense would be allowed when payment is made to HMRC.

Permitted expenses

Expenses are allowed if they were paid in the assessment period and:

1. wholly, exclusively and necessarily for your business; and

2. were reasonably incurred; and

3. an allowable expense.

Expenses can only be deducted in the assessment period in which they are paid.

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Example

Josie is a plumber. Her assessment period runs from 20th May to 19th June. She pays £360 for her annual liability insurance on 10th June. The whole £360 needs to be deducted as an expense when calculating her profit for the assessment period 20th May to 19th June.

However, if Josie was to pay her insurance monthly, she would only deduct any monthly payments made during the assessment period when calculating her profit.

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Allowable business expenses may include wages, rent, utilities, stock and travel costs. Capital items such as equipment, tools and certain vehicles including vans and motorcycles, are also allowed. Interest on business loans is allowable up to £41 for each monthly assessment period.

Expenses which are not allowed to be deducted include business entertaining, repayment of the capital element of business loans and the cost of some capital assets including property, shares, investment assets and costs relating to buying and use of a car (however, cars are eligible for flat rate deductions as explained below instead).

The DWP guidance (Chapter H4) lists allowable expenses and provides more details about these conditions. Some examples of allowable expenses include:

• regular, day to day costs of the business such as rent, wages, cleaning of premises, accountancy fees, stationery, advertising, phone bills. There is a list in the ADM Chapter H4214 which gives further examples.
• purchase of stock
• utilities, phone and travel costs (provided it is not specifically excluded – see below)
• expenditure on the purchase, lease or acquisition of tools and equipment
• VAT (See above for further explanation about how VAT can be treated)

A deduction can be made for a payment of interest in relation to a loan taken out for the purposes of the trade, profession or vocation, however this deduction cannot exceed £41 in the assessment period. This is a cumulative figure and covers the total interest payable across all relevant loans. This also includes interest on credit cards and overdraft interest and charges if the original expense related to the trade.

No deductions are allowed for:

• Expenditure on non-depreciating assets (including property, shares or other assets held for investment purposes)
• Repayment of capital in relation to a loan taken out for the purposes of the trade, profession or vocation
• Expenses for business entertainment
• Any expenses that were incurred unreasonably
• Expenditure on the purchase, lease or use of a car (see below for details of flat rate expenditure that can be deducted)
• Losses from earlier assessment periods

You may want to consider whether to use flat rate allowances rather than calculating actual costs for some eligible expenses but if you claim these flat rate allowances then you cannot also claim the individual expense.

The flat rate allowances are the same as those allowed under the simplified expense rules for Self Assessment. However, if you are claiming for use of your home for business purposes, when calculating the number of hours worked at home for the amount of flat rate allowance, you can only include time spent on actual work or marketing activities not time spent on business administration including book-keeping, being on call or storage of stock and business assets.

What if my monthly accounts show a loss? 

Self-employed losses

If you follow the steps above to calculate your self-employed earnings and it shows a loss in that assessment period after Step 3 or Step 4 or Step 5 then you will be treated as having Nil income in that assessment period. This means the minimum income floor may apply, which is explained on our advisers website, Revenuebenefits.

Self-employed claimants can carry forward any 'unused losses' from earlier assessment periods to deduct from profits in later assessment periods. However, unused losses are only those created at Step 3 of the self-employed income calculation set out above. Losses created by the deduction of pension contributions cannot be carried forward. There is no time limit on carrying forward the losses (subject to some rules about breaks between claims).

A loss is no longer an 'unused loss' once it has been used up in a subsequent assessment period. In practical terms we understand this means that a loss is only used up to the extent that it reduces your profit to Nil at step 5 of the calculation. 

If your UC award ends, any outstanding unused losses will normally be lost. However, the rules do allow you to continue to carry forward losses, and potentially accrue new losses, if you claim and are awarded UC again within 6 months.

Can I use my universal credit monthly accounts when completing my Self Assessment tax return?

Unfortunately, there are different rules for preparing accounts for UC and accounts for your Self Assessment tax return. However, if you elect to use the cash basis when preparing your Self Assessment return then you may be able to use some information from your UC figures such as sales income.

You must report your self-employed earnings for the assessment period up to 7 days before and 14 days after the end of the assessment period. You should do this via your online UC account and if you would like some help, you can all the UC helpline (0800 328 5644 : Relay UK (if you cannot hear or speak on the phone) 18001 then 0800 328 5644 : textphone 0800 328 1344).

Reporting self-employed earnings on time is very important. Generally, the calculation of earned income is to be based on actual amounts received in the period but DWP can estimate the amount of a person's earned income in relation to an assessment period where a person has failed to report information in relation to that earned income. That determination can be based on an estimate of the amounts received or expected to be received in that assessment period.

If DWP do not make an estimate, then failure to report earnings could lead to a delay in UC payment.

Where can I find more information?

You can find more detailed information in the UC self-employment section of our advisers website.

The DWP’s decision maker guidance is available online – Chapter H4 contains the rules for self-employment.