How do I work out my profits for universal credit?
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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 are self-employed will generally follow tax law.
What is universal credit?
UC is a new benefit which is paid monthly and is gradually replacing housing benefit, income-based jobseeker’s allowance, income-related employment support allowance, income support, child tax credit and working tax credit. Existing tax credit claimants will not be moved to UC until 2019-2022 unless something happens earlier that means they must claim UC or they choose to do so.
For further information see our 'universal credit section'.
I am self-employed, what information will I need to provide to claim universal credit?
You will need to provide information about your self-employed earnings to the Department for Work and Pensions (DWP) each month. This information is essentially monthly business accounts however these accounts must be prepared in a specific way, following the UC rules. The amount of UC you will receive depends on the monthly profits of your business and any other income you receive.
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.
How do I work out my monthly profits for universal credit?
The basic calculation of profits is:
GROSS PROFITS minus INCOME TAX, NATIONAL INSURANCE and PENSION CONTRIBUTIONS.
However there are some important rules you must follow:
- Gross profits are defined as actual receipts less permitted expenses.
- Actual receipts
All sales receipts and business income must be included in the month in which you receive actual cash payment.
For example, if your assessment period runs from 10 April to 9 May you may sell stock for £250 on 30 April but do not receive payment until 15 May. The £250 sale would be included as a receipt in your later assessment period 10 May to 9 June.
Although you must use a cash basis, it is not the same as the cash basis which small businesses may decide to use when completing their self assessment tax returns. It is important that you do not follow one set of accounting rules thinking that they will be acceptable to both HM Revenue & Customs (HMRC) and DWP.
- Permitted Expenses
Expenses are allowed if they are:
- wholly, exclusively and necessarily for your business
- were reasonably incurred
- an allowable expense.
Allowable business costs are deducted in the month in which they are paid for. For example, if you pay £360 for your van’s annual insurance in June, then you would be allowed to include all of the £360 as a business expense within June’s accounts. If however you renewed your van’s insurance but paid on a monthly basis then you would only be able to include £30 per month as a business expense.
Allowable business expenses may include wages, rent, utilities, stock and travel costs. Capital items such as equipment, tools and vehicles such as 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 cars (however, cars are eligible for business mileage allowances instead).
Self-employed claimants may want to consider using flat rate allowances rather than calculating actual costs for some eligible expenses
- Tax and National Insurance – 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 relate to the self-employed trade that you are completing monthly accounts for.
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
- Pension contributions – contributions to a registered pension scheme can usually be deducted as an expense.
- Flat rate allowances – it is possible to claim a flat rate allowance for business mileage, use of home for business purposes and premises used both as a home and for the business. 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. You cannot include 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?
If your monthly accounts show your business making a loss then you will be treated as having Nil income in that month and may be subject to the Minimum Income Floor.
From April 2018, new rules are introduced which allow some carry-forward of losses between assessment periods. So previous losses can be carried forward, but the carry-forward of the loss can only ever reduce the income in an assessment period down to the level of the minimum income floor.
Can I use these 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 limited information from your monthly accounts such as sales income.