Income from self-employment

Overview

Universal credit has specific rules which mean calculating income from self-employment is quite different to both tax and tax credits. Income from self-employment is treated as earned income for universal credit.

Generally, you should report your receipts and expenses for each assessment period. We set out the steps in calculating your monthly profit or loss for universal credit purposes.

The rules for establishing whether you have earnings from self-employment broadly follow tax law, although DWP or DfC can make a different decision to HMRC. You will also need to meet the universal credit gainful self-employment test to be classed as gainfully self-employed for universal credit purposes. It is possible for DWP to decide that you have earnings from self-employment to be taken into account for your award but that you are not gainfully self-employed.

Income information to report

You must provide information about your self-employed earnings to the Department for Work and Pensions (DWP) each month. Universal credit broadly looks at cash in and cash out of the business in each assessment period.

An assessment period is a calendar month – the start and end date of each assessment period depends on the date you made your universal credit claim. The rules for calculating profit for universal credit are not exactly the same as the cash basis for tax purposes. Whether using the accruals basis or cash basis for tax, the figures needed for universal credit are likely to be different so it is important to follow the universal credit guidance carefully.

You must report your business income and expenses information to DWP each month, between the period of seven days before your assessment period and 14 days after the end of your assessment period. There is more information about this on the GOV.UK website.

Reporting self-employed earnings on time is very important. Generally, the calculation of earned income is to be based on actual amounts you receive in the period but DWP can estimate the amount of your earned income in relation to an assessment period where you fail 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 universal credit payments.

Receipts and expenses

For each assessment period, DWP will need to know your receipts and expenses.

Actual receipts

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

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 business related 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 receipts inclusive of VAT and then deduct a VAT payment as an expense when it is paid to HMRC or you can report the receipts 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:

• wholly, exclusively and necessarily for your business; and
• were reasonably incurred; and
• an allowable expense.

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

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)

You can make a deduction for a payment of interest in relation to a loan you have 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)

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

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.

Calculating monthly profits or losses for universal credit

The way profits for universal credit are worked out is set out in the legislation and follows these steps:

Step 1

For each trade, profession or vocation that the claimant is are engaged in 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 and VAT must be included in the month in which they are made or received. The tax and national insurance should, strictly speaking, relate to the self-employment, however in practice it is not possible to separate tax out in this way.

For example, income tax, class 2 and 4 national insurance payments in January and July will be deducted as a business expense in those months. So if the tax bill is paid on 20 January, it will be included as an expense in the universal credit assessment period that contains the 20 January.

Step 4

Deduct any relievable pension contributions you have made in the assessment period (unless these have already been deducted 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 on our losses page. If the result is nil or a loss, then your self-employed earnings are nil for that assessment period. If the result shows a profit, then that amount is your self-employed earnings for the assessment period.

Universal credit figures and self-assessment tax return

Unfortunately, there are different rules for preparing accounts for universal credit and accounts for self assessment tax returns. However, if you elect to use the cash basis when preparing your self assessment return then it may be possible to use some information from the universal credit figures such as sales income.