How is Universal Tax credits worked out?
In our recent article we gave you a run down on universal credits; we explained what it would be replacing, and the importance of informing HMRC of changes. Now we will look at how universal credits are worked out if you re self employed.
How will your payments be worked out?
If you have been self-employed for 12 months or more, the DWP will work out your payments based on the minimum income floor.
How your minimum floor is level calculated?
HMRC take the number of hours you are expected to work each week, (up to 35 hours) dependent on personal circumstances. This figure is then multiplied by the relevant national minimum wage (NMW)
So if you are aged 30 HMRC believe you can work a minimum of 35 hours a week. They start with multiplying 35 by the NMW of £7.50 =262.5 (weekly figure). This is then multiplied by 52 and divided by 12 to reach a monthly figure:
252 x 52/12= £1137 (monthly figure)
They will also deduct income tax and Class 2 and 4 National Insurance from this figure, currently using 2017/18 figures, this works out around £12.35 in National Insurance.
The DWP therefore expect you to earn (£1137-£12.35) = £1125.15 a month. For every additional pound you earn above this, the Universal Tax Credit will decrease by 63p. If you earn less, unfortunately your Universal Credit will not rise.
There are exemptions to who can be assessed using the minimum floor income
If your new business is less than 12 months old, the minimum income floor won’t apply to you for the first year. You will have to attend an interview every three months to prove you are still gainfully self employed and looking to increase your earnings. For the first 12 months your assessment will be made on your monthly earnings. You can only make one start up period every five years.
Disabled and Lone parents
If you fall into this category of “no work –related requirements group or the “work focused interview”, “Work Preparation” group, and are also self-employed then the minimum income floor also won’t apply
If you are unsure always ask check with the DWP, it is better to avoid any over payments then underpayments.
What happens if for one month your expenses are high?
If one month you find certain expenses not factored in, resulting in a unexpected drop in income. Universal income will not go up. It cannot be used to offset against a future month where your income rises. Universal credit looks at income month by month irrelative to any additional factor your business may face.
Managing your income
It’s essential that if you are going to use universal credits to supplement your income, that you try to smooth your incoming and outgoing finances as much as possible.
Universal credit is paid monthly in arrears. If all of a sudden one month you are scrapping the barrel for work and the following month you are turning away work, you must remember that if you go below the minimum income floor it won’t be topped up but it could be reduced to accommodate your increase in profits.
Therefore it is advised that you try to work out your yearly income, which Blue Skies can help you with. Then divide this by 12 for a monthly guideline. If one month your income is higher than you expected, save the extra amount, as this will allow you to offset this against any learner months.
What can you do to predict your expenses?
Look at whether moving to monthly payments will be helpful, as opposed to yearly ones. Things to make sure if you do this, is that companies do not charge you more to pay in instalments. Also check for rolling contracts. Paying monthly means you sometimes forget when the renewal is due so don’t scan the market for competitive quotes.
There is lots of information and calculators you can use on the internet to see if you are eligible to apply. It is essential that if you are a client and find your income dropping, or you have a change in circumstances keep us up to date. We are here to work with you, and the quicker we know of any changes the quicker we can implement some actions to avoid any negative outcomes.