Universal Credit and Self-employment

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Universal Credit and Self Employment

The Universal Credit White Paper argues in annex 3, point 5 that:

“Some self-employed people under Tax Credits report very low levels of income. We know that in starting up a business that it can take some time before it becomes profitable. But once established we would expect to see a reasonable income from the business activity. So for Universal Credit we are considering introducing a floor of assumed income from self-employment for those registering as such. The floor will be set at the National Minimum wage for the reported hours; clearly profits above this limit may be received and reported. For those self-employed people who engage in only a few hours of activity, and do no other form of paid employment then we will expect them to engage with the conditionality requirements as set out in Chapter 4.”

This paragraph has raised concerns and been criticised by a range of organisations, including Community Links, the Federation of Small Businesses and groups representing the self-employed. They argue that this approach is at odds with efforts to boost self-employment in the claimant population through the New Enterprise Allowance and the Work Programme.

Self employment can be favoured option for many job seekers, particularly for groups that find traditional employment difficult to access.  Universal Credit offers an opportunity to integrate self employment with the benefit system.  Traditionally, self-employment has struggled to integrate with the benefit system.  Self-reported earnings increase the opportunity for fraud and raise the suspicions of government and business people often prefer to avoid the bureaucracy of making a benefit claim when that time could potentially be better invested in their business – sometimes leading to informal employment.

Universal Credit is expected to increase take-up of benefits from the self-employed as the bureaucracy involved in making a claim falls.  At the same time, the government aims to enforce conditionality on people moving into self employment in the same way as those going on to work for an employer.

The statement in the white paper acknowledges that:

  • Benefit claimants moving into self-employment should have the same access to benefits as those moving into traditional employment.
  • Self-employed people claiming support should be earning at least the minimum wage, at least in the medium and long term.

Under the current system, moving into self-employment from JSA is a real challenge. The need not greed campaign find that many claimants avoid the hassle of making a claim entirely and often choose to work informally, putting themselves at risk of prosecution and restricting their ability to develop the business.

The self-employed use existing in work support (Tax Credits) to supplement their income, as an example, this thread shows the concerns of self-employed couriers working in variable-hours employment, often reporting low levels of income, but arguing genuinely that though a few under-report earnings, they often earn less than the minimum wage in self-employment once their costs are accounted for.  However, this suggests in turn that self-employment can be used by firms as a way to avoid having to pay the national minimum wage, with the risk that they use this advantage to unfairly undercut rivals, something that the government are understandably keen to avoid.

Those concerned about using a floor of reported hours at the national minimum wage argue based on their experience of supporting people into self-employment that:

  • The state should allow time for a business to reach profitability.
  • Self-employment should have different conditionality requirements because of the effort required to start a business – with people often working more hours for less income in the early stages.
  • It is unlikely to prevent deliberate fraud as those that under-report income just as easily could under-report hours if both are self-reported.

I was surprised when I first read about using reported hours instead of reported earnings.  Universal Credit clearly operates on the basis of income, eliminating hours rules and minimising the amount of information that would need to be collected.  While the temptation to underreport earnings exists, there is no suggestion that it is anymore widespread among self-employed claimants as compared to self-employed more generally. This is really a matter for HMRC however their resources would arguably be better directed toward reducing higher value tax evasion.  It is unclear whether DWP will have the resources to pursue this type of fraud effectively, but self-reported hours, revenues, costs and profits should provide sufficient information to distinguish between businesses that are genuinely struggling to be sufficiently profitable and those that are deliberately under-reporting.

The DWP should ideally align Universal Credit with efforts to support self-employment as a route off welfare into work.  For example, the NEAS allows six-months for a business to reach profitability (though campaigners argue that it can sometimes take two to three years).  I would guess that six months is probably just about sufficient to identify whether the self-employment route is sustainable and whether the support offer should be extended.  CSJ research found that the costs of starting in entry level self-employment were often less than originally expected, and the ability to raise revenue quickly was (unsurprisingly) critical to business success.  Conditionality during this initial period at least could take the form of support to grow the business.

Fundamentally, it is unfair if companies are using self-employment as a way of paying their workforce less than the national minimum wage.  Those couriers earning less than the minimum wage may ultimately have to charge their employing company more to account for the full costs of work, including the administration, petrol and additional travel time if required.  This leads inevitably to a debate about the practicality of a national minimum wage and the trade-offs this involves, an interesting question that is outside of the scope of Universal Credit.

22 Responses

  1. Andrew Marsden

    I am thinking of becoming aself employed courier and wondered if everything went pear-shaped, would I still be eligible for jsa or any other benefit?

    • Joel Reland

      Hi Andrew,

      Your entitlements are the same as any other person’s.

      Assuming that you mean that your business would go bust, you would be eligible for JSA just like any other unemployed individual. If you had paid enough National Insurance over the past two years, you would be able to apply for contribution-based Jobseekers Allowance, which you can claim regardless of your savings or the earnings of your partner (if you have one). Otherwise, you would be able to claim income-based JSA as long as you have less than £16,000 in savings and your partner works less than 24 hours per week on average. You would also be eligible for JSA while running your business, if you were working less than 16 hours a week.

      If you mean to say that your business would still be operating but not making much money, then you would be entitled to all the same benefits as if you were employed by a company. These benefits, which are calculated according to your income, include Working Tax Credit, Housing Benefit, Council Tax Support and Child Tax Credit. In order to calculate your entitlement, you would need to input your earnings and hours worked into our Universal Benefit Calculator (link below).


      I hope this information is helpful.


  2. I am considering going self employed, I have a long term illness that restricts me doing a full time job. so would be claiming the disability component of working tax credits, and will be working on average 16 hours per week. If I earn £6.31 per hour equals the minimum wage.is that based on is net profit? because once I take out insurance for liability and vehicle expenses that would be needed to run my business.
    I would be priced out of the market.

    You see my problem? to meet the minimum wage working part time as a sole trader, counting all the expensive and hours worked unpaid like book working, accounts every month, cleaning, advertising and traveling to give quotes etc. I would have to charge way to much to be competitive. I was hoping working tax credits would enable me to work and gain some self respect. but by the looks of things it will be impossible in the future. I’m gutted and feel useless and trapped.

    • Dear Paddy,

      Thanks for your comment. You bring up some very interesting points.

      Your income would be your net profit, for the purposes of calculating either tax credits or Universal Credit.

      Under Universal Credit, new start-up businesses are given a 12 month grace period during which the Minimum Income Floor (number of hours required x NMW) will not apply. During this period, you would not be expected to look for other work and your Universal Credit award would be calculated using your actual income, not the Minimum Income Floor. This grace period will apply again after five years.

      After the grace period, it will be assumed that you earn the Minimum Income Floor when calculating your Universal Credit award. That means that if you still earn less than this amount, your income will be reduced.

      I am sorry to hear that you do not feel that self-employment is a viable option for you. Do you feel that you should be allowed to earn less than the minimum wage?

  3. Hello,

    I am self-employed. For a while I did actually begin to see a reasonable profit for my labours but the last few years have been, well, to be perfectly honest, dire. I really appreciate the benefits of this country in situations like mine. I will make the point here though that my goal has always been to move off benefits (all of them) and make ends meet by my own labours.

    I receive housing benefit and working tax credits. My wife receives child tax credits for our family. I have been tempted so many times to register unemployed but I guess my pride gets the better of me even though I know that at the moment I would be financially better off. I try to do what I can but it seems the recession is working against me all the time.

    My post is for this reason: I am puzzled about the truth behind how the Universal credit system will affect me. Just last week I read that it will not affect me until at least next April because I am self-employed, then I read that it will start this September and then yesterday I saw somewhere that because of my particular circumstances, I will not be affected by the cap at all.

    Can someone please shed some truth on the matter as I am confused and concerned at the possibility of a) having a challenge in my business and b) seeing my benefits cut when I am doing all I can to make ends meet in hard times.



    • Dear Ben,

      Thank you for your comments.

      There are many changes happening to the welfare system at the moment, and it can get very confusing. The benefit cap is a separate reform to Universal Credit so it is likely that the two policies will affect you in different ways. Four areas (Bromley, Croydon, Haringey, and Enfield) are piloting the benefit cap from April 2013. As long as your benefits are below £500 per week, it is unlikely that the benefit cap will affect you. You can contact your Local Authority to find out more.

      Universal Credit is being piloted in the Greater Manchester area from April 2013. It won’t begin to affect existing claimants until April 2014, but this process will not be completed until 2017 so it is unlikely to affect you for a number of years. To get an estimate of what you will receive under Universal Credit, try out our free Universal Credit Calculator.

  4. Hello Mark,

    The whole point of Universal Credit is to reward work and earnings.

    You will ultimately have to declare at least minimum wage earnings for the hours that you work as self-employed, but you may still be entitled to some Universal Credit support if you do this.

    I will do a separate post on self-employment once I have been through the regulations. Universal Credit is unlikely to impact you for a few years yet, in the meantime all the best with your business.


  5. I am at a total loss as to why someone like me is being punished like this.

    I am 57 years old and because of the years I spent as a full-time carer, I have very little work history. This means that I stand a very big chance of being left on the dole for the rest of my working life. That is 9/10 years of at least £150 a week benefits. But I have self-employed work that with a little help £40-£50 pounds a week will keep me until retirement and paying national insurance contributions.

    I want to work, I want to pay as much of my way as I can, but it looks like I will be forced to spend my last working years claiming dole. What good does this do anyone?

  6. I have been told that if, as a self employed person, I declare that I get the minimum wage for 24 hours work a week that I will qualify for tax credits. Is that true? I think I could do this.

  7. I was a full-time unpaid carer for many years, but those I cared for died. Aged 57 with little work history, I signed on as unemployed. Four months of genuinely trying and I could not get an offer of full-time work. After threats from the DWP to remove my benefits, I decided to take what what self-employed work I could get. It pays less than the minimum wage, but if I put in the hours, with some working tax credit I can just about get by.

    Now, I am told that this is not good enough and under Universal credits I will be forced out of work and back onto the dole. If it is the same as last time, I will get three months of benefits, costing much more than I would get from working tax credits, then told my benefits will be cut.

    Where does that leave me? I could keep working as self-employed, but that would simply put me in more and more debt. I thought I was doing the right thing by working, even if I needed a little help, but now it seems the government wants to consign me to the scrapheap without a second thought.

    I fear for the future, I really do.

    • Hello Mark,

      Sorry to hear about your experience and thanks for your comment.
      Clearly it is better for you to be doing what work you can rather than no work at all, and Universal Credit should support this.

      This post argues both sides of the debate on self-employment.

      You will get a period of time to increase your earnings from self-employment, and, in an ideal world, you would get support to increase your earnings from self-employment so that you were earning at least the minimum wage.

      What is your business, do you think you could raise earnings to above the minimum wage?


      • I draw illustrations for story books. At present i am working for a Spanish publisher, who limits the amount of work I can give them. I think the only reason I got this work is because I was willing to take such low rates. I honestly cannot say that I will improve my income, it is possible, but after six months, I have yet to find more work.

        My self-employed work is still at the low-end of professional competence. Added to this, competition is quite fierce.

        I understand why I am so unattractive to prospective employers. At my age and having so little work experience.

        I have been told that if I were earning the minimum wage, even for as little as 24 hours a week, I would still get tax credits. That hardly seems fair. I am willing to put in the hours in order to stay off the dole and having to claim even more in benefits, but I’m being penalised because I am willing to work harder for my money than the government deems fit.

    • To be clear, 3 months on the dole would cost more in benefits than I get for a years tax credits. This does not make sense. Also if I continue as self-employed it would be without any tax credits, so I would eventually run up debt and be in a worse position.

      • I read that it is very difficult for the over fifties to get off the dole. I feel that I am looking at the prospect of spending most, if not the rest of my working life signing on. I felt ashamed everytime I went to the dole office. Most there were professional, but one person particular was very nasty and treated my like a workshy, good for nothing. After four months of working hard at trying to get a job and not succeeding, she told me that if I did not get off the dole my benefits would be stopped.

        Thankfully the CAB told me about working tax credits or I would now be on the streets and destitute.

        I really fear for my future. I have never shirked work and always tried to do what is right, but it seems that is not enough. I wonder how many older people are in my position?

        Sorry for making so many comments, I have a lot to get off my chest and I cannot find any other forum in which to make my situation know.

  8. Type your c
    There are too many anomalies in self employment for one system to work fairly for all. Different businesses require different levels of investment, vary in complexity and start to make a profit within widely different timescales. And what is meant by ‘profit’ or ‘earnings’? If you take as drawings every little bit of spare cash, you might show some earnings but your business might suffer because of it. Investment of surplus cash to build the business will in many cases be the wise and prudent thing to do – leaving the proprietor with little spare for their own drawings. Sole traders and the business entity being one and the same is very different from having a limited company and paying yourself a wage. To expect every business to pay its proprietor minimum wage is not necessarily comparing like with like. The current system of Tax Credits creates a buffer that allows people to get their business off the ground, and far from being a bad thing that is only to be encouraged. The more resiliant, dynamic people, able to conceive of, start and run a business, the better the social capital. Some of these businesses will be very successful and go on to employ other people and contribute to the local or even national economy. But which ones? If we (or the government) could accurately identify successful businesses from the outset, and make them profitable in 6 months, that would be great. But it doesn’t work like that. People should be encouraged to start businesses, not put off.
    omment here…

    • Hi Cathy,
      Thank you for your comment. The government has proposed a twelve month window for a startup business to reach a level of profitability where they pay their owner the minimum wage. Do you think this is reasonable, or should it be longer (or indefinite)?
      The challenge is that low income households are subsidising their living costs with an in-work Universal Credit, and may be competing against similar businesses that aren’t. There are clearly two sides to this story, but for me the crux of this debate leads to a debate about the validity of opting out of the minimum wage.
      Thanks again for your contribution.

  9. The self employed after setting up a buisness for about six months should definitely have a n assumed minimum wage per hours worked income. I know a lot of people who abuse the tax credit system by declaring very low income and get full tax. Credits. It’s a a disgrace and needs tightening up. If this country wants to get out of recession then the saving this would make are very very substantial.

    • Fran

      We relatively recently took over the family farm after 2 deaths in quick succession, one involving intestacy (off topic but if you don’t have a will make one NOW because you leave an extortionate nightmare for those left behind). The business continued to operate for 2 and a bit years whilst the intestacy was being sorted. During that time a large overdraft was accrued to fund running costs which we also inherited. In the years prior to the deaths there had been chronic underinvestment in equipment/buildings/stock; therefore the overdraft increased significantly again. It would be very unusual for anyone starting out in farming to make a profit in 6 months. According to our accountant we could expect to break even in year 3 and into profit (weather/global commodity prices depending) thereafter. So far that has been the case. For some types of business 6 months is a ridiculously short time to turn a profit.

  10. deven_pip

    Hi Jaki,
    I’m not sure that I fully understand your point, but I know that many of your concerns are shared by self employed people, and to be clear I don’t speak for the government in any way.  However, I doubt that many would label the conditionality regime as ‘draconian’.  It is right that claimants who are able look for work up to a certain level of income, and claimants affected by disability would face a lighter conditionality regime.  
    The governments legitimate concern is that some people run businesses operating at below the minimum wage for an ongoing period, undercutting other businesses that have to pay their workers more. The challenge will be in finding a way to implement the legislation that supports short hours work.
    Hope that helps.

  11. deven_pip

    Hi Jaki,
    The exact regime under Universal Credit hasn’t been made clear yet.
    The expectation is for the DWP to use an improved version of the work capability assessment, or a correlation with the conditionality categorisation of the claimant (ready for work, support into work, keep in touch and no conditionality). 
    Hope that helps.

    • deven_pip

      Jaki –
      The Universal Credit disability awards will be based on the Work Capability Assessment (WCA), with those in the support group getting the higher award (£74.50) while those in the work related activity group will get the standard disability award (£25.95). Hope this is helpful. Thanks.

  12. I would like to comment on self-employment as an option for disabled people. The Sayce Report showed that for many disabled people, self-employment is the only option as it offers opportunities from home and flexible hours. However, to talk about Draconian ‘conditionality’ and restrictive time limits on ‘viability’ is going to deter disabled people who a) may only be able to manage a few hours a week and therefore b) are going to be at a disadvantage when it comes to making the business ‘viable’ if it ever becomes this at all and c) disability, self-employment, particularly in the arts field are all by definition precarious.  Does this mean disabled people shouldn’t have the same opportunities as their ‘able’ counterparts?  What about the Equality Act which promises ‘reasonable adjustments’ to enable disabled people to enjoy the same opportunities at work?  But if a reasonable adjustment might be number of hours worked (say 4 hours a week), it is clear that the disabled person is going to be at a disadvantage compared to those who can work a full week. Surely the DWP/Tax Office would pay for the shortfall? And why would they impose time limits on disabled people?  Surely there has to be recognition that for disabled people a business may only at best give them a supplementary income?  I would very much like some answers to these concerns because the talk is very scary for disabled people, so scary that they fear to take risks and surely this isn’t the intention of the government and policy makers? 

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