Following the Chancellor's Spring Statement speech yesterday (23 March) Head of Tax, John Endacott provided his insights into the key issues: What the Spring Statement tells…
By Steve York and Sarah McDermott
Universal Credit (UC) was introduced in April 2013 and has been slowly phased in to replace a range of benefits, including working tax credits and child tax credits. Sole or joint claims are made based on individual circumstances, reflecting the family circumstances.
UC has been in the news a lot in recent times as the additional £20 per week provided to claimants due to the coronavirus pandemic has come to an end. There are nearly 6 million claimants of UC, many of whom are employed or are self-employed and who see the value of the UC reduced the more they earn.
Self-employed individuals must report their income through the Universal Credit Portal monthly. This can be particularly onerous where a claimant is trading in partnership. In the first year of trading, referred to as the ‘start-up period’, actual earnings will be applied to calculate the UC payment, giving time to build up the business. After this period earnings are subject to a ‘minimum income floor’ based on the premise that your earnings should at least match your working hours at minimum wage. Where your earnings exceed this figure, actual earnings will be used in the calculation, otherwise the minimum income floor will be the deemed income for the period.
There are complex rules surrounding what counts as income and expenses for Universal Credit purposes which may not match the rules for accounting and tax purposes, often meaning more than one set of figures are being recorded over the course of a year.
There are several components to the UC, so more UC is received depending on someone’s age, whether they are in a couple and the number of children they have. There is also a work allowance for those with child responsibilities or if they or their partner have restricted work capabilities due to their health or a disability. The work allowances element of the UC, which vary depend on whether you receive housing benefits, will increase by £500 per year as announced in the Autumn 2021 Budget.
There are also reductions for capital held and a cap limiting the amount that can be received. The UC is then clawed back, or tapered, the more they earn. The taper rate was 63% meaning that you would lose 63p in UC for each additional £1 earned. However, the announcement in the Budget today was the taper rate is reducing to 55%, so a claimant will lose 55p in UC for each £1 earned.
The change will be brought during the next five weeks, by 1 December 2021.
It should be noted that this is only going to make those who are working better off, as they will retain more of the UT than before. Those that are not working will see no change.
So how does this work in the real world? Let’s use an example of Clare who does not claim the housing element and is a single parent of one child. With self-employed profits of £1,000 for the month, after deducting the higher work allowance of £515, the remaining £485 is subject to the taper rate. This would previously been 63% so the award would be reduced by £305.55, but with the announced reduction in taper to 55% the restriction reduces to £266.75, meaning they receive an additional £38.80 that month.
On the basis the taxpayer was receiving the standard allowance for a single person over 25 of £324.84 and the standard child amount of £282.50 (born prior to 6 April 2017), the award of £607.34 would be reduced by £266.75 to £340.59, whereas previously it would have been reduced by £305.55 to £301.79.
Because the rates payable under Universal Credit are based on a range of circumstances there is no easy point at which to say a claim would not be beneficial, but anyone on low income and especially those starting in self-employment should check their eligibility.
Take Brian, who has no children and is employed for 15 hours a week at £10 per hour. He earns £150 per week and so at the 63% taper rate he loses £95 of his UT. At the lower taper rate of 55% this reduces to £83, so he would be £12 per week better off.
In his statement, Rishi Sunak gave the example of a single mother of two, in rented accommodation and earning the minimum wage would retain £100 per month as a result of the changes.
For more Autumn Budget analysis, visit our Budget hub.