Tax situation with self employed work and universal credit?

Energize

If I'm claiming the job seekers part of universal credit and I do self employed work, they pay me 65% less benefit as a proportion of my income correct? As I have gone over the personal allowance I will also pay 20% on the gross income. Would this would effectively take away 85% of my income away before NI is taken into account?

eg. I if earn £250 in a month and would normally receive £340 benefit they would pay me £340 - (£250 x .65) = £177.50 so I'd get £427.50 that month, but then I'd have to pay 0.2 x £250 = £50 income tax on that, effectively reducing that months earnings to £377.50.

So I could work potentially 10-25 hours for an extra £37.50 if my maths is correct. Doesn't really make it seem like it makes any sense to do any extra work unless I ask for payment on a future date eg £1000 worth of work in 3 months time or something so only 1 months benefit payment is affected.

Is my maths right here?

Darksparkle

If you only earned £250 per month then you wouldn't be over the tax threshold. The standard personal allowance for this tax year is £11,000

Plus you only pay tax on the amount earned over the personal allowance, not the full amount.

Icequeen99

Energize wrote: »

If I'm claiming the job seekers part of universal credit and I do self employed work, they pay me 65% less benefit as a proportion of my income correct? As I have gone over the personal allowance I will also pay 20% on the gross income. Would this would effectively take away 85% of my income away before NI is taken into account?

eg. I if earn £250 in a month and would normally receive £340 benefit they would pay me £340 - (£250 x .65) = £177.50 so I'd get £427.50 that month, but then I'd have to pay 0.2 x £250 = £50 income tax on that, effectively reducing that months earnings to £377.50.

So I could work potentially 10-25 hours for an extra £37.50 if my maths is correct. Doesn't really make it seem like it makes any sense to do any extra work unless I ask for payment on a future date eg £1000 worth of work in 3 months time or something so only 1 months benefit payment is affected.

Is my maths right here?

It depends on your circumstances. Are you single? Do you have children? Do you have limited capability for work?

Those questions are relevant to whether you will get a work allowance.

IQ

Energize

Darksparkle wrote: »

If you only earned £250 per month then you wouldn't be over the tax threshold. The standard personal allowance for this tax year is £11,000

Plus you only pay tax on the amount earned over the personal allowance, not the full amount.

I was employed earlier this year and have exceeded the personal allowance already.

Icequeen99 wrote: »

It depends on your circumstances. Are you single? Do you have children? Do you have limited capability for work?

Those questions are relevant to whether you will get a work allowance.

IQ

I'm single, no kids, don't have a limited capability for work.

Mersey_2

The self employed UC claimants don't pay tax & NICs as they're going along each month.


They do this when they file their Self Assessment return online by the end of the January following the tax year.

Energize

I understand that I pay it later. But whether I'm paying it now or later it's still 85% being taken away, which creates a bit of a benefits trap. It's not quite as bad in part time employment because they only take 65% of the net leaving the employee with 28%.

Mersey_2

True up to a point. But you may be entitled to a work allowance, plus you deduct work expenses (plus pension contribs etc) before you reach the net tax figure owed.


You'd have to be v unlucky to be taxed at that level, as well as the fact that over 90% of the newly self-employed UC claimants do not pay any income tax, as they earn below the £11k pa personal allowance. Half of these don't pay NICs either due to their low net earnings.


You should have been given this already, but if not - ask the DWP for a UC5. This guide is for the self-employed UC claimant and should list allowances, costs and deductions you make to your gross income which the DWP should take account of the following month (to calculate your next UC payment) after you report your earnings for the monthly reporting period over the 'phone.

Icequeen99

Energize wrote: »

I understand that I pay it later. But whether I'm paying it now or later it's still 85% being taken away, which creates a bit of a benefits trap. It's not quite as bad in part time employment because they only take 65% of the net leaving the employee with 28%.

As you are single, there will be no work allowance. So you will be subject to a 65% taper on your self-employed earnings.

Tax and NI paid in that assessment period are deducted from your earnings to get a net figure before the 65% taper is applied.

You will need to register as self-employed.

Finally, after 12 months you will be subject to the Minimum Income Floor which means they will assume you are earning (probably) 35 hours x NMW less a notional tax and NI amount.

IQ

Energize

Yeah I'm registered as self employed, have been for a long time. So who do I report the earnings to so that 65% is applied on the net and not the gross?

Mersey_2

Self-employed UC claimants report these to the national UC Contact centres (over the 'phone).


I think you need to do this within 7 days of each monthly reporting period. The JCP (DWP) should have given you a pack containing this and the UC5 ideally.


They'll run the UC5 form ie income received during the past 30 day period,
any expenses, deductions and so on.


In fact I think you need to sign part of the UC5 (so the DWP know your self-employed as well as HMRC). This may be an error on the DWP's part if they haven't provided you with one yet.

Tolly_T

I know it's hard to think of working that many hours for so little gain. I was unable to work for many years and when I finally went back to work I was about £20 a week better off than I was on benefits for 18.5 hours work. That was after housing benefit and council tax benefit had been reduced. This was many years ago. When my health improved a little and I felt that I could work again I had to try, I'd have felt bad if I hadn't.

There's nothing wrong with relying on benefit if you're unable to work or can't find work, that's what it's there for. It doesn't sound like you're in that position. You've got the option of doing some self employed work. Try not to compare what you're on now with what you'll be on if you're working. That should only be relevant if you'd be worse off by working in which case you'd need to consider if you could afford to live on the reduced income.

Think of other potential benefits of working. Initially you will be doing a few hours. Is there a chance over time that you'll be able to build up the work and possibly even earn enough to not have to rely on Universal Credit? Would you like to be employed again rather than self employed? Employers might view you better if you're self employed when you apply for a job rather than being on benefits.