Self-employment can be challenging, especially during slow periods or when dealing with illness, which can significantly impact your finances. Universal Credit is an option for self-employed individuals, but it involves strict rules regarding income and expenses declaration that can be confusing for many. Unlike tax returns, the criteria for Universal Credit are distinct.
When applying for Universal Credit as a self-employed person, the process is similar to those who are unemployed or have low earnings from traditional employment. The initial step involves submitting a claim online followed by an in-person visit to the local Job Centre for an initial appointment to demonstrate that you are ‘gainfully self-employed’ and earning a reasonable income based on your work hours.
Exceptions to this requirement include the first 12 months of starting a business and extended sick leave where the business operations must continue in your absence. The determination of being ‘gainfully self-employed’ is crucial due to the concept of the Minimum Income Floor, which sets a minimum expected income based on working hours.
Reporting income on a monthly basis is essential, starting from the date of your initial claim submission. Failure to report income and expenses promptly can lead to delays in receiving Universal Credit payments. Unlike HMRC tax returns, Universal Credit reporting follows a cash basis, focusing on actual cash inflows rather than invoiced amounts.
While some income sources do not need to be reported, such as Personal Independence Payment, other sources like pensions or property income must be declared. Allowable expenses for Universal Credit must be ‘reasonable’ and exclusively related to the business. However, the interpretation of allowable expenses differs between HMRC and DWP, with DWP being more stringent.
It is crucial to maintain separate records for monthly reporting and annual tax returns to ensure clear documentation for both Universal Credit and HMRC. For businesses exceeding £50,000 turnover, compliance with Making Tax Digital is mandatory from April 2026, emphasizing the importance of accurate record-keeping and expense reporting.