Trap for the Self Employed

Tax credits cut 100%  for self employed without children, up to 70% for a single parent and 58% for a couple with children under Universal Credit

Update: the cuts below were  in place before the election, but  more cuts were announced in the Summer Budget. The Universal Credit Work Allowance is abolished for single claimants and drops from up to £263 /mnth (single parent +1 child+ housing element) to £192, so the figures below are an underestimate.

Hidden in plain sight – trick or mistake?

the mechanism to cut 100% from some self employed claimants Universal Credit claimant’s basic awards is already in the Welfare Reform Act.  An 87% reduction to the Universal Credit Work Allowance for claimants with no dependant children combined with a limit on entitlement if they earn too little, cuts their basic award by 100%. For self employed parents, the basic award could be cut by up to 70%.

Cut for earning too little - cut for earning too much

The Universal Credit (UC) Work Allowance is set so low and mandatory earning requirements so high, that self employed Universal Credit claimants (currently eligible for Working Tax Credit) will get nothing if they have no dependant children.

Under Universal Credit, all self employed claimants will be treated as if they have earned a minimum income; the Minimum Income Floor (MIF) which is set at the equivalent of 35 hrs/wk at the national minimum wage, (currently around £910/month).

Table 1. Combined effect of Work Allowance & MIF on basic Universal Credit awards

The Work Allowance, is the level of earnings allowed before benefits begin to be withdrawn. Under Working Tax Credit, the Work Allowance is £9850 (£820/month)  for claimants with no dependant children, but under under Universal Credit, it is £1332 /yr (£111/month).   So these claimants will not receive payments (U Credit basic award) and their only option to continue claiming, is to abandon self employment and look for employed work.

Self employed women

Self employed women will be worst affected as their average earnings are £9,800/yr,(below the £11,000 MIF), compared with £17,000 for men. [1]

Amongst all working families (with one child) awarded tax credits in 2012/13, 1,200,000 were single parents and only 600,000 were couples.[2] Some self employed single parents could lose 70% of the basic allowance if awarded the housing element of Universal Credit. (Table 1.)

Up to 1. 5 Million self employed could be affected

Over a third (36.6%) of self employed workers earn less than £11,000 /yr. so would be subject to the MIF.  There are 4.5 m. self employed workers in the UK, so up to 1.5 m. could be affected by these changes.

Note: The self employed are also subject to conditionality and  sanctions,  under Universal Credit rules including the requirement to report their earnings on a monthly basis to the DWP and passing a test to prove they are ‘gainfully self employed’.

 

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 References

1. Social security provision andthe self-employed, A study by the Social Security Advisory Committee, Occasional Paper No. 13, September 2014: See table 2: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/358334/Social_security_provision_and_the_self-employed__FINAL_24_SEPT__.pdf

2. Statistics – National statistics, Child and Working Tax Credits statistics: finalised annual awards: 2012 to 2013
https://www.gov.uk/government/statistics/child-and-working-tax-credits-statistics-finalised-annual-awards-2012-to-2013

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