A look at Step 3 – How UC assesses your income , starting with the basic rules of assessing any income under UC, the key UC difference between "earned" and "unearned income" and a further look at important types of unearned income for people affected by cancer
Welcome to the third part of a series of a series blogs looking at the UC sums and how much UC someone might receive. In previous parts, I looked at:
- UC Sums 1: Who Counts? How do the Sums Work?: the basic principles of the sums, who is counted in your claim and how – in Step 1 of those sums – any savings affect things
- UC Sums 2: What makes up my Maximum UC?: In Step 2 of the sums, how the “standard allowances” and “UC elements” add up to reach the “Maximum UC” that you could get
Here in UC Sums 3. Income – the basics and unearned income, I will focus on the basic UC rules for assessing income, why "earned" and "unearned" income are treated differently and how UC looks at different types of "unearned income", with a focus on those most important for people affected by cancer. I will flag up others, too but do contact me for further details if any of those apply in your case.
In UC Sums 4: Earnings and the final sums, I will go on to look at how earnings are treated rather differently. Sometimes, people can be too unwell or too busy as a carer to even think about work, but looking ahead they may be thinking of easing back into work,, when UC can continue to offer support.
Basic rules that UC uses for any income
Monthly assessment period
UC assesses income on a monthly basis: the amount that comes in between the start and finish of your UC Monthly Assessment Period.
Those payments are always taken net of any income tax , national insurance or pension contributions
UC wants to keep things simple, so it does not have “legacy benefit” rules around averaging out income, nor of allocating earnings - or payments of arrears of other benefits - to the periods they were meant to cover. This does mean that your monthly income figure - and as a result your UC payment - can fluctuate more than in the previous “legacy benefits”, especially for those who are in paid work. Those added complications of the old system could help to make the benefit fit the realities of life on a low income, as UC can sometimes rather randomly decide you have had far more income than it felt like last month, purely because of the date they record that you had it.
Other basic rules
There are still some detailed rules around how to deal with specific types of income and the sometimes “grey areas” as to whether a payment is counted as income or as capital, to be assessed under the savings rules.
I will look at some of the main ones for “unearned income” below, but if you have one of the types of income mentioned more briefly do feel free to message me or get advice for more detail
“Earned” versus “Unearned” income
There is a big dividing line in UC between the treatment of “earned” income and “unearned” income. Earnings includes most amounts from employment – or net profits from self-employment – while “unearned income” covers the rest.
The reason for the difference is that UC is taking over two different roles from the “legacy benefits it inherits:
- to top you up to a safety net level - “the minimum that the law says you need to live on” – by counting most other income £ for £ and topping that up so that your income is at least up to your Maximum UC level (from Step 2) . UC is then acting like the old Income Support or Income-related ESA
- to “make work pay” – by bringing your income levels above Maximum UC levels if you are on low (or temporarily reduced) earnings. Here UC is taking on the role of tax credits
UC also takes over help to pay the rent - whether you are earning or not - as it takes over from Housing Benefit. In fact while people may think of both HB and UC as being mainly to help lose out of - or unable to work - the majority of claimants of both benefits are actually in work.
To do this in one system, UC has chosen to apply the same basic sum in work or not. So earning doesn’t change the way that your maximum UC is worked out at Step 2 (apart from extra help for childcare costs while working) . However, it does treat earned income – here in Step 3 in a more generous way: by ignoring some of it and applying a taper to the rest.
In general, this is taken £ for £; UC ‘s “safety net” role is to look at what you have in other income and then top this up to your Step 2 Maximum UC level.
However, there are some important exceptions. Some unearned income is ignored completely, and other amounts may be partly ignored. There is only space to cover the main – and most common exceptions – here. Do message me if any of the types of income mentioned here ring a bell and you want to check these in more detail.
I will start with the common area of other benefits and then look more briefly at other areas of unearned income.
Other benefits, apart from UC:
In general, these count £ for £. So, for example, if you are unwell and claim New-style Employment and Support Allowance (Ns-ESA) or are a carer who claims Carers Allowance (CA) , then UC will count these in full as income. There are though extra elements - for being unwell or being a carer - that partly make up for that
Dougal is going through cancer treatment. He claims New-style ESA and is paid this at a rate of £111.65 a week including the ESA Support Component. He claims UC as a top-up and ESA is counted £ for £ as income, but his ESA support group status entitles him to the LCWRA Element at Step 2. UC will then top up his ESA up to the weekly equivalent of £150.68 for living costs (plus any help towards rent)
Florence, is Dougal’s friend and carer, but lives separately from Dougal. She claims Carer’s Allowance and receives £66.15 a week, but this too is taken off £ for £ from UC. However, UC will include a carers element in the sums and top up her CA to give her an amount for living costs equivalent to £109.95 a week or rather £94.95 - as last time we made long suffering Florence to be aged under 25. However, if Florence was a carer in Scotland though, UC will ignore the value of the Carer's Supplement (currently equivalent to £7.95 a week), so that will be a boost for carers of all ages.
Is it worth claiming those other benefits?
Under UC, you do not actually need to claim ESA or CA to qualify for the extra "carers" or "limited capability" elements. This is a change, as under "legacy benefits" you did need to claim as it was those other benefits that assessed whether you counted as sick or as a carer. So, when you claim UC, they may helpfully advise to save yourself the added hassle of claiming them, as you would be no better off overall in your monthly income for doing do. However, there are still good reasons for claiming both:
- you may get that part of your benefits income earlier - and can be paid that that part of your benefits income more frequently - than under UC. This may help with budgeting
- you will not have all your benefits income in the one UC basket, if something goes wrong
- you will get full National Insurance credits (Class 1), rather than UC’s more limited Class 3 credits
- you will pass the same – or similar – tests as in UC, for the extra UC elements for being unwell or being a carer. However, that process may be quicker - and run smoother - if overseen by those benefits
- carers in Scotland will get a top up to Carers Allowance from Carer’s Supplement, which is not counted as income for UC. The supplement will merge into a new Carer’s Assistance, but again the difference between the new benefit and Carers Allowance will be ignored. Claiming then will be needed to get that extra help and to experience what aims to be a rather different level of customer service Social Security Scotland.
Benefits that are ignored completely
However, some important benefits are ignored completely, including some that are very relevant to people affected by cancer:
- disability benefits – Attendance Allowance (AA), Disability Living Allowance (DLA), Personal Independence Payment (PIP) and the equivalent amounts in the armed forces compensation and war/industrial injuries disablement schemes
- War Disablement Pensions (based on % disability). However but the similar Industrial Injuries Disablement Benefit is counted
- Bereavement: Bereavement Support Payments, War Widows/ers and surviving partner payments
- Any Scottish/N.Ireland supplements: any additional amounts and protections that have been set out in N. Ireland e.g. welfare supplements - or that Scotland has powers to add in as it wishes - e.g Carer's Supplement
- Dougal also gets Personal Independence Payment (PIP) and that is ignored completely
- Mr Rusty gets a % war disability pension from past military service - long before his cancer diagnosis. UC ignores the value of this completely
“Benefits” that count as earnings
Some payments may sound like benefits but count as earnings instead. This applies to the Statutory payments paid by / through employers and also to any e.g. contractual sick or maternity pay from work. The statutory payments are:
- Statutory Sick Pay (SSP) during the first 28 weeks of being unwell
- Statutory Maternity/Paternity/Adoption Pay when a new child is about to or has just arrived into your home , whether by birth or adoption.
These statutory payments – along with any additional contractual payments that top up or carry on after these payments stop - get that more generous treatment of earnings, so only count in part against your Maximum UC (from Step 2).
However, those getting the equivalent amounts in other – e.g. New-style ESA or sickness insurance payouts rather than SSP / work sick pay or Maternity Allowance rather than SMP - do have those benefits counted £ for £
Other unearned income in brief
While those other benefits may be the most common “unearned income” in UC , there is a range of other unearned income that may be relevant to some visitors to Maggie’s centres. I will cover these briefly here, mainly to highlight these are listed and that there are some specific UC rules about them. Do though message me - or get other advice - if any of these ring a bell for you:
- maintenance payments from an ex-partner in relation to children are ignored totally, but
- maintenance for you as an ex-partner is counted in full.
Most students in advanced education are banned from claiming UC, with financial support based on student grants and loans instead. However, some students, mainly those who are parents and who count as “disabled” - including most with a cancer diagnosis - can claim UC.
However, UC will take into account most grants - with some exceptions - and will also assume that you have taken out the full student loan. UC will, however ignore certain amounts, as costs of studying.
Occupational and private pensions and annuities
Any regular income from a private or works pension counts in full. So, if you are looking at e.g. early ill health retirement, then you may want to look at any choices about whether and how to draw on any pensions carefully.
The choices you may have depend on the sort of pension scheme you are in:
- more traditional defined payment schemes set out what you get based on your pay and years in the scheme and you – and an employer – pay in accordingly. There may be variations if ill health forces earlier retirement., but broadly you may be able to opt for a lump sum but mainly you get paid the appropriate pension
- Most private pensions – and increasingly more work based schemes – are defined contributions schemes. This sets the contribution levels which then builds up into your own “Pension Pot” . You then have a wider range of “Pension Choices” as to what you do with that pot : e.g. to leave it well alone to mature nicely, to take it all out and go wild, to trade it in for an annuity (a regular pension) or to keep control of the pot but draw from it as and when or more regularly.
There are a range of planning and tax issues attached to these choices so you may want to get financial advice before committing yourself. But there are also ways UC reacts to those Pension Choices to consider too – while you or a partner are of working age. The rules change a little under Pension credit, paid in pension age.
If you are self-employed, you may have paid into private sickness or critical illness insurance policy to top up the basic New-style ESA, that you would be entitled (from your National Insurance contributions). This is a way of giving you something like the same cover that some employees get – such as full pay / half pay for a while. However, any payouts from these policies count in full as unearned income.
Rent payments from a tenant
UC groups landlords into one of three types:
- Renting out a room in your own home: UC will just ignore the lot
- Rent as income from capital: Most landlords become so accidentally e.g. inheriting a single home within the family. Both the value of that second home and any rent from letting it out count as capital rather than income. This might take you way over the £16,000 savings limit for any UC anyway, but it could be ignored for a while (e.g. if you were taking steps to sell the property) or be below the limit (e.g. if you inherit jointly)
- Self-employed earnings: if you are more of a professional landlord, then rental income is treated like any other self-employed earnings..
Trust, personal injury payments and special compensation schemes
In general, UC takes all trust income into account. It no longer matters whether it’s a discretionary or a non-discretionary trust.
However, different rules apply if it is a trust from a personal injury payment and certain special Government compensation payments, when trust payments are ignored completely.
Other unearned income
Certain other payments are ignored completely in the UC sums:
- social services payments – e.g. for children, fostering allowances
- financial support from a charity
- voluntary payments e.g. from friends and family
- payments to a third party e.g. if someone else pays a bill for you
- mortgage protection policy payments.
- payments in kind: concessionary coal, jars of honey, sacks of potatoes etc
Summary and next time
Summary of this blog
Universal Credit aims to simplify the rules a little as it replaces previous benefits that did two things. Firstly, to act as a safety net - to top-up your other income to a prescribed minimum level (your Maximum UC level from Step 2) . Secondly to help @make work pay" and help you to move above that level when on low - or perhaps temporarily reduced - earnings. And it't that second role that makes UC deal with "earned income" rather differently.
There are some common principles: UC is looking at all income net and works from the amount you receive by the last day of your Monthly Assessment Period. It does away with complications / realities of trying to get a fair steady picture of income related to the period when it was due, but just aims to go with the fifure for each Monthly Assessment Period. That may cause only occasional hiccups if your income is mainly from unearned income, but gets rather more of an issue when earnings and paydays vary, as we will see next time.
The general top-up principle is to look at your other income £ for £ but there are some really useful exceptions, even under the tougher rules for unearned income. The most common ones will be the fact that disability benefits - such as Personal Independence Payment - are ignored in full. But I have also advised Community members who have benefited from having War Disablement Pension or the Scotland's Carers Allowance Supplement being ignored too.
Even when another benefit is counted in full - and you are not required to claim them and would be no better off doing so - then there can still be real advantages in still making that claim. And benefits paid via work will be treated under the more generous earnings of last time.
There are particular rules that apply to other sorts of unearned income and it may well be worth getting further advice if these apply to you.
Looking ahead to next time
Next time we will look at:
- how the more favourable treatment of earnings works out in practise,
- some of the practical problems when variations in earnings come up against the rigidity of the Monthly Assessment Period
- and move on to much simpler ground with the easy Step 4 which just amounts to taking Step 3 from Step 2 to arrive at the normal UC amount due in your circumstances.
- you may though get some individual deductions or even an addition - to the amount actually paid to you
Please post any general queries or share any thoughts or experiences around the way UC works out the sums, by posting in this linked Conversation topic. Or for more private one to one advice, please private message me or pop in for a chat at your nearest Maggie's centre.
Links and further reading
Other blogs on UC sums:
- UC Sums 1: Who counts? How do the sums work?
- UC Sums 2: What makes up my Maximum UC?
- UC Sums 4: Earnings and the final sum
- UC Sums 5: UC gaps and working when unwell
Other blogs on UC
- UC 1: What is UC?
- UC 2: Switching to Universal Credit
- UC3: How to claim Universal Credit
- UC4: Sickness and carers issues and New-style ESA