How does UC assess earnings from work? This blog looks at work allowances, tapers and variability in earnings whether employed or self-employed . And we round off the sums with the much easier final Step 4: Taking one from the other.
Welcome to Part 4 of this series of blogs looking at UC sums and that important practical question of how much UC you might expect to get. Previously, 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
- UC Sums 3. Income – the basics and unearned income - 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", focussing on those most important for people affected by cancer, while flagging up others, when you might want to contact me for more information .
Now, there may be times during your experience with cancer, when you might forget about earnings: you may be too unwell to think about any paid work during treatment, although some may manage it (or be receiving contractual sick pay through it). Or you want / need to may need to take time out to concentrate on being there as a carer. There may then be times when:
- employed earnings might drop to nil at some points - but perhaps still with some ongoing sick pay
- if self-employed , some amounts may still be trickling in: invoices being paid, or some income from limited activity while your business ticks over.
You may then still be getting some earned income even in months when you can't do paid work. Other times "earned" income may feature more, perhaps as you start to plan for easing back into work in recovery or if you are a carer who now feels able to combine caring with some paid work, once things settle into this strange new normal of living with cancer. UC is often talked about as a new way of offering more incentive, support and active participation for the unemployed to find work. However DWP statistics show that when UC is fully rolled out the majority of people claiming it will be in paid work already and most of the rest will be people who are unwell or carers and others not required to actively seek work.
As I mentioned last time, UC deals with earned income a bit differently and more generously, as it doesn't just want to try to ensure your income is at least at your Step 2: Maximum UC, but to also try and move you above that level, so that you can feel that UC "makes work pay"
What counts as earned income?
Your earnings are taken net of income tax, National Insurance contributions and any pension contributions you make. Within earnings then UC will count e.g. : wages, overtime, holiday pay, tips and so on
But some payments from work are not counted: e.g. refunds of expenses, payments in kind, other allowable expenses (e.g. for homeworkers) and a few special payments
UC will also count those payments – through an employer – that may feel and look more like a benefit, but are treated as “earnings” under the more generous earnings rules below. These include:
- statutory payments i.e. Statutory Sick Pay (SSP) and Statutory Maternity/Paternity/Adoption Pay
- any other similar contractual payments made by an employer e.g. under contractual sick or maternity pay schemes
As ever, income is less clear cut when self-employed. Receipts come in gross, before deductions for tax, NI, VAT and not always at regular intervals. But even then that’s not your income, as you also need to deduct the costs of stock, materials and expenses etc when doing the work.
UC takes it in the following steps:
- work out your actual receipts in the assessment period e.g. sales, takings, paid invoices, any tax refunds, receipts in kind and any sales of business assets
- deduct any permitted expenses: e.g. regular costs (rent and bills), wages and other costs for any employees, stock purchase, advertising, repairs to business assets, purchase of equipment, transport, interest on loans etc
- take away any payments made for tax and NI
- if the result is negative – and you made a loss that month - then earning count as £0, for this period, but the losses can be carried over to the next period
- deduct any pension contributions made
- deduct any unused losses from previous payment periods
- check whether the earnings left are more than any Minimum Income Floor that applies in your case.
The Minimum Income Floor (MIF)
The MIF applies after 12 months of trading, when UC assumes that you earn at least the MIF, and so counts this as your earnings, even if the actual amount you receive that month is less.
The MIF is usually set at the earnings you would get if you worked 35 hours a week at the national minimum wage, but these hours can be reduced for e.g. health limitations or caring responsibilities.
So, you need to go through quite a few steps to work out what your net income actually is and to do so each and every month, and report it each month. Now in some ways this all mirrors what you may be used to doing to keep track for say, your income tax returns. However:
- you need to report the totals for each monthly assessment period, rather than annually for income tax or tax credits ; and
- any UC will be based on income you receive during that assessment period, rather than being averaged out over the financial year (as it is with income tax and tax credits)
UC then asks a lot more of self-employed claimants. Some will be able to cope with the added red tape burden, others may struggle either because of health issues (like cancer) or because the self employed include many scratching a living at lowest incomes, with perhaps less admin confidence
Certainly, the days of keeping all receipts in a shoe box and rough books, for a once a year review and working up by an accountant are over. Many accountants may not be set up to offer a monthly service or the cost of doing so might be significant.
Variability in earnings
This is emerging as a much greater issue for workers - whether employed or self employed , than UC had considered as it was being designed.
For employees :
Even if your pay is fairly fixed, you may be paid other than calendar monthly. That means that as you carry on your normal budgeting between your regular four-weekly, fortnightly or weekly paydays, you may find that UC thinks your earnings are rather more in one assessment period than another, so you will see UC payments fluctuate dramatically, when from your point of view nothing much has changed.
Even those paid monthly – with little change in amounts - can find that e.g. a delay in the employer entering dates on the HMRC Real Time Information System (UC has not caught up with the ealities of most payroll systems that do not allow for a different due date to be entered) or being paid early before Christmas, could shift a pay day into a different UC assessment period. Suddenly, you have technically been paid twice in the same period and your much needed UC payment drops or you may come off UC altogether.
For the self employed
Things can be much more variable for the self-employed, as payment of invoices may come along like buses and months of “feast and famine” are a regular feature for many self-employed earners UC payments will then be much more variable month to month than the old tax credit ways (which were based on your previous year’s taxable income).
Does variability of UC payments matter?
The result of the fixed "what comes in during the assessment period is what counts" is that: one month you may get far less UC than you might have expected …and more another month. Some months you may come off UC altogether. If that happens you must do a "rapid reclaim" the following month to restart your UC
UC say that
- a) it will all come out in the wash – but various other rules mean that it very well may not; and
- b) people need to look at UC in a different way, as a flexible friend to even up the peaks and troughs, rather than a reliable, known part of that income.
In practise though:
- your income may not actually feel like its changed at all, as you carry on budgeting normally from from payday to payday. But suddenly - by accident of dates - that essential UC top up feels like it is letting you down
- a reliable regular payment - like Working Tax Credit – may have been a great help for those dealing with the fluctuating incomes of either self-employment or much more variable casual employment.
- rules like the Minimum Income Floor (MIF) for the self-employed and the Surplus Earnings Rule for all earners (due to really start affecting people from April 2020) will both mean that higher UC support in a "bad month" for earnings might not fully compensate for reduced UC in a "good month"
The Minimum Income Floor (MIF) - affecting only the self employed - as explained above - means that you will always count as having earnings at your MIF or above. If you earn less - or a make a loss- next month, having had reduced UC support during a previous good month, your UC payment in the following bad month doesn't help as much as if it was based on actual income.
The Surplus Earnings Rule is going to really add complications from April 2020, for both the employed and the self employed - it will need a bit of explaining as and when it is confirmed. However, in a nutshell, though, it will mean that UC will works out the exact point when your entitlement to UC reaches zero in a month when you come off UC. If say, a double pay day that month - or some invoices being paid, takes you over this point by more than £330 in that good month, then anything over that £330 will count as "surplus earnings". These will then be used in the sums when you come back onto UC the following month, and mifght either reduce the UC you might otherwise get or stop you getting UC that next month as well . The effects of surplus earnings can play out over several months. It is as if UC are expecting you to squirrel away any surplus earnings to use in the future, but whether you do or not, they will count you as having this money available to you.
There has always been a tension between predictability - which often people on lower incomes really value to aid budgeting - and flexibility - which can help if some bolt out of the blue like a cancer diagnosis reduces or stops earnings. Early support for families (such as Family Income Supplement) was criticised for being too rigid, while UC has been criticised as being perhaps too flexible (and with added complications) . It may be that, a concerted attempt to build in a bit of both - as in tax credits - may be the most helpful.
How much of your net earnings count
Having worked out your net earnings – whether from employment, self employment or a mix of the two - what does UC do with the figure?
- may ignore some of it, if you qualify for a UC Work Allowance ; and then
- will apply a taper to the rest. i.e. UC won’t count earnings after any work allowance £ for £, but will instead only count some of it as a percentage (a bit like income tax)
The promise then is that as a result of these two concessions from the normal £ for £ rules (with important exceptions) for "unearned" income , is that that you should clearly see how starting work – or doing more work – will make you better off; and so you can see how UC “makes work pay”
Work Allowances (WAs)
These help give you a bit of a kick-start when you start doing some earning: if you are earning less than your Work Allowance, you get to keep everything you earn. Until April 2016 , everyone on UC had a work allowance, even if only a small one of £111 a month. The amounts were higher if you either had children or had health difficulties that meant that you had "limited capability for work".
From April 2016, only those higher rates remained and they were cut back. A plan to cut Working Tax Credits was dropped but cuts were made to workers being helped under UC, and these would be waiting for those on WTC as they switched over to UC. In April 2018, the remaining Work Allowances were largely restored, but the lower amounts were still left out. WAs currently stand at:
- a standard rate of £287 a month, if you receive any help from UC Housing Costs Element.
- a higher rate of £503 a month, if you do not get any Housing Cost Element.
I find an explanation as to why the WA rate depends on a very separate issue of help you may get under Housing Costs Element. For now “it’s just the way it is” and that may mean weighing up the help you get with housing costs versus any loss from the lower Work Allowance and getting advice.
- a single person cannot get add two work allowances together e.g. if they are both unwell from cancer treatments and are also a lone parent.
- nor can a couple get one Work Allowance for a partner who is unwell and another for the other who is the main carer of the children. It is simply one Work Allowance per UC claim / joint claim.
The fact that you do get a Work Allowance while still feeling the effects of cancer and its treatments is a welcome though. Unfortunately, you don’t get a Work Allowance as a carer, though working carers do benefit a little from still being allowed to have a Carer’s Element in their maximum UC (at step 2)
Often though, people going through cancer treatment ask me whether there isn’t a bit of a contradiction between working and counting as having “limited capability for work” ? Will earning at all cast doubt on that important extra “limited capability” element within their UC? And especially when they feel in a position to do a bit more work - or even go full time – while still facing some extra difficulties and costs from late effects.
UC is rather confused about this compared to the legacy benefits, and I will explore this a bit more next time as it is easier to look at this in the context of gaps in UC’s design and possible solutions being proposed by the disability groups.
Work Allowance examples:
Dougal is unwell but is able to do some hours – on a flexible basis – with the Magic Roundabout Company. He pays rent for his flat in Kennelwood and so gets a Housing Costs Element. The first £287 of any earnings in a month are ignored
Florence is Dougal’s carer but lives separately and any rumours of any relationship are exaggerated, she smiles,disarmingly. She is looking at working 20 hours, when not helping Dougal. She would not get any Work Allowance, and any Carers Allowance would stop at 16 hours. However, she would still be able to benefit from a Carer’s Element at step 2
Applying the taper
Everyone working on UC - whether they get a Work Allowance or not - still benefit from having earnings counted via a taper, rather than in full. So after taking off any Work Allowance, UC only counts some, but not all of the rest of your earnings.
The original plan was that UC would replace all of the previous clashing mix of often steep tapers with one simple, all-inclusive and less steep taper of 55p in every £ - or 55% . Now, that would still have been a high effective tax rate, just at the point when the DWP stated: “economic theory tells us that financial incentives have their greatest effect at lower incomes” . Nevertheless, 55% seemed a lot better than the 85% - and at times over 100% - of the “legacy benefits” poverty trap.
However, in practise, cuts have made, the UC taper a little less generous than first advertised:
- the taper rate was first set at 65% rather than 55%, though has since been reduced to 63%.
- the taper is no longer all inclusive, thanks to the decision to keep Council Tax Support outside of UC, rather than merge that in too. This means that you continue to face a separate - and extra - taper of at least 20%, for as long as you still qualify for some help with council tax. In some parts of England, that CTS taper can be as high as 50%
So that means that people can still face a combined taper of 83% - and in some areas over 100% for a while - as earnings rise. Eventually, as council tax support falls out of the picture, your taper will fall back to 63%, but that still compares very poorly with the 41% taper of tax credits, which kicked once clear of the old Housing or Council Tax Benefit tapers.
The effect the, is that the taper has not had much effect in tackling the legacy benefits “poverty trap” when moving into work, and once earnings pick up a bit and you are out of that "poverty trap" you are now facing an effective tax rate of 63% rather than 41%
Examples of working while unwell
Dougal has an out of work income of £654.02 plus help with rent (within UC) and separate claims for council tax and PIP . The next month he earns £487, from part-time working during days when he is feeling a bit more up to it. The first £287 is ignored, leaving £200 to be counted. UC then tapers this remainder at 63%, so he only loses £126 of the £200. However, he also loses a further £40 off his council tax support that month. He is still better off working as he gains all of his earnings up to £287 but only £36 of the rest. His income that month will be £323 higher than the previous month
Zebedee is in the same situation as Dougal, but is under the old “legacy benefits” – where all income below a Permitted Work earnings limit of £131.50 a week (or £569.83 a month) is ignored. Income-related ESA also pays more than UC for living costs, than UC does in their circumstances - Zebedee's out of work income is £841.97 a month plus help with rent (from Housing benefit) and separate claims for council tax and PIP. So Zebedee is not only better off when unable to work, but he gets to keep all of the income from doing the same work as Dougal. His income that month is £487 higher than in the previous month
Step 4 Taking one from t’other
This is the easy bit:
- add up your Maximum UC from Step 2
- add up your assessed income from step 3
- Take away one from the other and that’s the amount of UC due for that Monthly Assessment Period
However that general application of the UC sums to your circumstances is before any individual deduction or additions in your case.
Why might I get deductions?
Amounts may be taken away because of:
- sanctions – in which you lose all of the standard allowance – 50% if one partner in a couple is sanctioned if you have not met your “work requirements”. Get advice as many sanctions are highly challengeable
- repayments to UC – many people have to apply for an Advance Payment as they wait the 5 weeks until their first payment. They could then be repaying at 15% of their standard allowance for up to a year after. Or you may have had a Budgeting Payment for a one-off item. Or be repaying a past overpayment of UC, which may be incorrect – get advice
- Third Party Deductions: UC wants you to sort out any regular budgeting or payments of rent arrears or fuel bills and are much more reluctant to be a helpful alternative to direct debit. They will offer a fall back if you are struggling to manage budgeting and so can offer managed payments of rent to your landlord or third party deductions for other bills and arrears. You should know and expect these deductions – some follow past good practise of being at affordable levels, others such as for rent arrears are not.
Why might I get an addition?
There are two main reasons:
- underpayments of UC in the past: UC may take a while to add all the elements due - e.g. forgetting some, delays in the WCA, messing about with your Housing Costs - so their may be some arrears due to you that should have been in last months. Any arrears though are not extra income but add to your savings total. You will feel some extra money, but it should not be counted in working out your Step 3 income.
- a Transitional Element - that's an extra amount back at Step 2. But to work it out, UC will be doing the normal final sum at Step 4, and then comparing that with your "legacy benefits income" the previous month. It is an important issue people moving over from legacy benefits to UC, if they get less in the normal UC sums than they get in legacy benefits. It is though not relevant to people who claim UC from the start. Only some switchers get this protection though, so it will be very important for Zebedee to hang until he can switch with protection . Otherwise he will to drop down to Dougal's level straight away. See the explanation of this in Part 2 of this series; and do get independent advice before switching to UC.
Summary - and yet a next time
This wraps it up for how the sum's work, but it's not quite time for "The End" on this blog so there are a few important issues for people affected by cancer that make sense to be dealt with now that we have fot the sums done and dusted. So there will be just one more blog in this series.
Summary of this blog
UC started out with clear eyed good intentions to treat earnings more generously, so that UC could not only support you to have a minimum level of income, but also help you to see clearly how work pays. The original idea was it would do this with
- a Work Allowance for all to give you a kick-start when you kept all of your net earnings; and
- and a simple all in one taper of 55% of any earnings above the WA, so you still kept 45% of the rest.
So initially it would be all gains to you, on taking a job - with tapers kicking in it might still feel that overall you were keeping most of it, but that you would notice that doing more hours or increasing your pay rate, you might start to notice UC taking a bit more than half. And some of the encouraging leaflets still cling to this original idea.
The trouble is:
- WAs were cut back considerably and then restored , but not fully so that some get a bit less and others don't get one
- The taper has ended up higher higher at 63%, but with an added complication in that you need to factor in the additional tapers in Council Tax Support sums. That results from the decision not to merge CTS into UC. The ambition to really tackle the "poverty trap" has got a bit lost as a result - you could be losing most of earnings in reduced UC and CTS.
Further complications come from the rather rigid approach to when income counts. That makes variable incomes much more difficult than UC imagined whether your income actually has varied or is just treated as if it had by UC's Monthly Assessment Period. Add in the complications of the Minimum Income Floors and Surplus Earnings Rule, and UC may not pass it's own test of "making it clear to understand how work pays"
UC though, can still provide valuable support in work. It may be that you eventually get back into work well above UC levels, but in the meantime UC can be helpful if a bit bewildering.
I will finish off by this series by looking at some missing bits in UC's design and Elements that will explain:
- why Zebedee does rather better than Dougal - but others can do better on UC, but in an unusual way - UC's disability gap
- why mixed age couples - where one partner is over pension age and the other is under - do significantly worse, if forced to claim UC rather than Pension Credit - UC's pensioner gap
- how UC gets rather confused about support for people who are unwell, but able to do a little bit of work. It may feel less safe and less advantageous initially and gets a bit surreal as you are ready to go for 16 hours or more - UC's "disabled worker" gap.
I am sorry, then, if these blogs are a bit complicated at times. UC was meant to be so simple that it would not need much explaining or advice work but cuts, complications and clashes with reality can make it a little more tricky than was intended.
Do please ask any general queries, make any comments or share any experiences - good and bad - by posting in the linked Conversation . Please also feel free to message me or drop by your nearest Maggie's centre and have a chat with one of my Benefit Advisor colleagues, if UC feels a bit confusing or behaves oddly. Or indeed for any other concern around your benefits entitlement.
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 3: Income - the basics and "unearned" income
- UC Sums 5: Mssing elements, 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