LITRG urges for changes to universal credit for the self-employed

A new report has called for changes to be made to the universal credit system for the self-employed, saying the current system does not work well for contractors who find themselves with a fluctuating income.

The data, compiled by the Low Incomes Tax Reform Group (LITRG), warns that without such changes, people could be put off the self-employed route entirely and existing claimants may even be forced to give up their work.

The changes LITRG are calling for include:

• Allowing self-employed claimants with fluctuating income to average their income over a period of up to a year.
• Changes to the calculation of the ‘minimum income floor’ and increasing the start-up period during which it does not apply from one to two years.
• Greater consistency in definitions of self-employment.
• More specialist support for self-employed universal credit claimants.

LITRG Chair Anne Fairpo, commented, “The last ten years have seen a significant rise in the number of people who are self-employed, many of whom are on a low income and therefore unable to afford professional advice. Universal credit is gradually replacing working tax credit as the primary welfare support for low income working-age people.

“We have been raising concerns with both Parliament and Government about the proposed treatment of the self-employed under universal credit since 2010. The universal credit assessment period is one month as against one year for tax, definitions of income and profit from self-employment differ for universal credit and tax, and universal credit operates a cash basis which diverges from the cash basis option for tax.

She added, “Perhaps the most concerning part of the self-employment regime under universal credit is the minimum income floor which fails to account for fluctuating earnings or one-off large business expenses. This can lead to a situation where a self-employed claimant with fluctuating earnings can receive substantially less universal credit than an employed claimant earning a similar annual income above the level of the current minimum income floor. We cannot believe that is an intended consequence. From April 2018, the universal credit system will become far more complicated with the introduction of surplus earnings rules for both the self-employed and employed and in some cases this will make the disparity worse.

“Without further changes, there is a real risk that those thinking about starting out in self-employment will be dissuaded and those already in self-employment may be forced to give-up before they have been given a chance to grow their businesses. We urge the Government to consider our recommendations carefully and make the necessary changes to the existing rules.”

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