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Self employment and benefits

If you or your partner are working, or thinking of starting work, as a self employed person you might qualify for welfare benefits to top up your income.

The benefits you are entitled to will depend on a number of things, including your age, the number of hours you work and how much you earn.

1. Am I employed or self employed?

Working out if you are self employed is usually straightforward. If you run your own small business or work for a variety of clients and are able to choose when you work and who for, you are almost certainly self employed.

Some people think they are self employed however, or are told they are self employed by the people who are engaging their services, when they are should actually be classed as workers or employees.

Workers and employees have certain statutory rights, such as being paid the National Minimum Wage.

Casual workers, people on zero hour contracts and temps (those temporarily working for an employer where their contract is actually with an agency) are all still usually classed as workers or employees.

You do not have to have a written contract to be considered a worker or employee. Your regular working arrangements are more important. There is no single legal definition of whether you are employed or self employed. Some factors that might be considered if the situation is unclear include:

  • Whether you work for one person or organisation at a time

  • Whether you have to work a set number of hours

  • If you can be told how, when and where to do your work

  • Whether you have to do the work yourself or are free to pay someone else to do it.

If you are unsure what your status should be, use the Turn2us Find an Adviser tool to find further help and advice.

2. Do I need to register as self employed?

If you become newly self employed you should register for self assessment with HM Revenue and Customs (HMRC) and tell them that you are now self employed. This can be done online via HMRC's online services (link opens in a new window). This information will not automatically be passed on to the Tax Credit office or any other agency for the purposes of working out what benefits may be available to you.

There is no single registration process when it comes to self employment and benefits.

If you are already receiving benefits, becoming self employed will usually count as a change of circumstances and you should inform the relevant agencies as soon as possible.

If you are making new claims, you will do so as a self employed person and will provide the relevant information during the claim process.

3. What benefits can I claim?

When it comes to working out which benefits you are eligible for and how much you might get, the same rules apply whether you work for an employer or are self employed. However, it can be a little trickier working out your hours and earnings if you are self employed.

Benefits you might be entitled to when you are self employed include:

If you are self employed but are not able to work due to illness, injury or disability, there are other benefits you might be able to get. See: What benefits can I claim if I can't work because of illness, injury or disability?

4. Self employed people and national insurance

National insurance is a scheme in which working people make payments that count towards certain benefits. If you work for an employer and you earn above a certain level (known as the 'primary threshold') you will pay Class 1 national insurance contributions (NIC). These will usually be deducted from your salary automatically alongside your income tax. If you are self employed you are responsible for paying your own national insurance contributions. As a self employed person you will usually pay Class 2 NICs and you will also have to pay Class 4 NICs if you earn above a certain amount.

Class 2 NICs count towards most of the contribution based benefits that Class 1 NICs do, including:

They won't usually count towards contribution-based Jobseeker's Allowance but it's worth remembering that your eligibility for this will depend on your NICs over the past couple of years. If you were previously paying Class 1 NICs as an employee and only recently became self employed, you might still qualify for contribution based Jobseeker's Allowance.

You don't have to pay Class 2 NICs if you earn below a certain amount, currently up to £6,205 per year. You will still have to apply to HMRC for an exemption and you might choose to continue paying to make sure you qualify for contribution based benefits. Class 2 NICs are paid at a flat rate of £2.95 per week. This can be paid by Direct Debit monthly or every 6 months, or you can arrange for HMRC to bill you twice a year. Check the HMRC website information on Class 2 NICs  for further details.

Class 4 NICs are applied as a percentage of your yearly profits if you earn more than a certain amount, currently £8,424 per year. They are usually paid alongside any tax you owe.

For more information see the Low Incomes Tax Reform Group's tax and national insurance pages for people who are self employed

 

Updated April 2018

5. How do I calculate my hours of work?

When you are working out your hours, you should count the time you spend actually doing work and any essential activities connected to that work. This could include the time spent book-keeping, visiting potential clients, preparing advertising or buying stock and equipment. If your hours vary from week to week, you should use an average. It can help to keep a note of your hours as part of your regular book-keeping.

If the number of hours you work varies, there are special rules. If your hours of work vary in a regular way, your hours are averaged over the ‘cycle of work’. For example, if you work three weeks on and one week off, your cycle of work would be four weeks and an average of hours over a four-week period would be used. 

If you have no recognisable ‘cycle of work’, then the average of hours over the five weeks prior to your claim for benefit is usually used. There are special rules if you only work during term time or if you do seasonal work.

For more information see our information about Working hours: Benefit rules

6. How do I calculate my earnings?

Your earnings from self employment will count as income when working out what benefits might be available to you.

For Working Tax Credit, your earnings are the taxable profits you made from self employment in a year. This is the figure used on your tax return to work out how much tax you have to pay. This means that the Tax Credits office will usually use your self assessment tax return to work out how much Tax Credits you should get. If you have not completed your tax return, you can provide an estimate of your profits.

To work out your taxable profit you deduct allowable business expenses from your annual turnover figure. The Notes that accompany the tax credit claim form (link opens in a new window PDF file size 3,144 kb) explain more about working out taxable profit.

For Income Support, Jobseeker’s Allowance, Housing Benefit (England, Scotland, Wales), Housing Benefit (Northern Ireland) and Council Tax Support, your earnings will be the net profit you make in a year. This is usually the last tax year (the tax year runs from 6 April each year and ends on 5 April the following year); if this is not possible for example because you started self employment recently or part way through the tax year, you may be able to use an average of your profits over a shorter period.

Your ‘net profit’ is worked out by taking the figure for your earnings and making deductions for reasonable expenses, tax, national insurance contributions, and half of any pension contributions.

If you work as a childminder, there is a special rule for working out your earnings. One third of your gross earnings count as income and then deductions are made for tax, national insurance contributions, and half of any contribution to a pension.

When you are claiming these benefits you will usually have to fill in separate claim forms detailing your earnings and deductions.

7. Can I get self employed tax credits?

If you work full time and your income is low, you might get Working Tax Credit (WTC). For WTC purposes, full time could mean 16, 24 or 30 hours a week, depending on your circumstances. You will be classed as working full time if:

  • You are single, responsible for a child and working at least 16 hours a week; or

  • You are a couple and responsible for a child and are working at least 24 hours a week between you, with one working at least 16 hours (exceptions apply)

  • You are disabled and are getting, or were recently getting, certain disability related benefits and are working at least 16 hours a week; or

  • You are 60 or over and are working at least 16 hours a week; or

  • You are 25 or over and working at least 30 hours a week.

Your self employed earnings will affect how much you might be entitled to, use our Benefits Calculator to get a Working Tax Credit estimate.  

WTC is worked out by using your income from the previous tax year to estimate what you will be earning in the current tax year. This means that WTC awarded for the current tax year are initially based on your income for the previous tax year. At the end of the tax year, when you get your tax credits renewal pack, you are asked to confirm your income for the tax year that has just ended to see if you received the right amount of tax credits.

This can cause problems if you are self employed and your earnings vary from year to year. If your actual earnings end up being over £2,500 more than what was estimated, you might have been paid too much tax credits, this is called an overpayment and you will have to pay this back.

If your actual earnings end up being over £2,500 less than what was estimated, you might not have been paid enough tax credits, this is called an underpayment and you will receive this as a lump sum.

If you think your earnings this year will be over £2,500 more, or over £2,500 less, than your earnings in the previous tax year, you can inform the Tax Credit office at any time so that they can adjust your current payments if needed. You can do this using an estimate of what you think your earnings will be.

8. What benefits can I get if I work part-time?

Benefits you can get when working part time include Income Support if you are a person who qualifies (e.g. a single parent) or Jobseeker's Allowance. You must be working less than 16 hours per week, and if you have a partner they must be working no more than 24 hours per week.

You can claim Pension Credit, Housing Benefit (England, Scotland, Wales), (Housing Benefit Northern Ireland) and Council Tax Support whether you work full time or part time.

If you qualify for Income Support, income-based Jobseeker’s Allowance or Pension Credit you may be able to claim help with your mortgage or home loan payments

Earnings, other income and capital affect the amount of benefit you can get. Any genuine business assets you have (e.g. a work van, premises, or money in a separate bank account that is used purely for the business) are ignored.

Use our Benefits Calculator to find out which benefits you may be entitled to and how much you could get.

9. What if I have less work than usual?

If there is a downturn in your business and you have less work than usual or no work, you might be able to claim benefits for the first time or the amount of your benefits might increase.

If you are still working full time but your income has dropped, you might qualify for Working Tax Credit for the first time or the amount you get might increase. For Working Tax Credit purposes, working 'full time' could mean 16, 24 or 30 hours depending on your circumstances. For further details see Can I get self employed tax credits? (Working Tax Credits).

The amount of Working Tax Credit you get is worked out using your income for the last tax year. If the downturn in your business means that your income this tax year is likely to be more than £2500 less than it was the year before, the amount of Working Tax Credit you are paid could increase. You should give the Tax Credit office an estimate of your earnings this tax year and they will work out if your Working Tax Credit payments can be increased.

If you have not stopped working, but have reduced your hours and are working less than 16 hours a week you might get Jobseeker’s Allowance. It can be difficult to get Jobseeker’s Allowance if you have only temporarily reduced your hours. The rules for calculating hours of work could mean that your average hours are worked out over a year. You might be classed as working at least 16 hours even though you are actually working less.

If you claim Jobseeker’s Allowance you will have to look for full time work. This includes looking for work with other employers not just self-employed work and not just extra work for your business.

If you have stopped working in self employment altogether you will be unemployed and might get Jobseeker’s Allowance.

If you have a mortgage, it might be better for you to work less than 16 hours and claim Jobseeker’s Allowance as Working Tax Credit does not include help with mortgage payments. You will need to work out which benefit you will be better off claiming. You can use our Benefits Calculator to find out.

The rules are complicated and it can be difficult to know which benefits to claim. If in doubt, seek advice from a benefits adviser. You can use our Find an Adviser tool to find a local one.

Your hours of work will not affect:Pension Credit, Housing Benefit (England, Scotland, Wales), Housing Benefit (Northern Ireland) or Council Tax Support.

 

 

 

 

10. What benefits can I claim if I can't work because of illness, injury or disability?

If you have been working in self employment and are unable to work because of illness, injury or disability you might be able to get the following benefits to top up or replace your earnings from self employment:

There are other benefits not related to illness, injury or disability which you may become entitled to for the first time or get an increase in because of your change in income:

Can I get self employed Sick Pay?

Statutory Sick Pay (SSP) is paid by an employer when an employee is unable to work due to sickness. If you are self employed you cannot get Statutory Sick Pay as you are working for yourself and therefore do not have an employer.

If you are self employed and temporarily unable to work due to illness, you should check if you qualify for Employment and Support Allowance.

11. What if I stop work to have a baby?

If you are going to stop working as a self employed person to have a baby, you might be able to get the following benefits to top up or replace your earnings from self employment:

Once you have had your baby you might get:

There are other benefits not related to having a baby which you may become entitled to for the first time or get an increase in because of your change in income:

Can I get self employed Maternity Pay?

Statutory Maternity Pay (SMP) is paid by an employer when an employee leaves work to have a baby. If you are self employed you cannot get Statutory Maternity Pay as you are working for yourself and therefore do not have an employer.

If you are self employed and temporarily unable to work due to having a baby, you should check if you qualify for Maternity Allowance.

12. How will Universal Credit affect me?

Universal Credit is being rolled out across the UK. Whether you can claim depends on where you live (in a full digital service area or a live area) and your personal circumstances. 

Universal Credit is replacing the following benefits:

Some of the main issues for self employed people include:

Face-to-face interviews

When you make a claim for Universal Credit you will have to attend a face-to-face interview. You will need to show that your self-employment is organised, developed and carried out regularly in expectation of profit. It must also be your main form of employment. If you cannot demonstrate these things, you will need to agree to look for and be available for other work in order to claim Universal Credit.

Minimum income floor

When you are self-employed and you claim Universal Credit, you are treated as if you are earning a certain amount. This amount is called the 'minimum income floor'. If the minimum income floor applies to you and you earn below this level in any month, you are treated as earning the minimum income floor. If you are earning more than the minimum income floor, your actual earnings are taken into account instead.

The minimum income floor is the equivalent of someone working full time (35 hours per week unless you have other responsibilities) on the National Minimum Wage for your age group.

Example: John is a self-employed taxi driver aged 35. He has a slow month and only earns  £800. His minimum income floor is £7.83 (National Minimum Wage for 25+ year olds) x 35 (hours per week) x 52 (weeks) ÷ 12 (months) = £1187.55 per month. This amount would be used to determine his Universal Credit payment for that month, rather than his actual earnings of £800.

Another example: Sally is a self-employed hairdresser aged 24. In her claimant commitment, she has agreed that she can work a maximum of 20 hours per week because she has to look after her son before and after school. She has a good month and earns £700. Her minimum income floor is £7.38 (National Minimum Wage for 21/24 year olds) x 20 (hours per week) x 52 (weeks) ÷ 12 months = £639.60 per month. Sally's Universal Credit payment that month would be calculated using her actual earnings of £700 rather than her minimum income floor. 

If you start a business whilst you are claiming Universal Credit, the minimum income floor will not apply to you for the first 12 months. This 'start up period' gives you a chance to grow your business. In the start up period, your Universal Credit payment is calculated based on your actual earnings even if they are lower than your minimum income floor. 

You get a 12 month start up period for the first 12 months of your Universal Credit claim if you started your business less than one year before you started your claim. You can only have one start up period for each business and you can only have one start up period in every five years.

Monthly reporting

If you are self employed you will have to supply monthly 'cash-in and cash-out' figures to the Department for Work and Pensions (DWP). If you fail to supply these figures between 7 days before and 14 days after each month, your Universal Credit payment will be suspended.

See our Universal Credit Benefit Guide for more details about Universal Credit.

 

Updated: April 2018

13. Self employment and benefits: Frequently asked questions

1. I’m self employed, but struggling to make the business pay. Is it better for me to claim Jobseeker’s Allowance or Working Tax Credit?

It can be difficult to decide if you will be better off on Jobseeker’s Allowance or Working Tax Credit.

You will need to find out how much you will get if you claim each benefit. Our Benefit Calculator will help you to work out how much you might get for these benefits.

These are some points you might want to think about when deciding which benefit is best for you:

  • You must not be working or only be working part time to get Jobseeker’s Allowance. Part-time work is employment you do for less than 16 hours each week

  • If you claim Jobseeker’s Allowance, you must agree to look for and take other full-time work

  • You must work full time to get Working Tax Credit. If you do not have children living with you and do not have a disability, you may have to work at least 30 hours each week to qualify

  • If your hours of work vary through the year, you might be treated as being in full-time work even when you are working less than 16 hours. If the average number of hours over the year is over 16, you will not be able to get Jobseeker’s Allowance

You will only get help with mortgage payments if you work part time and get Jobseeker’s Allowance.
 

We suggest you seek advice from a local benefits adviser to help you decide which benefit to claim. You can use our Find an Adviser tool to find a local one.

2. Can a self-employed person get any help to pay the mortgage on their home?

You will only be able to get help towards the mortgage interest payments on your home if you are entitled to one of the following benefits:

This is because help with this type of housing cost is included as part of these benefits and cannot be claimed on its own.

You cannot get Income Support, income-based Jobseeker’s Allowance and income-related Employment and Support Allowance if you work full time – i.e. work more than 16 hours or more per week, or your partner works more than 24 hours per week.

If you work part time and your earnings, other income and capital are low enough and you meet the other rules for these benefits, you might be able to claim help with mortgage interest payments.

If you or your partner is Pension Credit age, you might be entitled to Pension Credit. As long as you meet the age rules and your income is low enough you can get this if you work full or part time.

To find out whether you can get one of these benefits try the Turn2us Benefits Calculator.

3. Can a self-employed person claim Housing Benefit and Council Tax Support?

Yes, you can work in self employment and get Housing Benefit (England, Scotland, Wales), Housing Benefit (Northern Ireland) and Council Tax Support if your earnings and other income are low enough.

Housing Benefit can be paid if you rent your home.

If you pay a mortgage or other loan for your home, see question 2 above.

Council Tax Support is to help you pay your Council Tax bill if you rent or own your home. There are no work rules for Housing Benefit and Council Tax Support, so you can get it if you work full or part time.

4. What is the New Enterprise Allowance?

New Enterprise Allowance is a scheme that is intended to help unemployed people start a business through business mentoring and a weekly allowance. You can claim it if you (or your partner) have been getting Jobseeker’s Allowance for 26 weeks or more and live in England, Scotland or Wales.

If you take part in the New Enterprise Allowance scheme, you will get access to a volunteer business mentor who will provide guidance and support as you develop your business plan and through the early months of trading. Once you show that you have a viable business with potential for growth, you will be able to access financial support. A weekly allowance paid at £65 a week for 26 weeks (up to a total of £1,274)

There is also the chance to apply for a loan of up to £1,000 to help with business start-up costs.

See the GOV.UK website for more information on the New Enterprise Allowance (link opens in a new window)

5. I am self employed and my wife is about to have our first child. Can I claim paternity benefits?

The main paternity benefit is Statutory Paternity Pay. This is paid by an employer to an employee who meets the qualifying conditions, to cover a period of leave for a birth or an adoption. If you are self employed you cannot get Statutory Paternity Pay as you are working for yourself and therefore do not have an employer.

Updated: March 2018

 

14. Schemes and useful links

New Enterprise Allowance

Government scheme aimed at helping those in receipt of certain benefits to start their own business. You could get a loan to help with start-up costs, a weekly allowance payment and help and advice from a business mentor.

Enterprise Clubs at FSB

The Federation of Small Businesses has information on local Enterprise Clubs. These provide places where unemployed people who are thinking about setting up their own business can meet, share ideas and receive expert advice and support from local business people.

Gov.UK self-employment setting up information

Information on becoming self employed and the schemes that are available to help you, including the New Enterprise Allowance.

Gov.UK information on self employment

Has comprehensive information about self employment, including how to register for self assessment and starting up in business.

HM Revenue and Customs Starting Your Own Business e-learning course

Free e-learning course aimed at anyone who is starting their own business in the UK.

Small Business Advice UK

Website produced by a media company that provides information resources and forums for people running or thinking of setting up a small business.

Money Advice Service

Free and impartial money advice provided and useful budgeting resources 'Budget Planner available'