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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.

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. For more information about this, read the Low Income Tax Reform Group's guide to self employment.

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

2. Do I need to register as self employed?

Self employed people have to register with HM Revenue and Customs (HMRC) to pay tax.

This won't register you are self employed for benefits purposes.

There is no one way to register as self employed for benefits. You should tell each organisation (for example, the Department for Work and Pensions (DWP), HM Revenue and Customs (HMRC) or your local council) that pays you benefits that you are self employed and you should let them know your income from self employment.

 

3. What benefits can I claim if I am self employed?

When it comes to working out which benefits you are eligible for and how much you might get, the same rules usually 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.

The best way to work out what benefits you can claim is to use our Benefits Calculator.

 

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 are self employed, you are responsible for paying your own national insurance contributions. As a self-employed person, you will usually pay Class 2 national insurance contributions (NICs) and you will also have to pay Class 4 NICs if you earn above a certain amount.

For information about the benefits your contributions count towards, read our guide on National Insurance Contributions.

For more information, see the Low Incomes Tax Reform Group's Tax and National Insurance pages for people who are self employed.

 

 

Updated: October 2019

5. How do I calculate my hours of work - self employment?

You do not need to calculate your hours of work if you are claiming Universal Credit.

If you are claiming tax credits (Working Tax Credit or Child Tax Credit), Jobseeker's Allowance, Employment and Support Allowance (ESA) or Income Support, you may need to calculate your 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 - self employment?

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

For Universal Credit, you will need to report your earnings every month. You will have to report how much you earned in that assessment period. To calculate your earnings:

  • First work out how much you actually received in that assessment period

  • Then deduct any permitted expenses (costs you had to pay to run your business and that were only paid to allow you to run your business).

  • Then deduct money you have set aside for taxes and national insurance

  • Then deduct any money you have paid towards a private pension

  • Then deduct any losses from previous assessment periods. 

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. You can find detailed information about how to do this on the HM Revenue and Customs (HMRC) website.

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.

Updated September 2019

7. 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 claiming Universal Credit and are affected by the minimum income floor, you might find that your benefits don't increase even though you have less money coming in. 

If you are still working full time but your income has dropped and you are already getting Working Tax Credit or Child Tax Credit,  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 Working Tax Credit if I am self employed?

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 £2,500 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 your usual hours have dropped below working full time (16, 24 or 30 hours per week, depending on your circumstances), you should speak to an adviser to check whether you will still be entitled to Working Tax Credit.

If you are no longer entitled to Working Tax Credit, you should use our Benefits Calculator to check whether you might be better off claiming Universal Credit.

Updated: October 2019

8. Can I get Working Tax Credit if I am self employed?

Most people can no longer make new claims for Working Tax Credit. If you are already getting Working Tax Credit, you may be able to carry on getting tax credits if you become self employed. You will need to let HM Revenue and Customs (HMRC) know you have become self employed.

If you are already getting Child Tax Credit and start working, you may be able to claim Working Tax Credit.

You may also be able to make a new claim for Working Tax Credit if you get a Severe Disability Premium and satisfy the other rules for entitlement to Working Tax Credit. You may find it easier to use our Benefits Calculator to work out if you can claim Working Tax Credit.

To be entitled to claim Working Tax Credit, you must be working full time. For Working Tax Credit 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); or

  • 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.

Self-employment earnings

Your self-employed earnings will affect how much you might be entitled to. Use our Benefits Calculator (link above) to get a Working Tax Credit estimate.  

Working Tax Credit 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 Working Tax Credit awarded for the current tax year is 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.

Updated: October 2019

 

9. Universal Credit and self employment

Self-employed people can get Universal Credit if their income and capital are low enough. 

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.

Some people are exempt from the minimum income floor. This might apply to you if

  • You have limited capability for work or work related activity; or
  • You provide 35 or more hours per week of care for a person who receives a disability benefit; or
  • You are over pension age; or
  • You are looking after a child under three; or
  • You are a foster carer or a 'friend or family carer' for a child under 16; or
  • You have had a child placed with you for adoption in the past 12 months
  • You have started your business in the previous 12 months.

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. Your minimum income floor will be set according to how much work you would be expected to do according to your circumstances.

Example

John is a self-employed taxi driver aged 35. He has a slow month and only earns  £800. His minimum income floor is £8.21 (National Minimum Wage for 25+ year olds) x 35 (hours per week) x 52 (weeks) ÷ 12 (months) = £1,245.18 per month. This amount would be used to determine his Universal Credit payment for that month, rather than his actual earnings of £800. This means that in this month John would be £200 worse off than someone working as an employee earning the same amount he earned.

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 £7.70 (National Minimum Wage for 21-24 year olds) x 20 (hours per week) x 52 (weeks) ÷ 12 months = £667.33 per month. Sally's Universal Credit payment that month would be calculated using her actual earnings of £700 rather than her minimum income floor. 

Starting a business while claiming Universal Credit and the 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.

Managed migration and minimum income floor

If you are moved onto Universal Credit through managed migration, the minimum income floor won't apply for the first 12 months of your Universal Credit claim.

Monthly reporting

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

If you earn enough in a month to mean you don't have any entitlement to Universal Credit, your claim will close and you will need to re-claim Universal Credit.

If you have income in an assessment period that is more than £2,500 over your maximum Universal Credit entitlement, some of this income might be carried over into future assessment periods. If you are affected by this, you should speak to an adviser.

Updated: September 2019

10. Self employment and benefits: Frequently asked questions

1. 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.
 

2. I am self employed. 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.

3. 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 have made enough national insurance contributions to qualify for New Style Employment and Support Allowance.
 

4. 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:

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 a Support for Mortgage Interest loan.

To find out whether you can get one of these benefits, use our Benefits Calculator.

If you get Universal Credit, you can only claim a Support for Mortgage Interest loan if you have no earned income at all. 

5. Can I get any help growing/ starting my business?

New Enterprise Allowance is a scheme that is intended to help unemployed people start a business through business mentoring and a weekly allowance. You may be able to claim it if you (or your partner) get Jobseeker’s Allowance, Universal Credit, or Income Support as a single parent. You can only get it if you live in England, Scotland or Wales.

If you take part in the New Enterprise Allowance scheme, you will get access to a mentor and a weekly allowance paid at £65 a week for 13 weeks, then £33 per week for a further 13 weeks (up to a total of £1,274). There is also the chance to apply for a loan of up to £25,000 to help with business start-up costs.

To access the New Enterprise Allowance you should speak to your work coach.

See the Gov.UK website for more information on the New Enterprise Allowance

Updated: October 2019