Universal Credit

Universal Credits is the flagship of the Welfare reform bill discussed in November 2010 – it is payable to individuals on low incomes and is designed to top up their earnings.  It will be rolled out in four areas next April – Tameside, Oldham, Wigan and Warrington – with the remainder of the country going live in October 2013.

The Universal Credit will be accessible through the Government Gateway website and all claims will be managed online with payments for one month being made on the basis of the earnings from the previous month – and for the employed this process does appear to be in line with the Governments objectives of making the system simpler.  Salaries will be recorded monthly through the PAYE scheme and HMRC will pass on the information to the individuals’ Universal Credit accounts.  In turn the individual will retain more of their earnings rather than have a deduction for tax.

But what about the self-employed? – the new start up businesses who want to take themselves out of unemployment, or potentially the entrepreneur who has a business idea he or she wishes to persue?  These individuals will have little or no earnings in the first few months or possibly a year.  It is likely that they will initially set up as a self employed soletrader with no salary/earnings and they will have no employer to pass on the Universal Credit payment to which they are due.

As the workings of the Universal Credit are finalised it is becoming clear that the lower earning self-employed worker will have more administrative burdens placed upon them.  The self-employed worker with need to report their monthly income from self-employment  to the Department of Work and Pensions (DWP) but will need to be in a different format to that required by HMRC’s new cash accounting basis, introduced in the last budget.  It will also need to be in a different format to that used for producing official accounts.  A third set of information will be required and there will be a window of only seven days to provide the information or the payments will stop.

There is also the uncertainty for workers who do not know if their earnings are reported through the system by those they do work for.  This would result in the potential loss of much needed support during the period of uncertainty.

It has been suggested that small businesses, where the family currently obtain Tax Credits, and new start up businesses may want to consider incorporating their businesses in order to have a salary paid on a monthly basis.  The salary can be operated through the PAYE system, removing the necessity to undertake the burden of monthly accounting to the DWP via HMRC.  Broadly, the overall administrative burden is less when a limited company is used and it may be worthwhile to review this option before the Universal Credit commences.  However, the additional costs incurred in incorporating a business and producing full accounts at a time when businesses are trying to keep overheads to a minimum, may outweigh these benefits.

It is also worthwhile having a transition plan in place if you have a Tax Credits overpayment which is being repaid to HMRC on a monthly basis.

We will be keeping an eye on how options develop for the self-employed, and will inform people accordingly.

This article was taken from our Pay Less Tax brochure Summer 2012.

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