We understand that this month the DWP have rolled out a fix to an ongoing error in the way UC is calculated for couples where one is self-employed and affected by the Minimum Income Floor (MIF) and the other has PAYE earnings.
It looks like that for the last 10 years the system has not been calculating deductions for earnings for these couples correctly.
It appears that the UC system was previously only taking the higher of the self-employed member’s MIF amount OR their partner’s PAYE earnings.
For example, if the self-employed member of the couple was earning below their MIF of £1,400 and the employed partner was earning £1,000 net a month. Their UC has been being worked out using earnings of just £1,400 (i.e., the lower income was incorrectly ignored completely).
Fixing this error means that many claimants will see a substantial drop in their UC award (and some may lose it altogether).
It is unclear whether the DWP will be creating overpayments and if they do, whether they will be seeking to recover these.
How should it work for these couples?
The assessment of a couple’s earnings where one has self-employed earnings and the other has PAYE earnings is complicated.
Step 1: Work out the self-employed member’s ‘individual threshold’
This is the number of hours they would be expected to work multiplied by the minimum wage that would apply to them less an amount for notional tax and NI.
If the self-employed member’s earnings from self-employment (and any other PAYE earnings they have) are higher than this amount, then they are not affected by the MIF (and the couple’s UC would be based on the actual self-employed earnings plus any PAYE earnings they or their partner have received in that Assessment Period).
If the self-employed member’s earnings from the self-employment (and any PAYE earnings they have) are lower than this, then go on to Step 2.
Step 2: Work out the couple’s ‘joint earnings threshold’
This is calculated by adding together their ‘individual thresholds’ (i.e., the number of hours they would each be expected to work multiplied by the minimum wage that would apply to them less an amount for notional tax and NI).
If the total of the self-employed member’s earnings from self-employment (and any other PAYE earnings they have) plus the PAYE earnings of their partner are more than their ‘joint earnings threshold’, then they are not affected by the MIF (and the couple’s UC would be based on the actual self-employed earnings plus any PAYE earnings they or their partner have received in that Assessment Period).
If the total of the self-employed member’s earnings from self-employment (and any PAYE earnings they have) plus the PAYE earnings of their partner are less than their ‘joint earnings threshold’, then go on to Step 3.
Step 3. Add together the couple’s ‘assessable earnings’ (i.e., the MIF amount plus the other partner’s PAYE earnings), and compare this to the couple’s ‘joint earnings threshold’.
If their ‘assessable earnings’ are lower, then use this when working out their UC award.
If the ‘assessable earnings’ are higher, then deduct the excess from the self-employed member’s MIF. Add the resulting lower MIF to the other member’s PAYE earnings and that is the new ‘assessable earnings’ figure figure to calculate their UC.
So, where the non-self-employed partner is earning above their ‘individual threshold’, the amount of any excess earnings i.e., any earnings above their ‘individual threshold’ reduces the impact of the MIF on the couple’s UC award. This ensures that the couple are not ‘punished’ for the PAYE earner having earnings above their ‘individual’ threshold whilst their partner is affected by the full Minimum Income Floor.
What can a couple do if they are affected?
Anyone seeing a significant decrease in their UC due to this problem may need to seek advice. An adviser would check whether the self-employed person is in the correct conditionality group (the MIF can only affect those that would normally be expected to look for work (ignoring their earnings)), whether there are any benefits that they are missing out on, and potentially how finishing self-employment would affect their UC entitlement.
Example:
Mike, 21, works as a self-employed plumber. After 12 months on UC, the DWP decide that Mike is ‘gainfully self-employed’. And as he has been trading for over 2 years, he is subject to the Minimum Income Floor.
Step 1
Mike's individual earnings threshold is £1384.97 per month
(35 hours per week x minimum wage (as he is under 23) £10.18 = £356.30. This is converted to monthly figure of £1543.97 with a nominal amount taken off for tax & NI of £159.00).
This month, Mike's take home pay from his plumbing is £850. This is below his ‘individual earnings threshold’.
Step 2
His partner, Sharon, 24, works 18 hours a week in an office job while their 3 children aged 8, 6 & 4 are at school. She gets paid £750.00 every month. For the purposes of their joint UC claim Sharon is the 'responsible carer' for their children.
Sharon's individual earnings threshold is based on 25^ hours per week x minimum wage, so her ‘individual earnings threshold’ is £1102.83 per month (25 hours per week x minimum wages £10.42 = £260.50, converted into a monthly figure of £1128.83 with a nominal amount taken off for NI of £26).
Their joint earnings threshold is £1384.97 + £1102.83 = £2487.80
^ This is what Sharon agreed with her Job Coach ie for other 'responsible carers' it could be more (or less).
Mike's earnings of £850 + Sharon's earnings of £750 = £1600 are below their joint threshold of £2487.80.
Step 3
Because Mike's earnings are below his threshold and the couple's joint actual earnings are below their joint threshold then the Minimum Income Floor applies.
Mike will be treated as earning his threshold of £1384.97 - but this might be reduced to a lower Minimum Income Floor based on Sharon’s earnings.
Mike's individual threshold £1384.97 + Sharon's actual wages £750 = £2134.97. As this is less than their joint earnings threshold (i.e., less than £2487.80, Mike’s Minimum Income Floor is unaffected and stays at £1384.97 for this Monthly Assessment Period. This is added to Sharon’s earnings of £750 and this is the total of their ‘assessable earnings’ for that Assessment Period.
Previously the DWP would have been using just Mike’s MIF amount of £1384.97 (being the higher of his and Sharon’s earnings) when assessing their entitlement to Universal Credit. So, they will see a drop in their UC entitlement of £412.50 based on the same income figures (because the DWP is now also considering Sharon’s wage of £750 (750 x 55% = 412.50)
What if Sharon was earning £1200?
Step 3
Mike's earnings are below his individual earnings threshold.
Their joint assessable earnings of £1384.97 + £1200 = £2584.97 are above their joint earnings threshold. So the Minimum Income Floor will apply but will be reduced by £97.17 (i.e., the excess (£2584.97 - £2487.80).
So Mike's Minimum Income Floor this Monthly Assessment Period will be £1287.80 (£1384.97 - £97.17).
This will be added to Sharon’s earnings of £1200 to give a total earnings figure for that MAP (£2487.80).
Previously the DWP would have been using just Mike’s MIF amount of £1384.97 (being the higher of his and Sharon’s earnings) when assessing their entitlement to Universal Credit. So, they would see a drop in their UC entitlement of £606.56 based on the same income figures (because the DWP is now also considering Sharon’s wage of £1,200 – though the decrease is offset slightly by the reduction to Mike’s MIF).