Deductions for income tax when self employed

I have a self-employed client with a partner and child whose income exceeds £2k pm but, with the inclusion of housing costs, should be entitled to approx. £50 per week UC based on his net income. However, UC are not taking income tax into account and his UC is less than £50per month.
According to ADM H4158 they should deduct from the gross profit any payments “made by the claimant” in the assessment period to HMRC in respect of each trade, profession or vocation for National Insurance contributions and Income Tax.  The problem is, of course, that he will be submitting a tax return at the end of the year as there is no provision to pay monthly. This seems grossly unfair but, apart from raising an MR to see what they come back with I can’t see any way around it. Does anyone have any thoughts?

Under reg 57 of the UC Regs you can deduct any payments made in respect of tax in that assessment period - it’s up to the person when they pay their tax (providing it’s before the relevant deadline) and it could make sense to pay it in months when they’ve had higher income - or just pay on a monthly basis.

Thanks Daphne,

I wasn’t aware this was an alternative. I’ve now signposted him to the Business Payment Support Service to try and set up monthly payments.

Reg 57A is another solution here: sporadic large tax payments can be carried forward from month to month as “unused losses”, until they finally work their way through the system.  It does mean that UC entitlement will be lopsided, with a series of months in which there is no income, then the rest of the year there is no tax.  But at least it isn’t all concentrated into a single month.

Paying a regular amount of tax monthly is a better way of doing it though - you can adjust your payments after doing your tax return.

HB Anorak - 05 August 2019 06:33 PM

Reg 57A is another solution here: sporadic large tax payments can be carried forward from month to month as “unused losses”, until they finally work their way through the system.  It does mean that UC entitlement will be lopsided, with a series of months in which there is no income, then the rest of the year there is no tax.  But at least it isn’t all concentrated into a single month.

But this way they would lose the use of the work allowance (they have a child) in the months with no income.

If the MIF would apply, that would be a further problem with this method. However, there are two potential reasons the MIF may not apply here:

1. The MIF only applies if the claimant is otherwise subject to full conditionality, and a claimant has no conditionality if monthly earnings are above their individual threshold. Monthly earnings are calculated before deductions for tax, so there shouldn’t be a problem for the month in which the tax is paid. However, later months which deduct unused losses will probably be an issue (I doubt unused losses can be attributed to specific expenses paid in the earlier month, and even if they could, who says the loss wasn’t caused by any other expense?).

2. As above, the MIF does not apply if monthly earnings are above the claimant’s threshold. Monthly earnings are averaged if income fluctuates. That being the case the MIF shouldn’t apply at all here, as the claimant is well above the individual threshold once earnings are averaged. However, DWP don’t seem to be applying the rules this way.

Yes, good point about the work allowance: over the whole 12 months, for a fixed amount of annual income, you want it spread as evenly as possible to get 12 work allowances, or if you are being really crafty and you also have a housing element, 6 work allowances and six months of surplus earnings exactly equal to the surplus earnings disregard (which is more than the work allowance for people with a housing element).  By the time you have calculated all the permutations, also factoring in the MIF if applicable, you won’t have any time left to go to work!

You should also make pension contributions in the most advantageous months rather than regularly in many cases.

Hello,
I would like to revive this thread to provide advice to my client who will be claiming UC as self-employed; he has a non-working partner and children. He can’t claim UC for now as he is his wife’s sponsor and as an immigration condition he cannot support her with benefit income. When she gets her visa and he can claim UC, he wants to know how he can calculate his monthly income tax and NI payments for monthly reporting to UC even though he normally pays this liability once per year after completing his self-assessment.

I understand that
- income tax and NIC payments are only counted as expenses when they are actually paid to HMRC in the UC assessment period;
- if he only pays income tax + NICs once per year to HMRC, then this could result in a loss for that assessment period, the loss would be carried forwards to future APs
- he can arrange to pay his HMRC liability by weekly or monthly instalments, so that this can be reported as an expense to UC, and adjust those payments after his self-assessment; or if he receives a refund this would be treated as self-employed profit for UC.

The disadvantage of paying NICs and income tax once a year is that the loss might result in the benefit cap being applied, and maybe for more than one assessment period as the loss is carried forward.
However the disadvantage of paying HMRC monthly is that if his profit is on the low side, then paying HMRC every month might subject him to the MIF (after the 1st year on UC). The youngest child is currently 18 months old and his wife is the main carer so if I’ve understood correctly, the MIF level for them as a couple would be only based on his projected earnings alone as she is not subject to WRR

Obviously I need a bit more information about his self-employed profit to work out which is going to be better for him to do. Is there anything else I need to think about?