Self-employed avoid big cut to universal credit after return of the 'minimum income floor' delayed until April

Last week, MoneySavingExpert.com founder Martin Lewis warned of the "sinkhole" waiting for many self-employed people after Thursday 12 November, when the planned return of the minimum income floor would have meant payments were slashed. He suggested that any self-employed people affected should write to their MP as soon as possible.

The minimum income floor is basically an assumed level of earnings. When calculating how much universal credit you'll receive, the Department for Work and Pensions (DWP) assumes the self-employed earn at least roughly minimum wage. Without the floor in place, those earning less than that level are assessed on actual income – so get more help. Now the Secretary of State for Work and Pensions has announced that the suspension of the minimum income floor will continue for the time being.

See our Coronavirus Self-Employed & Small Limited Company Help and Coronavirus Universal Credit & Benefits guides for more info on your rights if you're self employed, and details of the support available. 

What is the minimum income floor – and why is today's announcement so important?

In normal times, if you've been "gainfully self-employed" (meaning your main occupation has been self-employment) for more than 12 months, you'll be affected by the minimum income floor rule – though there are exceptions.

• Normally with the minimum income floor, the DWP assumes you earn a wage that you may not actually get. If you claim the benefit when you've been self-employed for over a year, the DWP will assume you earn at least the same as someone in paid employment with similar working hours on the minimum wage. See how the minimum income floor is calculated below.

• The problem comes for people who earn BELOW the floor. Here, when assessing you for the benefit, instead of looking at what you actually earn, the DWP will assume you earn the (higher) minimum income floor, and the more you are deemed to be earning, the less universal credit you get. See below for an example of how this works in practice.

• If you earn ABOVE the floor, there's no issue, as you'll be assessed on your actual income.

• In March, the Government suspended the minimum income floor due to the pandemic – but it had been due to return on Friday 13 November. Its suspension was a lifeline for many self-employed people who had initially seen income plummet after Covid-19 hit, as it meant their universal credit payments were calculated on what they were actually earning, rather than an assumed amount that may have been higher than the reality. The fact it now won't return till April will therefore be good news for many.

Here's what Martin had to say in response to the news today – and below you can see his original tweet to the Chancellor Rishi Sunak last week campaigning on the issue:

How is the minimum income floor normally calculated?

Here's where it gets complicated:

• First, the DWP calculates how many hours you could be expected to work each week. This could be up to 35 hours a week, or fewer in some circumstances – for example, if you have caring responsibilities. 

• Your expected working hours are multiplied by the hourly national minimum wage for your age group, and then calculated as a monthly salary. For example, if you're aged 25 or over and in employment, you must be paid a legal minimum of £8.72 an hour – though it'll be less than this if you're younger.

  This weekly wage is then multiplied by 52 and divided by 12 to get an equivalent monthly salary. So someone who was expected to work a full 35-hour week would be expected to earn:

  - £1,322.53 a month if they're aged 25 or over. This is based on a minimum hourly salary of £8.72.

  - £1,243.67 a month if they're aged 21-24, based on a minimum hourly salary of £8.20.

  - £978.25 a month if they're aged 18-20, based on a minimum hourly salary of £6.45.

  - £690.08 a month if they're under 18, based on a minimum hourly salary of £4.55.

• The DWP then deducts tax and national insurance to work out your minimum income floor. This is deducted at an amount "the Secretary of State deems appropriate", so can differ from case to case. 

While the tax and national insurance make it hard to state exact minimum income floors, the monthly wages above can be taken as a good approximation of the level of minimum income floor that will apply to you in your age group (assuming you'd be expected to work full time).

How does the minimum income floor affect payments?

Your universal credit payment is based on many factors, including where you live, whether you have children, whether you're in a couple and more. And it's also affected by how much you earn – or, how much you're assumed to earn under the minimum income floor rule. So...

• If your actual income is LESS than your minimum income floor, it's the minimum income floor that's used to calculate your payments instead, meaning you'd get less universal credit than if your actual earnings were used.

• If your actual income is MORE than your minimum income floor, your real earnings will be used to calculate your universal credit payments. 

If the Government had brought back the minimum income floor, some self-employed people would have seen a drop in their universal credit. Here's an example of what could have happened (though as we say above, universal credit entitlements are based on lots of different factors, so see this as an illustration)...

A 40-year-old self-employed musician, who wasn't eligible for help under the Self-Employment Income Support Scheme, started claiming universal credit in April after coronavirus restrictions disrupted his income. 

At the moment he is only able to earn about £200/month due to reduced demand, and his universal credit payments are based on this amount. As he is a homeowner, lives alone and doesn't have children, at the moment he gets £283.89/mth in universal credit. 

But if the minimum income floor is brought back in, his universal credit payments would be calculated as if he were earning his minimum income floor amount. This could be around £1,200/mth for someone in his situation, though exact amounts will vary – even though his actual income is only a fraction of this. As a result, he would no longer be entitled to claim universal credit, leaving him almost £300 a month WORSE OFF.