How does Universal Credit work if I have a limited company?

Even before the cost-of-living crisis, the question ‘How does Universal Credit work if I have a limited company?’ got asked a lot.

And with the question still regularly posed today, I will provide an answer in the shape of a guide, demystifying how Universal Credit works for limited company workers who need to make a claim, writes Meredith McCammond, technical tax officer at the Low Incomes Tax Reform Group (LITRG).

Busting the limited company myth

Not everyone who has a limited company is a high earner!

If you have a lower income, suffer a fall in income or are unable to work for a moment, you may need to make a claim for Universal Credit (UC).

What is Universal Credit?

Universal Credit is a means-tested benefit for people of working age to help with living costs.

It covers people who are out of work, in work, and those who cannot work.

It can include amounts for certain housing costs, children and childcare costs with additional amounts for people who have disabilities or caring responsibilities and who meet certain conditions.

Can limited company directors claim Universal Credit?

Yes, directors can claim Universal Credit.

The UC regulations contain ‘look-through’ rules, so that where a claimant stands in a position that is analogous to that of a sole trader, they are treated for UC purposes as being a sole owner or partner.

This broadly means that they will be treated as self-employed for UC purposes. The consequences of this depend on whether the claimant is carrying on a trade or a property business.

If you are trading, any income/receipts of the limited company will be treated as your own self-employed income. Any expenses of the company, that are allowed to be deducted for universal credit purposes, are treated as your self-employed expenses.

How are self-employed earnings calculated under Universal Credit?

What counts as an expense when calculating self-employed income for Universal Credit is set out in the official guidance (see specifically ‘H4201’).

Self-employed earnings are then calculated as:

Self-employed income minus allowable expenses minus deductions for income tax, NIC and certain pension contributions.

Universal Credit is based on monthly assessment periods.

Earnings from self-employment must be reported usually within 14 days after the end of the assessment period. You can find guidance on how to report your income and expenses here, courtesy of the government.

But won’t any drawn salary also be treated as ‘employment’ earnings?

Yes. Guidance on what happens where directors are paid a salary from their limited company is available in our specific guidance. In short, any salary will be employed earnings for UC purposes, but also it is an expense of the business when calculating self-employed earnings. Some directors will want to take guidance from an adviser on how the capital value of the company is treated. Crucially though, dividends are not taken into account as income.

Where does payment of corporation tax get recognised?

As you can see from the above, only income tax is taken into account in the latter part of the earnings calculation. This begs the question – ‘With Universal Credit, what happens with any corporation tax paid?’

Although the position is not 100% clear, it seems that the only place to deduct corporation tax would be as an ‘allowable expense’ of the company. This would be in the monthly assessment period in which the corporation tax is paid.

Why isn’t the corporation tax position clear?

While the basic framework is in place, because of the relatively small numbers of limited director claimants involved so far, some of the detail isn’t yet clear and there is a lack of in-depth, official guidance.

Our organisation has witnessed some examples of misunderstanding by UC officials about how the rules work in practice for directors.

Unfortunately, this misunderstanding can result in some confusion or uncertainty where claimants are being told different things by different UC officials.

Are there any other issues with Universal Credit?

UC uses a cash basis.

The rules, while similar, are not identical to the tax rules and are set out in separate legislation.

There are also specific rules about allowable expenses (for example, there is a ‘reasonableness’ test), which covers losses and also surplus earnings.

If I’m a limited company director, what is the minimum income floor?

A key part of UC for the self-employed (including company directors) is a policy called the ‘Minimum Income Floor’ (MIF).

In general terms, after a 12 month grace period, if you earn less than your individual threshold in an assessment period your actual earnings will be ignored and instead you will be treated as if you have earned that notional individual threshold amount and have your UC calculated on that basis.

The threshold is broadly 35 hours x relevant national minimum wage, minus notional tax and NIC.

There is an individual threshold for single claims and a couple threshold for joint claims. Any employed income can also impact the MIF calculation.

Is the minimum income floor universally applicable, including to limited company workers?

Be aware, the MIF does not apply to everyone.

It only applies if you have no limitations on your capability to work (that is, you are in the ‘all-work requirements’ group) and where the Department for Work and Pensions (which administers UC) have determined you are in ‘gainful self-employment.’ The term is defined here by the DWP.

Also note that the 12-month grace period can end earlier if you are no longer in gainful self-employment and/or you stop taking steps to increase your earnings to at least your individual threshold level.

One impact of the MIF is that if you earn a low amount in a particular assessment period, for example because you had less work or because you had a large business expense to pay, your universal credit will not increase to reflect your full fall in actual income.

Instead, it will only reflect the fall in income to the level of the MIF.

Disagree with your award?

If you do not agree with the way that your ‘award’ has been calculated (i.e. how much you’ll get), you can challenge the decision on your UC award by appeal.

The first step in the appeal process is to request a Mandatory Reconsideration (MR). If you are not satisfied with the outcome of the Mandatory Reconsideration, you can then an appeal to an independent tribunal – the process is outlined here. Be aware, there are strict time limits for requesting a MR.

Top three key points about UC – partners, working age, capital limit

Universal Credit is a huge topic, with lots of consideration needed if you want to make a UC claim as a limited company director -- but some of the key things to understand are:

As with most means-tested benefits, UC takes into account circumstances and income of the claimant and their partner (if they have one).
We have seen some self-employed claimants apply for UC in the expectation they would get something, but their partner’s income is too high to receive any payment.

UC is for those of working age.

Broadly, those who have reached state pension age cannot claim UC unless they are part of a ‘mixed age’ couple where their partner is under state pension age. They may be able to claim pension credit instead and there are some limited exceptions for people who are moving from tax credits to universal credit under the managed migration exercise during the 2024/25 tax year.

UC has a capital limit of £16,000.

If the claimant has capital above that amount, they won’t be entitled to UC no matter what their income is. Between £6,000 and £16,000 capital will produce a tariff income that will be used in the calculation. There are specific rules for how business assets are treated in relation to capital limits.

Universal Credit as a limited company? It’s not for the faint-hearted...

UC for directors is very complex. If you find yourself in need of financial support, it is recommended to get advice before making a UC claim.

A website we are behind for advisers provides more detailed information here but as an individuals, you are more likely to want to use AdviceLocal.uk – a directory of local welfare rights specialists – to help find advice and support with making a claim.

You can also use the following calculators to help identify what financial help might be available in the shape of Universal Credit. Good luck!

Universal credit for limited company directors