Can a director of a limited company claim Universal Credit?

One of the main benefits that limited company directors tend to look at the potential for claiming is Universal Credit, writes chartered accountant Graham Jenner of tax advisory Jenner & Co.

That’s because while other state benefits may of course be available to directors, the starting point for any new claim is likely to be a Universal Credit claim.

Director or not; it's not technically a question with Universal Credit

Broadly speaking, individuals who are on low income, out of work or who cannot work, and who meet additional criteria, may be eligible for Universal Credit. Whether they are a director of their own limited company or not -- it makes no difference.

However with all benefits including UC, strongly consider enlisting some advice tailored to your circumstances because the benefits system is complicated. Partly, that’s because the system is trying to cover so many different circumstances, and partly because it needs to prevent people manipulating how they receive income to maximise their entitlement to benefits!

Regulation 77, applying to most limited company contractors…

As a director is an employee of the company, it would be all too easy for a director to pay themselves only a small salary and a sizeable dividend, in order to obtain more in the way of benefits. Or they could manipulate the timing of dividend payments to their advantage.

To overcome this, Regulation 77 of the Universal Credits Regulations states:

‘Where a person stands in a position analogous to that of a sole owner or partner in relation to a company which is carrying on a trade or a property business, the person is to be treated, for the purposes of this part, as the sole owner or partner.’

This Regulation 77 will apply to most contractors with their own limited company. It, effectively, treats the profit of the company as the income of the director (assuming there is only one director/shareholder).

Declare the ‘ins and outs’

This will mean that, when making a Universal Credit claim, it will be necessary to declare the ‘ins and outs’ of the business. The salary or wages and any dividends are therefore ignored, when assessing the eligibility to Universal Credit.

Therefore, if a director has little or no income because his/her company has little or no income, then they may well qualify for Universal Credit.

Be aware, the income has to be declared on the last day of the monthly ‘assessment period’. It is beyond the scope of this article to look at the cash amount of benefits payable, but it is worth noting that Universal Credit is reduced by 55p for every £1 of income (over a certain level).

The key 16k threshold

In addition to income criteria, there is also a savings and investments criteria.

In order to qualify fully for Universal Credit, the claimant must have £16,000 or less in money, savings or investments.

That raises two questions regarding limited company contractors:

1. How is their ‘investment’ in the company treated?

Valuation of small, private company shares is difficult but, helpfully, for the purposes of UC, the value is generally treated as the amount of capital they hold -- often only £1. The actual value of the shares is disregarded.

2. Are bank balances, savings and investments of the company treated as though they are of the director/shareholder?

Any assets of the company that are used wholly and exclusively for the purposes of the trade are disregarded from the claimant’s capital while they are engaged in activities related to that trade.

Right, wrong, reasonable

So, while the profit of the company is treated as the director’s income, the assets of the company are not treated as their assets and the value of the shares is, effectively, ignored.  This surely must be the right position. Actual savings of an individual can be used to live on, while searching for a job, but selling the company shares to provide money to live on, is impractical in the short term.

Similarly, if the company needs assets with which to operate, including money in the bank as working capital, it would be wrong to expect the director to take that from the company to live on, as it would jeopardise the company’s ability to trade.

However, it would appear that, if the company has stopped trading, and has cash, savings or investments, these will be counted as assets of the individual. That seems reasonable, in that they are no longer needed in the trade and represent something the director/shareholder could live on, if necessary.

Finally, for more tailored advice, consultant your contractor accountant or an adviser specialising in Universal Credit.