Universal Credit: a limited company director’s overview

Universal Credit is a benefit paid to individuals who are on a low income, out of work or cannot work, replacing other benefits like working tax credit and income-based Jobseekers Allowance. And the key criteria to qualify is that you must have less than £16,000 in money, savings and investments.

For limited company directors, this is a potential blocker to making a claim for Universal Credit, writes Matt Fryer, managing director of Brookson Group.

Universal Credit: intro and eligibility criteria as a PSC contractor

That’s because the £16k threshold includes company capital. It’s also worth noting that the claim is made per household, so even if a partner is not eligible, how much you receive will depend on your partner’s income and savings as well as your own.

Everyone who is eligible for Universal Credit receives a basic allowance, (£368.74 per month if you’re single and aged over 25). But this allowance varies depending on how old you are and whether you're claiming as a single person or as part of a couple. You may also be entitled to additional amounts - known as ‘elements’ - depending on your circumstances.

How is a PSC director assessed for Universal Credit?

As noted above, in order to qualify fully for Universal Credit, the individual must have £16,000 or less in money, savings or “investments”.

For a PSC, investments are treated as being the amount of capital they hold and the actual value of the shares are disregarded. 

Another key point is that any assets of the company used ‘wholly and exclusively for the purpose of the trade’ are disregarded as well. However, if the company has ceased trading and there are cash reserves in the business, and funds available for drawdown is available, this amount would contribute to the £16,000 limit.

The Regulation 77 Rule (Universal Credits Regulations 2013) 

The 2013 regulations recognise that directors of Personal Service Companies (such as limited companies) are in a unique position, in that they can plan withdrawals from their company in a tax-efficient manner. For example, by taking a small salary and a larger dividend as and when required.

In this respect, for Universal Credit purposes, the regulations look through this ability to be ‘flexible’ with profit extraction, which they perceive would allow directors to manipulate withdrawals to their benefit for Universal Credit.

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 directors with their own PSC.

As a consequence, it treats the profit of the company as the income of the director (assuming there is only one director/shareholder).

The practicalities for PSCs of making a claim for Universal Credit

In practical terms, for a director who considers they may qualify for Universal Credit, they will need to submit monthly returns of ‘ins’ and ‘outs.’

Essentially, the company’s ‘ins’ and ‘outs’ comprise:

• Income

This will be a ‘receipt’ into the business, from which allowable deductions for certain expenses -- such as wages -- can be made. The resulting figure is then added to any employed earnings they receive as a director or employee of the company, so there is no double-counting.

• Any self-employed income the claimant is treated as having under regulation 77 is taken into account, along with employed earnings.

• Your Universal Credit payment will be based on the earnings you report at the end of each monthly assessment period.

Final thoughts on PSCs and UC

Where a PSC continues to trade, it appears equitable and fair that the basis for calculating eligibility for Universal Credit (UC) discounts trading assets and share-values, as the former are wholly necessary for the company to continue to trade, even if trading conditions are poor and have impacted profits.

Similarly, if the company has ceased trading and there is residual cash in the company once all company liabilities have been settled, it would be appropriate for these funds to contribute to the eligibility criteria of having less than £16,000 in money, savings and investments.

Ultimately, if a director has little or no income because their company has little or no income, then they may well qualify for Universal Credit. However, we would always advocate speaking to your accountant or financial adviser in respect of your company’s financial position, to consider the viability of any claim and to ensure its appropriate to your personal circumstances.