Surplus Earnings
A “How To” guide on how to calculate surplus earnings for UC.
Introduction
Surplus earnings is an aspect of Universal Credit which can cause a lot of confusion. For most people most of the time, it is unlikely to be an issue. However, future changes will increase the number of claimants affected by Surplus Earnings rules, and given that benefits calculators cannot generally contend with these rules, it is important to be able to manually calculate their impact.
The goal of the Surplus Earnings rules is to stop claimants or employers “gaming the system” by arranging to be paid a whole year’s salary in one go, thus forfeiting one month’s Universal Credit while enabling them to claim the full amount with no earnings taper in other Assessment Periods. In outline, the Surplus Earnings rules allow for some income above a certain (currently quite high) threshold to be carried forward into future Assessment Periods to reduce or remove the advantage of being paid all in one go. The rules apply both to employees and self employed people claiming Universal Credit.
Who is affected?
In short, anyone receiving UC who gets a large amount of earnings in a given Assessment Period. This could be for a variety of reasons, such as a bonus payment or holiday pay.
How Does it Work? The Friendly Version
All Universal Credit claims have some amount of earnings which, if exceeded, will result in no benefit being payable — this is called the “Nil UC Threshold”. There is no fixed Nil UC Threshold, as it depends on which standard allowance and UC elements the claimant or claimants receive, whether they get a work allowance and, if so, which one i.e. higher or lower. Generalising is therefore not possible and each case has to be taken individually. A benefits calculator is useful to help work out a claimant’s maximum Universal Credit and their work allowance, as this is the first step in working out when surplus earnings rules will apply.
Surplus earnings rules do not kick in as soon as someone earns enough to stop their UC. Instead, there is an additional threshold, called the “De Minimis” amount, which is added to the Nil UC Threshold to determine the claimant’s “Relevant Threshold”. Only earnings above the Relevant Threshold are surplus earnings under the rules. The De Minimis amount is currently £2500, so surplus earnings rules are only invoked when a UC claimant has received a high lump sum of income, relative to usual. If the De Minimis amount is reduced in future, there may be more claimants caught by the surplus earnings rules.
Example — Fred
Let’s take a deliberately simple example. Fred is 29 years old and has no housing costs. He is single, is not responsible for any children, and does not have Limited Capability for Work. His savings are below £6000 and he meets the other eligibility criteria for Universal Credit.
Fred is leaving his job, so claims UC to top up his income. His Assessment Period runs from the 20th to the 19th of the following month. Fred receives UC of £324.84.
On the 18th of June he received a bonus from his employer of £3500.
Clearly, for the Assessment Period of 20 May to 19 June, Fred will receive no Universal Credit. Furthermore, because of regulation 3 of the Universal Credit (Coronavirus) (Self-employed Claimants and Reclaims) (Amendment) Regulations 2020, Fred may not have to reclaim UC manually — he could be treated as if he has reclaimed in the following month. But, does he have surplus earnings under the rules?
Remember that the UC work taper is 55%, and that Fred will not get a work allowance. Therefore, earnings of £590.62 in any given Assessment Period will reduce his UC to zero, because 55% of £590.62 is £324.84. This can be calculated by dividing the max UC (£324.84) by 55%.
So, Fred’s Nil UC Threshold is £590.62. His Relevant Threshold is therefore £3090.62, i.e. the Nil UC Threshold plus £2500. His Surplus Earnings are simply the earnings above the Relevant Threshold, so Fred’s surplus earnings are:
£3500 — £3090.62 = £409.38
So, for the next Assessment Period (20 June to 19 July), £409.38 will be added to any earnings or other work income Fred gets in that Assessment Period and used to adjust his Universal Credit. If Fred gets no other money from work that month, his UC will be:
£324.84 — (0.55 x £409.38) = £99.68
After that, the surplus earnings have been eroded and Fred’s UC will return to normal, adjusting according to his earnings in each Assessment Period.
How Does It Work? The In-Depth Version
To do a Surplus Earnings calculation longhand allowing for all eventualities, the following sequence should be used. I have stuck to the terminology given in Chapter H3 of the Advice for Decision Makers, which covers the same explanation (H3306 — H3309). The ADM also has some more worked examples in Appendix 2.
First calculate the Nil UC Threshold:
NT = ( (M-U)/0.55 ) + WA
Then calculate the Relevant Threshold:
RT = NT + DM
And then calculate the Surplus Earnings:
SE = TE — RT
Where:
DM is the De Minimis amount: currently £2500
M is the maximum amount of Universal Credit, comprising standard allowance and all applicable elements
NT is the Nil UC Threshold
RT is the Relevant Threshold
SE is the Surplus Earnings
TE is the total earnings for that Assessment Period
U is unearned income, i.e. income from certain other benefits, pensions and assumed income from savings
WA = the applicable work allowance
Tactics — Self Employment Expenses
For people who are self employed, remember that self employed people can continue to report allowed expenses month by month to UC. If they are making no earnings, there will be a loss each Assessment Period equal to the allowed expenses. Losses can be carried forward to the first Assessment Period where there is a profit (Reg 57A UC Regs 2013), whereupon they will then be deducted from the earned income. This may help lessen the effect of a large lump sum of profit when it arrives.
What About Future Assessment Periods?
In most cases, the surplus earnings “cycle” will happen once, and the total earnings in the next Assessment Period, including the surplus earnings carried forward (called the “original surplus”), will not be enough to invoke the process again — at least, not while the De Minimis amount remains £2500. However, in the event that the total earnings including the original surplus added to any earned income are once again over the Relevant Threshold, the process will happen again in the same way. The recalculated surplus earnings are then known as the “adjusted surplus” and carried into the next Assessment Period, and so on. This is called “eroding” the surplus earnings.
Time Limit
The Regulations cited previously allow an automatic reclaim over up to five Assessment Periods to allow the process to happen without the claimant having to reclaim each time. If someone’s surplus earnings take them out of UC and they remain ineligible after five reclaims, the clock stops and surplus earnings rules will not apply to the prior earnings from that point forward. The claimant will have to reclaim manually. Of course, if the surplus earnings have not been spent, anything left will count towards the claimant’s capital.
Conclusion
We have explored the topic of Surplus Earnings and examined how the calculation works. Although benefits calculators can help identify when a claimant’s earnings will reduce their UC to zero, most of them do not calculate surplus earnings so it is helpful to know how to do it, or more realistically, where to look for a reminder (hint: bookmark this article!). In future, because of the expected future reduction in the threshold over which surplus earnings rules are invoked (now expected to be from April 2023), we can expect to see more of these queries.
Information and rates correct as of December 2021.
Abi Sheridan is a Help to Claim Specialist in the Expert Advice Team.
This article was originally written by Chris Cox, a Help to Claim Specialist in the Expert Advice Team. It has been edited and re-published following taper rate and work allowance changes, the end of Covid relaxations, and the announcement that the De Minimis rate will continue until April 2023.
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