The government's welfare reform programme has been one of the most politically contested policy areas of 2025 and 2026. After months of debate, rebellion, and substantial parliamentary revision, the Universal Credit Act 2025 passed into law. The original proposals — including tighter PIP eligibility tests for all claimants — were significantly watered down following pushback from within the Labour Party, but the headline change to Universal Credit's health element has survived and is now in force.
From April 2026, new claimants of Universal Credit who are assessed as having limited capability for work have seen the health element of their award reduced by approximately 50% — from £97 per week to £50 per week. Existing claimants on the health element are protected from this cut: their combined standard allowance and health element will be uprated at least in line with inflation through to 2029/30. The PIP eligibility criteria for existing claimants have not been changed; a comprehensive review of the PIP assessment framework (the Timms Review) is ongoing and expected to report in Autumn 2026. Any changes to PIP eligibility for new claimants will follow that review.
Meanwhile, the standard allowance of Universal Credit is rising above inflation for four consecutive years — worth an estimated £725 more per year for a single adult over 25 by 2029/30, described by the Institute for Fiscal Studies as the largest permanent real-terms increase to basic out-of-work support since 1980.
Why This Matters to CoreAcc Clients
Many of our clients are self-employed sole traders, freelancers, or owner-managers of small businesses. Some will know employees or family members who receive PIP or Universal Credit. And for any business owner who has ever had to stop working due to ill health — even temporarily — the question of what financial support is available is a real and personal one.
There are three specific areas where we think this is worth paying attention to.
1. Self-employed people and the earnings taper
Universal Credit uses an earnings taper to gradually withdraw the payment as income rises. Self-employed claimants face a particular quirk: from the second year of a UC claim, HMRC applies a Minimum Income Floor (MIF), assuming that a self-employed person earns at least the equivalent of the National Living Wage for the hours they are expected to work — even if their actual earnings are lower. This means that a self-employed person whose business is struggling may find their UC entitlement reduced based on what HMRC expects them to earn rather than what they actually have earned.
The MIF was suspended during the pandemic and reintroduced. It remains in place and continues to catch self-employed claimants off guard. If you are newly self-employed and considering whether to claim UC to supplement your income during a slow start-up period, understanding the MIF is essential before applying.
2. The income protection gap for sole traders
The welfare reform debate has highlighted how thin the income safety net is for self-employed people who cannot work due to ill health. Unlike employees, self-employed people cannot claim Statutory Sick Pay. They may qualify for Universal Credit if their income drops, but the new health element cuts mean the support available during a period of serious illness is materially lower for new claimants from April 2026 than it was previously.
For a sole trader with no formal income protection policy in place, a period of serious illness now poses greater financial risk than it did a year ago. Income protection insurance — which pays a portion of your normal income if you cannot work due to illness or injury — is not glamorous but it is increasingly important. Premiums are generally lower when you are younger and healthier; waiting until a health problem emerges means either paying more or being unable to obtain cover at all.
3. Employers with UC claimants on payroll
For small employers with staff who receive Universal Credit alongside part-time employment, your Real Time Information (RTI) payroll submissions are the mechanism by which HMRC and DWP automatically update those employees' UC payments. Accurate RTI reporting — submitting the right figures on the right dates — is not just a tax obligation: it directly determines what your employees receive from DWP in the same month. Errors or late submissions can result in your staff receiving the wrong UC payment, creating financial hardship even where no wrongdoing has occurred.
This is a practical reason to ensure your payroll is run on time and accurately every month. CoreAcc's managed payroll service handles RTI submissions automatically, giving your employees confidence that their DWP payments will reflect their actual earnings.
The Big Picture
The trajectory of UK welfare policy over the next three years is clearly towards tightening eligibility and reducing the generosity of health-related benefit payments, even as the standard allowance rises. The Timms Review into PIP assessments is expected to report in Autumn 2026, and any changes it recommends — if adopted — will apply first to new claimants and then progressively to existing ones. The direction of travel is unlikely to reverse.
For self-employed people and small business owners, the practical response is to review your personal risk exposure to income loss through illness, consider whether income protection insurance should form part of your financial planning, and ensure that your business structure and payroll processes support rather than undermine the financial wellbeing of your team.
Questions about income protection planning, payroll accuracy, or self-employed financial planning? Contact CoreAcc Accountants today.
This article was last reviewed in July 2026. It does not constitute legal, financial, or benefits advice.
