You'd think that would be the way they'd do it. But no, if you're a director or shareholder of your limited company, then they treat you as though you're self employed, which is utterly counter intuitive. They completely ignore your PAYE income, and you have to submit monthly takings and expenses accounts for the business, which UC then take as any business profit being your own personal income.
They decide which business expenses are allowed (I'm not sure if they do this automatically by computer system, or if they have humans poring over all your accounts every month, sounds like the latter though!). I believe the idea behind it is to prevent ltd company owners from hiding their income by leaving it in the company. Which is fair enough, but would be a lot more straight forward to work on an annual accounting period rather than recalculate it month by month.
UC is intended to be a benefit to help people who are on low incomes, but the way it's designed (with potentially massively varying benefit payments month to month, and always being paid in arrears), makes it brutal for the people it is intended to help. By nature people in these circumstances don't have a load of spare cash floating around as a buffer, and are trying to walk a tight rope balancing their household budget.
Yes the 20k example is my business t/o, not my personal income. There are expenses that come out of that - I might sell 20k worth of equipment, but it could cost me 15k to buy the parts in. Some of what I (re)sell are services too, which cost me monthly from the service suppliers.
For example, I have quite a few customers who I give a discount to for paying for 12 months of service up front. I might invoice them 10k for the next 12 months of service, and then I pay the cost price of that service monthly over the next 12 months, at say £700 per month. So I'll make £1600 profit on that (10k - 12*700) over the year, just that I've received all the payment for it up front. The way that'll work for UC is that they'll class it as a 10k profit on the month the payment is made (well 10k-700 I suppose), which taken by itself would totally wipe out my monthly UC payment for that month. Then they carry forward the surplus from a profitable month (income beyond the maximum that takes you above UC eligibility), to subsequent months. So the next month I'd still be massively in profit (on this contract taken in isolation), and get no UC again for that month. I've not worked it out exactly, but it'll probably be 4-5 months before the carried forward surplus has reduced enough to bring me back into being eligible for UC.
UC in monthly arrears is going to be like a pendulum effect, swinging wildly between a low payout following a strong trading month (but if that subsequent month is slower than the big one preceding it, it's a double whammy). And then after a slow month, you'll get a higher UC payment, but you might also be having a more profitable month then, and more money coming into the business account (and this is all despite being PAYE with a fixed salary).
The way to make it work smoothly is to have a very consistent income and expenditure month to month. Even the most regular business is going to have fluctuating monthly profits - some expenses that you always pay for on an annual basis, e.g. insurance, an annual trade show. And even if you do have a business with consistent income (e.g. one that's predominantly labour based), what if you dare to take a two week holiday during the year, that'll cause a slow month for sure.
I suppose it may be possible to plan ahead and smooth out timings of payments and expenses as best as reasonably possible. I could tell my annual paying customers that I can no longer invoice them for a discounted 12 months at a time, that they'll just have to pay it monthly instead. But a) there will be the issue of them losing a discount through no fault of their own (I'd probably have to honour it on a monthly basis), and b) it increases my admin work load dramatically as instead of raising one invoice and chasing one payment in a year, I'll be doing that 12 times for each of these contracts.
As I said, it's just so utterly complicated, I can only think their prime motive is to make it as difficult as possible to claim UC.
There's a very clever and subtle plot going on in the background where the government is trying to reduce the welfare burden by increasing wages (as per large national min wage increases), but not increasing benefit thresholds (or tax thresholds for that matter). So whilst they aren't obviously decreasing the amount of tax credit/UC an individual gets, they are receiving less in real terms.