Support for the self-employed in the spotlight

Drivers of self-employment

Labour MP Karen Buck suggested that we need to understand better the distinction between ‘self-employment’ as an entrepreneurial activity and the setting up of a business, and ‘self-employment’ as people who are working individually in a contract relationship with another employer, in the sense that the public have come to understand as the ‘gig economy’.

Benedict Dellot is Associate Director (Economy, Enterprise and Manufacturing) at the RSA. Dellot said that in 2012/13 the RSA published a survey with Populus that found that, of those who had started in business in the previous five years, about 27 per cent did so to escape unemployment. The RSA is doing its own research at the moment on gig economy platforms and it has so far found that about three per cent of the total workforce have engaged in gig work (finding work through an online platform, essentially) in the past 12 months. About 59 per cent of that three per cent are delivering professional services - so using things like Fiverr and Upwork; 33 per cent of them are delivering skilled manual services and about 16 per cent are providing driving and delivery services. He predicted that the gig economy will grow in medicine, tutoring, entertainment and personal services. Three main factors were driving the gig economy, he said: attitudinal changes - people wanting to work for themselves; technology – which has sent the cost of doing business into ‘freefall’; and demographic changes (more older people).

Nigel Keohane, Research Director at the Social Market Foundation, said you have more people staying in self-employment today and they tend to be doing fewer hours. Older people are using self-employment to phase in their retirement rather than switching straight away. We have an employment policy that is really set up for people working for an employer rather than the self-employed, such as the ‘very significant’ employer national insurance contributions at nearly 14 per cent, he said.

Stuart Adam, Senior Research Economist, Institute for Fiscal Studies, said that the fastest rise and more uniform rise in self-employment come from people running their own companies, a consistent trend that goes back to at least 1991. There has been a rise in overall self-employment ‘in the last few years’ but it has not been ‘uniformly upward’, he added.[GC1] 

Minimum income floor

Universal Credit includes a minimum income floor (MIF) if you are gainfully self-employed, and your business has been running for more than 12 months. The MIF is an assumed level of earnings. This is based on what the state would expect an employed person to receive in similar circumstances. If someone’s self-employed earnings are below the MIF that has been calculated for them by the Government, the state will use the MIF to work out their Universal Credit award instead of your actual earnings.

Nigel Keohane said the minimum income floor derives from concern about fraud and that Universal Credit is meant to be paid on a monthly basis based on real-time information. “We did some work (snapshot) looking at the hourly rates of pay for people in self-employment and we came out with a figure of 45 per cent for the people in self-employment who are paid below the hourly equivalent of the national living wage. What one could look at are ways of allowing people to report their income in a very timely way and maybe instituting some checks on that. Essentially, you could say, ‘We are ready to tolerate the threat of some fraud’ and reduce the threshold a bit. That seems to me to be a reasonable approach.”

Victoria Todd, Senior Technical Manager, Low Incomes Tax Reform Group, said that, in the early years of tax credits, HMRC operated a ‘pay now, check later’ approach. Since April 2015, it has introduced a commercial test for the self-employed in tax credits. It is doing that test upfront and then at various points of the claim. That has identified some of the people who were claiming for long periods but declaring zero income.  For the self-employed who have fluctuating incomes, the MIF can be really harsh, she said. Some of the examples in LITRG’s written submission showed that, out of an employed person and a self-employed person who had the same annual income, the self-employed person could end up with £2,500 less Universal Credit over 12 months. That is because of the MIF and their fluctuating income. The other area where it hits hard is if someone has big business expenses in one particular month. One of the disparities between the employed and self-employed is around pension contributions, she said.

Benedict Dellot said that the RSA had done a case study of two people who earn exactly the same amount over a year: £15,000. Person A earns that through regular monthly payments. Person B earns it through irregular monthly payments alternating between something like £1,650 one month, £850 the next. Person A is better off over the course of the year by something like £600, yet they earn exactly the same amount over those 12 months. That is not a fair system, so we have to do something about that, he said.

Stuart Adam suggested that you can just change the length of the 12-month MIF period. You could make it longer or, indeed, shorter. His second suggestion is that you could give some discretion in applying it. Rather than a minimum income floor just kicking in after 12 months, you could say it kicks in at a certain level and then the level gradually ratchets up over time. To deal with volatility, you could use a 12-month rolling average of their income rather than just assessing it on their income in a particular month, he added.

Tax credits and universal credits

Victoria Todd was not aware of any government statistics in relation to the self-employed on tax credits. Todd said there is not really a willingness to talk about the policy around the MIF with DWP. She is warm to the idea of averaging of incomes for MIF.

Nigel Keohane said the SMF found that 500,000 households with an individual whose main job is in self-employment are on the in-work benefit tax credits. It estimates that just under 200,000 would lose out under Universal Credit - that is, they would have less benefit income than they had when they were on the current system.

Benedict Dellot suggested extending the start-up period to 24 months. “If you are self-employed and you are applying for Universal Credit, you still have to go to the jobcentre and prove that your business is in pursuit of profit. Presumably, that would still apply if you extended it to 24 months. The way that Universal Credit exists right now, it may serve to sink businesses that may become viable in time, and we don’t want to have that situation. We should be conceiving of Universal Credit as a springboard as well as a safety net, and balancing that would be important.”

Benefit disparity (and national insurance and pensions)

Conservative MP Luke Hall asked whether, following the introduction of the new state pension, it was possible to draw out for debate the remaining disparities between self-employed people and employed people in terms of access to benefits and how this should be addressed, and specifically its potential implications for national insurance.

Stuart Adam said differences between the two types of employment are less and less.  With the rollout of the single-tier pension starting in April 2016, the self-employed accrue rights in just the same way as employees do. However, statutory maternity pay is more generous than maternity allowance for the first six weeks after having a child, and there is a difference. Adam agreed to a suggestion by Committee Chair Frank Field that IFS should do some calculations on the capital sums that the self-employed would have to accrue to buy a pension equal to the new state pension.

Benedict Dellot said that an option going forward is to have a national insurance top-up system. “If you are self-employed and you want to have access to things like the full statutory maternity pay and paternity pay, you may be able to top up your national insurance to receive those entitlements”, he said.

Todd said that under the new regime from April 2018 (once Class 2 is abolished) there will be a zero per cent rate between the SPL and the LPL – where a self-employed person will get credits. This levels things between the employed and self-employed – as the employed have always received NI credits between the LEL and PT. 

She said: "I don’t have a lot to add to the bigger issues, but one point that I want to flag up around disparity is to do with the changes and the abolition of class 2 for the self-employed. In April 2018 it will be the class 4 contributions that establish entitlement to benefits. One area that we are very concerned about is there has been a levelling between the self-employed and the employed, in terms of the small profits limit in class 4 to the lower profits limit. It will be the 0%, so effectively you will get credits if you have profit between those two levels. If your profit is below the small profits limit, then you would need to pay class 3 contributions, which at £14.10 a week currently is a lot more than the £2.80 class 2. Again, that is the same as the employed. Employed people below £112 a week would similarly have to pay at class 3. The difference is that for the self-employed, if their profit is just under that level for the year, they would have to pay 52 weeks to make a qualifying year for the state pension, which is about £733 to get that qualifying year for their pension; whereas an employed person could have 48 weeks of employment where they are getting credits and they would only need to pay four weeks at class 3 to make that a qualifying year. We are concerned about that disparity."

Solutions

Conservative MP (and chartered tax adviser) Craig Mackinlay said that Victoria Todd had highlighted “what I think is going to be a major problem, in that in 20 years’ time people may have been skating just below the Class 4 threshold so they will have paid no Class 4; whereas the system used to chase them for Class 2 to make sure that you are paying your contributions, there is no system to chase Class 3. It is a voluntary thing that you have to make a decision yourself. I am very worried that in 20 years’ time we will have an army of what have been fairly low-paid self-employed people expecting their state pension and being told, ‘Sorry, you have not built up entitlement’’’.

Steve McCabe MP (Labour) said that unless you are going to confer exactly the same benefits you cannot possibly shoehorn the self-employed into the existing scheme (paid for by NICs).

Nigel Keohane said work by the SMF shows employees take off significantly more time than the self-employed, that the employed save much more for a pension than the self-employed, and that the employed are much more likely - ‘I think twice as likely’ - to have received training than the self-employed. “The pension issue could be addressed quite easily, at least on the margins, by trying to mimic the auto-enrolment scheme that we have for self-employed maybe when they are making tax self-assessments”, he said. He made a general point: “Employers pay national insurance contributions. They are paying an apprenticeship levy. They are paying pension contributions as well, so we are putting responsibilities on them, much wider responsibilities.”

Benedict Dellot said sick pay is one of the biggest disparities, especially the lack of sick pay for the self-employed. Could you have a system that mirrors what NEST did for pensions, which is a state-backed insurance provider for the self-employed, he asked?  It would have to be mandatory, he added.

Dellot spoke about Dutch ‘bread funds’ as a possible solution. “What happens is you have 30 or 40 self-employed people who gather together and every month they put a small amount into a collective pot. When they fall sick they dip into that money and then they repay it when they return to full health. They are small-scale mutual schemes based on trust. They are not anything to do with the state. We are going to be doing some research over the next few weeks with the FSB to look into those different models to see whether they can be replicated in the UK”, he said.

He concluded by stating that “a fundamental point - and this is a much bigger picture - is that the elephant in the room here is employers’ national insurance contributions, when we are particularly talking about things like bogus self-employment. Long term, as a society, I think we should be trying to move away from tax on labour to taxing capital and taxing… unearned income more than taxing earned income”.

Tax free childcare

Victoria Todd said that we are getting more and more systems with different definitions, and as an individual it is ‘so confusing’ for people to understand all of these differences and to have different treatments.

The session took place on March 22 2017.

By Hamant Verma