Self-employed slide further into poverty

The state of self-employed incomes doesn’t seem to be getting any better. Research published by the Social Market Foundation yesterday found that the proportion of low paid self-employed, based on both hourly and monthly earnings, has increased significantly since the recession.

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Around 55 percent of the self-employed have monthly incomes that are less than two-thirds of median employee earnings.

This, says the SMF, is only going to get worse once the National Living Wage comes in. The self-employed are not covered by the NLW so, as the NLW rate rises, the gap between the self-employed and employees will increase. By the end of the decade, the SMF calculates that over half the self-employed will be on hourly rates below the minimum wage.

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The research also found that a majority of the low paid self-employed don’t have any income from other sources and even where they do, most don’t have very much. Some of the self-employed might be hobby-jobbers with income from elsewhere but for most of them, their business is their main gig.

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This bears out Michael O’Connor’s findings last year, based on a FOI request to HMRC, that, whatever their other sources of income, the mean incomes of the self-employed are, well, mean!

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The widening gap between self-employed pay and the minimum wage will cause problems for those people claiming tax credits. Universal Credit will start from the assumption that someone is making the minimum wage and will then top up their income accordingly. It will make no allowance for those who might be earning less. This can only make the income gap between the employed and self-employed even wider.

This army of impoverished freelancers may prove attractive to employers who want to keep their wage costs down. The SMF comments:

Effectively, with the National Living Wage acting as a floor for employees, there is a risk that low pay continues to exist, but largely invisible, through self-employment. Further, the self-employed are not entitled to same rights as employees, such as holiday and sick pay. There are different tax implications: elements of National Insurance do not apply to the self-employed. This means that this is not simply an issue of an excluded group living in greater relatively poverty. The divide in the way in which Government treats employees and the self-employed is making it artificially cheaper for firms to move to a model of firm-contractor, and away from the employer-employee model of working.

The steady fall in self-employment after mid 2014 went into reverse almost from the day the National Minimum Wage was announced. Last month, self-employment reached another record high. Many firms seem to lack the resources or capability needed to make the sort of productivity gains that would cover the cost of the NLW. It will therefore be tempting for them to side-step the problem by replacing employee jobs with new self-employment opportunities.

As the old saying goes, the poor will always be with us. Now, though, we call them micropreneurs. Perhaps that takes some of the sting out of what is otherwise a truly mind-boggling pay collapse.

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5 Responses to Self-employed slide further into poverty

  1. Graeme says:

    So what is happening is not that people, or the sort of people, who used to be self employed are making less money, but that employers replacing low paid employees with contractors?

    Is the definition used here based on tax or employment based definitions? Are they clearly self-employed (e.g. supplying their own tools, deciding their own working hours, working without direct supervision and all the rest of the stuff from the definitions) or do they barely/dubiously qualify as self-employed?

    I also wonder whether the definition of employee is being applied as strictly to the low paid as they are to those with higher incomes where HMRC have a motive to dispute it.

  2. It would be interesting to know how much use HMRC are making of their new (2015-16) self-employment test for determining eligibility to working tax credit. Self-employment claimants must now be able to show that their work is commercial (profitable or with a plan for achieving profit), regular and organised.

  3. It’s a bit simplistic to say “Universal Credit will start from the assumption that someone is making the minimum wage and will then top up their income accordingly”. There is a ‘minimum income floor or assumed income but higher real incomes will reduce Universal Credit. More worrying for self-employed people should be the sheer work in providing DWP with income and expenditure details *every month* and the dreadful consequences of varying earnings or seasonality.

  4. Pingback: Preparing young people for modern self employment | SecondaryCEIAG

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