More evidence of the collapse in self-employment incomes was published last week. The Resolution Foundation’s Earnings Outlook showed that the median weekly income of the self-employed is, in real terms, less than it was 20 years ago.
The gap between employee and self-employment earnings widened after the recession as the proportion of the workforce in self-employment rose to a record high.
On the same day, the Social Market Foundation also produced a report on low paid self-employment. They calculated that just under half the self-employed are being paid below the National Living Wage and that this rises to well above 50 percent in some sectors.
Furthermore, even before the introduction of the minimum wage, the self-employed were already more likely to be low paid than their employee counterparts in the same industry.
The discrepancy is only likely to get wider. The SMF report showed how difficult the self-employed find it to increase their earnings. Of the various routes out of low pay, the one most likely to succeed is a return to employment.
A widening gap between those on the minimum wage and the self-employed may lead employers to make greater use of self-employed labour. The numbers in self-employment fell as the economy recovered but began to rise again shortly after the National Living Wage was announced. This could be coincidence, of course, but the idea of using contractors as a minimum wage dodge must have occurred to some employers.
This isn’t just a problem for those struggling to get by on decreasing earnings. It’s a problem for the public finances too. As Sarah O’Connor said yesterday, the fact that more people are drinking from an ever-shrinking pool is finally dawning on our politicians.
Britain’s self-employed workers have caught the attention of policymakers, not least because their ranks are swelling while their incomes are shrinking. They account for 15 per cent of the workforce but earn less on average than 20 years ago. A debate rages over whether (and how) the government should intervene to support these workers, many of whom are happy, some of whom are not. Yet no one wants to deal with a more intractable problem — tax.
And while the self-employed are often accused of fiddling their taxes, even though the scope for doing so is pitifully small these days, it is the employers who have the most to gain.
Employees pay a higher rate of national insurance contributions (NICs) than self-employed workers. Employers, meanwhile, have to pay NICs on employees’ wages, but not on the money they pay to self-employed contractors. So the employer who chooses a self-employed contractor over an employee pays less, while the contractor takes home more. The exchequer is the loser, to the tune of about £2.85bn this year.
Not to mention the lack of sick pay and pension contributions which may well store up trouble for the future.
Perhaps the lower tax might be stimulating a new wave of entrepreneurship. Then again, maybe not.
You could argue this tax break is justified because it promotes entrepreneurship. But the proportion of self-employed people who employ staff of their own has dropped from 23 to 11 per cent since the turn of the millennium. The proportion who work more than 40 hours a week has dropped from 51 per cent to 35 per cent. If this is entrepreneurship, it is not the go-getting, job-creating entrepreneurship to which politicians usually allude.
The ONS Business population estimates published earlier this month show that the vast majority of the increase in the number of businesses is accounted for by those under the VAT turnover threshold.
That said, there are some promising signs in the latest set of figures. Until 2013, the number of businesses over the VAT threshold had barely kept pace with the increase in the workforce. In other words, it had remained largely flat while the number of low turnover businesses shot up. Since 2013, though, there has been a marked increase in the number of director only businesses turning over enough to be VAT and PAYE registered (the red section on the chart). In other words, enough to give their owners a reasonably stable income. There are over 180,000 more such businesses, an increase of 19 percent in three years. This is unlikely to give the chancellor the long hoped for self-employed tax bonanza but it does, perhaps, show that at least some of the newly self-employed have got into their stride and are starting to build sustainable businesses.
The overall picture, though, is still dire. It will take some time for the earnings of the self-employed to get back to where they were before the recession and the presence of an army of low paid self-employed might act as a drag on wages and encourage employers to substitute employees for cheaper freelancers. And if those freelancers are VAT-less, PAYE-less and NIC-less, that will be a problem for all of us in the end.