Low paid self-employed will be ‘worse off’ under Universal Credit

New research, released today by the Social Market Foundation (SMF), warns that around 40% of families (over 190,000 families) with self-employed earners who are in receipt of in-work benefits are likely to be worse off under Universal Credit.

Revealed: Worst sectors for low paid self-employment

The report, entitled Tough gig: Tackling low paid self-employment in London and the UK, shows that 20% of families with self-employed workers are claiming in-work benefits such as tax credits and housing benefits. When these are replaced by Universal Credit – which is being phased in by 2022 – many are likely to be worse off as the amount they can claim will be based on an assumption that they are earning the equivalent of an employee on the National Living Wage. The SMF estimates that around 45% of self-employed workers (1.7 million) are currently paid below the National Living Wage.

The SMF report – funded by Trust for London – raises further concerns about the continued rise in self-employment and the impact of the government’s low pay policies – such as the National Living Wage –  which are primarily aimed at employees. Around 1 in 7 UK workers are now self-employed according to official labour market statistics.

The report reveals the extent of low pay among the self-employed in five key sectors:

In the transport sector (includes taxi, lorry and coach drivers), 17% of workers are self-employed.

59% of these self-employed workers are estimated to be paid below the National Living Wage. There is a sharp divide between employee and self-employed; even before the National Living Wage was introduced: self-employed workers in this sector were 3.5 times more likely to be in low pay compared to employees.

In the construction sector (includes site workers, electricians, plumbers, painter and decorators) 41% of workers are self-employed.

Just under 40% of these workers are estimated to be paid below the National Living Wage, a lower proportion than the economy-wide average.

In the administration and support sector 36% of workers are self-employed.

Around 45% of these workers are estimated to be paid below the National Living Wage, close to the UK average for self-employed workers, and are largely employed in cleaning and gardening.

In the professional, scientific and technical sector 27% of workers are self-employed.

Around a third (31%) of self-employed workers are estimated to be paid less than the National Living Wage, lower than the economy-wide average, and are largely employed in design, photography and translation services.

In the wholesale and retail sector (includes sole traders, franchise holders and sales agents), 10% of workers are self-employed.

Around 55% of self-employed workers are estimated to be paid below the National Living Wage, higher than the economy-wide average.

The report highlights that a variety of different policies are likely to be required to tackle low paid self-employment. In some sectors, especially where rates of low pay are low, there may be potential for the low-paid self-employed to be supported into higher pay through training, negotiating higher rates, increasing the number of hours worked, or by finding work as an employee. Finding work as an employee doubles a low-paid self-employed person’s chances of escaping low pay, compared to staying in self-employment. In some sectors, the differing approach of tax and regulation appears to be driving changes in business models, potentially heightening the shift towards self-employment or what has come to be known as ‘false self-employment’, whereas other sectors are bucking the trend.

Key recommendations from the report fall into three main categories and include:

Addressing the tax & regulation gap between employee and self-employed:

  • Government should examine how it can minimise tax gaps between employees and self-employed, and avoid any future changes to the tax system that widen the tax differentials between employment statuses
  • HMRC should set up an accessible portal to inform workers about their rights and allow them to confidentially submit concerns about false self-employment. HMRC should set aside resources to investigate complaints related to false self-employment
  • The Low Pay Commission’s remit should be amended to ensure that it is explicitly required to take into account the effects on self-employment in making recommendations on future National Living Wage rate rises.

Giving the self-employed a stronger voice:

  • The Living Wage Foundation should explore how it can communicate its Living Wage rates to the self-employed and their customers, including through platforms
  • The Mayor of London should raise awareness of the implications of changes in the London Living Wage for the living standards of the self-employed
  • BEIS should explore how it could facilitate the setting up of specific staff associations for the self-employed in sectors where low pay and self-employment are above average. This exploration should examine the option of setting aside a small funding pot to help fund start-up costs for such associations.

Supporting the self-employed into higher pay:

  • The London Enterprise Panel should set up pilot training schemes for the low-paid self-employed, with evaluation of the impact training has on pay. As a first step, this should involve setting up a voucher scheme for low-paid workers in the construction sector to undertake certified training.
  • BEIS should work with platforms such as UBER to facilitate the development of a verified, portable ratings file that workers can download and take with them to future jobs
  • The government must recognise that staying in self-employment is not always viable and the Department for Work and Pensions should ensure Jobcentre Advisors are equipped and trained to provide support on making the transition from self-employed to employee, and moving across sectors, as well as business growth.
  • Low-paid self-employed individuals being moved from tax credits to universal credit should be given a 12 month exemption period from the minimum income floor to give them time to take steps to increase their earnings. This is separate to the existing 12 month period for start-up businesses.
“We have made great strides in tackling low pay among employees, however the self-employed have traditionally been overlooked. We welcome the government’s announcement that Matthew Taylor will lead a review into modern employment. Our report shows the scale of the low pay problem among the self-employed. If the government really wants to build ‘an economy which works for everyone’ – and deal with the problem of low pay among the self-employed – it must address the tax and regulation gap between employees and the self-employed, give the self-employed a stronger voice, and look at how training, better advice on business growth and wider opportunities can help people decide whether self-employment is the correct career path for them.”
Nida Broughton, Report author and SMF chief economist
“We are sleepwalking into a situation where increasingly self-employment means a life of poverty and hardship with few protections. This report shows the self-employed were twice as likely to be in low pay as employees even before the National Living Wage came in this year. That’s 1.7 million paid less than £7.20 an hour. The introduction of Universal Credit risks pushing even more of the self-employed into hardship, with around 190,000 families being worse off. Government must give much greater attention to this issue, particularly if it wants to avoid creating disincentives for people remaining in work.”
Mubin Haq, Director of Policy & Grants at Trust for London