The disappearing benefits of self employment

October 23rd, 2014

The Social Security Advisory Committee (SSAC) has called on the Department for Work and Pensions (DWP) to review the levels of social security contributions and entitlements of both self-employed and employed workers. The SSAC is an independent statutory body that provides mandatory scrutiny of most of the proposed regulations that underpin the social welfare system.

The SSAC has published a report which reveals that self-employed people now account for 15% of the UK workforce, compared to 12% in 2000, and that, although the self-employed generally have lower incomes and pension savings than people in paid employment, they face a variety of differences in relation to their treatment within the current benefits system.

The report also highlights concerns about the introduction of Universal Credit, such as how fluctuating income from self employment is dealt with, and the potential for the system to interfere with, or distort, business decision-making. The report recommends that simplifying the definition of self employment should also be investigated.

Universal Credit has been designed to overhaul the welfare system and ensure that it is gainful work – whether employed or self-employed – rather than benefits that pay. But under proposals to streamline benefits, the claimants who face the greatest concerns from the new system are the self-employed who have very low levels of earnings.

Currently, self-employed people with income that is well below the National Minimum Wage (NMW) are entitled to benefits such as Working Tax Credits, Housing Benefit, and Child Tax Credits, similar to people in paid employment.

These benefits are being replaced by Universal Credit (UC) which is expected to be received by around 700,000 ‘self-employed families’ (defined as where self employment is the main employment for at least one person in the family).

The changes involved in moving from the current system to UC will have a significant impact on the self-employed sector. An example of this is the introduction of the ‘minimum income floor’. This will limit the amount of means-tested support which a self-employed claimant can receive, by assuming a level of income equivalent to the National Minimum Wage of a similar claimant in paid employment.

Under the new UC system, self-employed people will have their benefits tied to this minimum income floor, and anyone who earns below this level will not receive any additional UC to make up the difference. If they earn above this level, their UC entitlement will quickly tail off.

The DWP is introducing this new requirement in order to encourage self-employed people to grow their business, rather than nudging along at minimal income levels while relying on state benefits. However, a major flaw with this requirement is that the assumed minimum income level is set at the NMW for working a 35-hour week, which equates to almost £1000 a month.

In reality, a significant number of self-employed traders will never reach this minimum income level and, as a result, could be forced to make business decisions that they wouldn’t otherwise make, or may even be forced to cease trading.

In response to this, the DWP has acknowledged the time it can take to establish a new small enterprise and generate enough sales to provide a reasonable income and living. As a result, there will be a ‘Start-up Period’ under UC, which means that self-employed people will be exempt from reaching the minimum income floor in their first 12 months of trading. But again, in reality, in a substantial proportion of cases, it takes considerably longer than 12 months to get a small venture established, and many sole traders and freelancers could spend a year working hard to build their new firm only to have their benefit entitlement reduced because they haven’t achieved their assumed minimum income level.

Under the UC system, the newly self-employed will be also be interviewed by an adviser at Job Centre Plus, and may be asked to provide a business plan and evidence of invoices and similar business records on a monthly basis to prove that they are genuinely trying to grow their business. If Job Centre Plus believe they are not making a serious effort to run a viable business, then they will be forced to find other paid work or lose their benefits.

The SSAC have highlighted all of these concerns to the DWP in their report and have made several recommendations to tackle the various issues.

Click here to read the full report and the SSAC’s recommendations.

To comment on this article you can do so below.

6 responses to “The disappearing benefits of self employment”

  1. Jay sparrow says:

    It is extremely difficult to find enough hours of work as a freelance self-employed consultant to achieve £600 per month, never mind £1000. As a single parent with caring responsibilities for a 16 year old child and a 91 year old parent, it is difficult to work more than 16-20 hours per week – even if I can find someone to give me the extra work (which I can’t). The family businesses which have given me sone hours of work will,not pay more than £8.50 or £10 per hour, even though I have several postgraduate qualifications.

    Now as a female of 60, my pension age has been increased by 6 years – so quickly has this been changed from 60 years to 66 years that I haven’t had time to plan for retirement and neither do I have the means. I do not earn enough income to pay the rent, I cannot achieve enough hours to have a ‘proper’ job, and I cannot carry out my caring responsibilities properly because I am not free at the times when my child and elderly parent need me because I have to work.

  2. Tracy says:

    The Govt have been pushing the long term unemployed to become self – employed to remove them from the unemployment figures ( for many of whom this is just not suitable) and now this proposal to cap benefits if they are not “enterprising”. I certainly can’t imagine a job centre advisor being able to make a judgement on how a business is developing, they don’t have the skills or knowledge to do so.

    And how many self employed freelancers work 35 hrs a week! ? this proposal makes no allowance for industry sector, e.g the arts sector would be hit badly by this.

  3. Barbara Robinson says:

    I took my pension at the age of 60 as the government requested all those born in the the late 1940’s to accept retirement.

    As I was struggling to find work and had a child that needed my help with schooling (some Autistic spec Learning problems) I agreed to take my retirement. That was just over 5 years ago. Sure I have guaranteed Pension Credits which has ensured that I have to live in a cramped and small flat, with one small single Bedroom and one Double Bedroom. When my daughter turned 18 my housing benefits dropped and my daughter now has to pay £67 towards our rent – she has not even completed the first year of high school!

    Well stuck in this flat I thought maybe I should go back to work to get us out of this situation. No-one wants to lease a nice flat to someone on DSS! Yes, work all your life – move to the UK live and work here 14 years ( plus the years I worked as a student in the sixties), have Indefinite leave to remain and they have to top-up my pension so I am classified DSS. My pension is very minimal – £5 per person per day for food – That’s what the government says is what we need to live on food wise. This is almost impossible and where is any quality of life to come from. With soaring costs and retail prices life is great for those in business with good incomes but not for state pensioners.

    I am a young 65 and still very active with numerous qualifications – wanting to be self employed as an artist or crafter. From what I have read – some manage but others never make enough to cover more than their basic costs. Am I allowed to sell my own paintings on eBay or Etsy? and build up to calling it a business, or do as I am told and get penalised for selling my picture/pictures for a couple of hundred pounds and not telling them I am trying to make an income to replace my Pension?

    All comments and help will be most appreciated.

  4. SK says:

    Well, It is time to say good bye to that Island. I hope Mr. Cameron will do his own self-emplyement one day and see how it is with their measures.

  5. Zara says:

    Thats very nice article for whom are not self employed and neither involve in benefit services, its very well treated welfare service. But i am self employed with a teen 13 years old and live in one bed. Since the benefit services found i am self employed they treated my family and i honestly badly. They did not only encourage me to carry on my jobs also i heard many times even from well known advisory services that rely on benefit services much much easier being freelancer in benefit service! So its very hard to belive para 10 of article. Such an experiences my family and i experienced for nearly one year because of being self employed thats enough to be mental healrh clients!

  6. Ann says:

    It is so greatly disappointing that the Art Sector is going to be badly hit by the Universal Credit. I was under the impression that the UK was a supporter of Art and Culture but it is not. Treating the Art Sector like any other type of business is just not right.

    The Self Employed in the Art Sector in the UK will be pushed to stop creating and trading, and will have to go and do some cleaning work as this will be classified a gainful work by the Government. No more self employed writers to produce more memorable books like Jane Austen’s. Good bye Arts and most probably Good bye small businesses.

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