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.
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