David Kirkby, Bright Blue, on the impact of Universal Credit on self-employed people on a low income

Britain’s labour market is one of the most flexible in the world, and increasingly, workers are opting for the most flexible part of it: self-employment. Between 2008 and 2014, the number of individuals self-employed rose by 732,00. Casting aside the traditional workplace, self-employment can offer more choice over how to work and when to do it.

However, while self-employment can be liberating, for many, state support is essential. Earlier this week, Bright Blue published its report Standing alone? which focuses on self-employed individuals who are in ‘low income’ households – households with gross income below 60% of the median. We found that 20% of self-employed individuals reside in a low income household, compared to only 10% of employees. As such, we estimate that approximately 900,000 individuals in the UK are self-employed in a low income household.

We found that this group are more likely to claim benefits (42%) than employees in low income households (38%). Furthermore, their financial resilience standing behind this government support is often weak. Self-employed individuals in low income households have a lower savings rate than employees in low income households. In our polling, income volatility and fluctuations came through as the biggest challenge they face in their job (55%).

Given these factors, the transition to Universal Credit, which is currently being rolled-out, is highly significant for many self-employed individuals. Once fully implemented, self-employed claimants who would have previously received mean-tested tax credits or Housing Benefit will receive Universal Credit.

There are a number of new rules which apply uniquely to self-employed claimants of Universal Credit. Claimants will undergo a ‘gateway interview’ to determine whether they are ‘gainfully’ self-employed – similar to the ‘remunerative work test’ for self-employed claimants of Working Tax Credits, implemented in 2015. They will also be obliged to report their earnings on a monthly basis. Monthly reporting of earnings in particular will increase the administrative burden upon self-employed claimants.

The most significant new rule which self-employed claimants will face is the Minimum Income Floor. This is a level of earnings which self-employed individuals are assumed – for the purposes of Universal Credit – to receive, irrespective of actual earnings. The Minimum Income Floor is set at a level equivalent to a certain number of hours worked at the National Minimum Wage. Even if a self-employed person’s earnings fall below this level, they won’t receive extra payments through Universal Credit to make up the difference.

While the Minimum Income Floor is intended to prevent the state propping up unviable businesses, there are concerns that meeting this Minimum Income Floor will not be possible for many claimants with still nascent businesses. There is a ‘Start-up’ period of 12 months, during which time new claimants are exempt from the floor, but it has been argued that this is not sufficient. A recent government survey of self-employed individuals who had become self-employed 12 to 24 months previously found that over half of the claimants reported a turnover (income prior to expenses being paid) of less than £1,000, with over a third reporting a turnover of less than £500. Applying a Minimum Income Floor of 35 hours per week at the National Minimum Wage indicates that the majority of this group would be affected.

The bottom line is that meeting the Minimum Income Floor will be a significant challenge for a large proportion of self-employed Universal Credit claimants on low household income. This is set to be exacerbated by the implementation of the new National Living Wage (NLW). While NLW is not applicable to the earnings of self-employed people, the Minimum Income Floor will be calculated according to rates of NLW. As the NLW rises over the course of this Parliament, so too will the level of earnings self-employed Universal Credit claimants are expected to have. A higher NLW may benefits employees, but it will reduce the amount of Universal Credit self-employed claimants can potentially receive.

As well as causing claimants financial difficulties, the Minimum Income Floor will also present informational challenges: ensuring that claimants are properly informed and fully understand the rules. The rules are complex and are applied differently in individual cases – the hours a claimant is expected to work per week depends upon their household circumstances. Moreover, the concept of an income floor is rather misleading; the Minimum Income Floor is arguably better conceptualised as a cap on benefits rather than a floor for income. A Department for Work and Pensions study has found that self-employed individuals struggle to understand the Minimum Income Floor and how it operates.

Universal Credit is a welcome and important welfare reform, but it poses difficulties for the self-employed, particularly the Minimum Income Floor. Policymakers will need to monitor its impact on self-employed claimants carefully. We also recommend implementing a new system of personal welfare accounts for the self-employed, which they would be required to pay into and then could draw down on in times of need. This should include when they are subject to the Minimum Income Floor.

By David Kirkby, Senior Research Fellow, Bright Blue – @kirkbydj