COMMONS

Chair calls for Budget move to stop penalising self-employed

14 November 2017

Case study shows self-employed parent of two is three hundred pounds a month worse off than employee under Universal Credit.

Fix flaw in Universal Credit

Rt Hon Frank Field MP, Chair of the Work and Pensions Committee, is today calling on Government for a Budget announcement to fix a flaw in the design of Universal Credit (UC) which can leave the self-employed far worse off than employees earning exactly the same annual pay.

He said:

"Universal Credit is riddled with design flaws. At the moment it penalises the self-employed, acting as a disincentive to entrepreneurship and an unfair punishment of those with volatile incomes.

This is further evidence of a welfare reform not geared to the realities of modern work.

A family could be left several thousand pounds worse off over the course of a year, compared to one in otherwise identical circumstances, simply because their earnings rely on the often volatile returns of self-employment.

It has taken the Government six months and counting to respond to our recommendation of reform.

I can only hope and assume that there will be some good news on this front in the Budget."

In a letter to the Secretary of State (PDF PDF 518 KB) the Chair of the Committee spells out these concerns, supplementing evidence from individual entrepreneurs who have stressed that Universal Credit can work against the self-employed or even push them out of business.

Self-employed much worse off

Universal Credit includes a Minimum Income Floor (MIF) for self-employed claimants which kicks in just 12 months after a business is set up.

Under this system, the amount of Universal Credit received is calculated on the basis that they earn at least that amount every month, whether they actually do or not.

For most people the MIF is the equivalent of 35 hours per week at the National Living Wage, or £1,138 a month.Self-employed claimants can lose out in this system because they can have volatile incomes.

For example, those with seasonal incomes, like farmers, can be particularly badly affected. In months when they have relatively high incomes, they are eligible for no or low Universal Credit - their Universal Credit payment is reduced to the same level as for employed claimants earning that amount every month.

In months when they earn little or no money, the system assumes that they earn at least the MIF.

In more lucrative months, this could leave a self-employed single parent of two self-employed workers over £3,500 a year worse off than the equivalent employee with identical annual earnings.

Stifling entrepreneurship

In its 1 May 2017 report into self-employment and the gig economy the Committee also found the application of the MIF can have the unwelcome side-effect of stifling entrepreneurship.

The Committee said that ensuring that UC is appropriate for the "large and growing" segment of the UK workforce that is self-employed, required "urgent action" and should be "a priority for the incoming government".

The Committee said the MIF should not apply to self-employed UC claimants until the policy had been independently reviewed, and set out various possible options for MIF reform:

  • Extending the Start-up Period, or tapering the MIF up over a longer period than one year to avoid producing a cliff-edge at the end of year one;
  • Applying the MIF on an annual or quarterly basis to help avoid penalising claimants with volatile incomes;
  • Basing the MIF on turnover and evidence of future profit, rather than income; and
  • Removing the MIF altogether. The requirements of claiming UC as a self-employed person may be sufficiently onerous to put off people who might view self-employment as an easy way of avoiding UC conditionality. This would imply that a key purpose of the MIF—discouraging unprofitable self-employment—is redundant.

Case study

Jack and Jill are both single parent of two children. They pay the same rent and have the same annual earnings.

But because Jill is self-employed and has a quarterly income, she has a total net income of more than £3,500, or £300 per month, less than Jack.

Jack

Jill

Single parent of two children Single parent of two children
Rent of £150 per week Rent of £150 per week

Earns £13,650 per year
(35 hours per week at National Living Wage)

Earns £13,650 per year
Employed Self-employed
Paid monthly Receives quarterly payments
Annual UC award: £10,737 Annual UC award: £7,152 (£3,585 less)
Annual net income: £23,296 Annual net income: £19,730 (£3,567 less)

The Government has cited Surplus Earnings Rules, which come into operation in April 2018, as a means of adapting Universal Credit for volatile incomes. They would, however, make no difference in this case. 

further breakdown (XLSX XLSX 14 KB) of the impact of Universal Credit Minimum Income Floor on case study families is available to view.

Further information

Image: iStockphoto

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