Low-income self-employed workers face being at least £2,000 a year worse off than regular employees with the same earnings under universal credit, according to new analysis of the government’s flagship welfare reforms.
The introduction of universal credit has seen a number of existing benefits combined into a single payment, and gradually replaces working tax credits as the primary welfare support for the low-earning self-employed dependent on in-work benefits
After analysing the terms of universal credit, the Low Incomes Tax Reform Group (LITRG) has warned that some self-employed business owners could even be forced out of trading altogether due to an inefficient one-size-fits-all structure that unfairly penalises entrepreneurs.
According to Anna Fairpo, LITRG chair, the most concerning aspect of the reforms is the minimum income floor (MIF), a claimant’s expected monthly income after tax and national insurance has been deducted, which “fails to account for fluctuating earnings or one-off large business expenses”.
“This can lead to a situation where a self-employed claimant with fluctuating earnings can receive substantially less universal credit than an employed claimant earning a similar annual income above the level of the current minimum income floor. We cannot believe that is an intended consequence,” Fairpo warned.
Within the report, it was suggested there was a “very real possibility” that people would be discouraged from entering self-employment, while existing claimants “may be forced to give up their work”.
Analysts at LITRG claimed to have undertaken tests which showed numerous cases of a self-employed person earning the same across a 12-month period as an employed person but left worse off financially.
“In one example, the self-employed person received £2,600 less universal credit than their employed counterpart. We cannot see how this can be fair,” the report stated.
The lobby group handed ministers a series of recommendations to reform universal credit in support of self-employed workers.
Primarily, LITRG has called for greater flexibility for self-employed claimants, particularly with regards to the MIF. As the MIF means claimants are assumed to earn a minimum level of income each month, seasonal businesses and those with fluctuating income and high one-off expenditure could be at a disadvantage. LITRG has suggested the MIF could be averaged over a relevant period, or 12 months.
The government has implemented a 12-month “start-up” period in an attempt to protect self-employed business owners, but LITRG has pressed for a longer 24-month introduction.
Fairpo added: “Without further changes, there is a real risk that those thinking about starting out in self-employment will be dissuaded and those already in self-employment may be forced to give-up before they have been given a chance to grow their businesses.
“We urge the government to consider our recommendations carefully and make the necessary changes to the existing rules.”
Up to 60 per cent of self-employed workers under-report their income to HMRC
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