Payroll

Universal credit leaving self-employed over 2, 000 a year worse off than employees

Low-income self-employed workers face being at least 2, 000a 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.

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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.

Thelobby grouphanded 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 themIF 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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