HR · 30 October 2017

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

Universal credit
Ministers have been warned that universal credit fails to account for fluctuating incomes among self-employed workers

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.

Read more: HMRC urged to publish guidance on planned self-assessment allowances

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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Simon Caldwell is deputy editor at Business Advice. He has a BA in politics and communications from the University of Liverpool, and has previously worked as a content editor in local government and the ecommerce industry.