Universal Credit: How to make it work for the self-employed

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The saga surrounding the government’s flagship welfare reform policy, Universal Credit (UC), continues to rumble on and is coming under increasing political pressure, with concessions already made on a free phoneline and waiting times for payment.

Now attention is turning towards how the self-employed are affected. Last week, IPSE’s Deputy Director of Policy Andy Chamberlain gave evidence before the Work and Pensions Select Committee on the subject. While recognising the rationale to simplify the benefits system and incentivise work, Chamberlain emphasised that UC unfairly creates problems for the self-employed.

At root, the issue is that UC actively penalises the self-employed for having a volatile income. Despite earning the same over the course of a year, a self-employed person can end up £3,000 worse off than an employee. This is clearly unfair, and results from what is known as the ‘Minimum Income Floor’ (MIF).

The MIF typically assumes a level of earnings equivalent to a full-time employee earning the national minimum wage. Where earnings fall below this level in any given month, an individual’s UC entitlement is not topped up to reach the MIF. However, in months where they earn over the MIF, for each pound they earn over the MIF, 63 pence will be deducted from their entitlement. By not topping up their entitlement in months where earnings are low, and reducing their entitlement in months where earnings are above the MIF, the self-employed are not being treated fairly.

This system of monthly assessment simply does not work for the self-employed who often have uneven income across a year. For example, a farmer will sell or produce crops only at a particular time of year and will therefore be penalised by the system. Similarly, self-employed businesses will face large one-off costs such as an insurance premium or storm damage that will skew the profit figures for any given month. There must be greater flexibility in the system if it is to work for the self-employed.

On top of the financial hardship many self-employed people are facing, the accounting rules under UC are creating significant problems. This is because the self-employed are forced to account twelve times a year to Department for Work and Pensions (DWP) on one basis, and once a year to HMRC on a different basis. The government must urgently review the impact that UC is having on the self-employed, particularly around the MIF and whether the system can be made to work more fairly for the self-employed.

Politicians from all parties seem to have acknowledged the problems that UC is creating for the low earning self-employed, but the government still appears to be oblivious. Earlier this week, new Employment Minister Alok Sharma MP and the Director of UC Neil Couling, were questioned about the policy in front of the Work and Pensions Select Committee.

Couling revealed that rather than looking to support people to grow their businesses, UC is:  "designed to incentivise people towards employment”. Sharma appearing to miss the point around volatile incomes, stated: “you should be constantly looking at how to increase earnings…if you are a farmer, business support mentors can help you increase earnings in slow months”. This ignores the fact that some businesses are seasonal by nature – in those ‘slow months’, the farmer will be literally sowing the seeds that bring him his earnings later in the year.

This hostile attitude from civil servant and government minister alike is sadly symptomatic of a government that actively wants to push people out of self-employment. Whether it’s IR35, National Insurance, Making Tax Digital or Universal Credit, there seems to be a wilful lack of understanding of what it means to be self-employed. As well as hitting individuals who want the freedom to work for themselves, this approach also hurts the UK economy which benefits hugely from the flexible expertise that the self-employed deliver.

Hopefully the government starts to see sense and limits the damage from Universal Credit and other disastrous policies such as IR35. IPSE will continue to make the case tirelessly to policymakers and ensure the voice of independent professionals and the self-employed cannot be ignored. 

Meet the author

Jordan Marshall

Policy Development Manager