Freelancers’ confidence in their businesses and the UK economy
Table indicates outlook for the next 12 months.
Confidence in the UK economy for the next 12 months
Confidence in their business for the next 12 months
Top factors lowering business performance in Q2 2021
Top factors enhancing business performance in Q2 2021
Freelancers were asked to rate the importance of 15 different factors affecting the performance of their business in categories ranging from significantly positive and slightly positive, to no impact, slightly negative and significantly negative impact.
Amidst the backdrop of rising inflation and experiences across the UK of fuel and stock shortages as a result of the pandemic and Brexit, freelancers could be expected to be less confident in their own businesses this quarter compared to last quarter where optimism around the re-opening of the economy and ending restrictions produced increased confidence levels.
The imposition of IR35 reforms in the private sector in April 2021– where freelancers must now contend with the fact that the responsibility for deciding the employment status of freelancers has moved to the end-clients for medium and large sized private business clients - could be expected to reduce freelancers’ confidence in their own businesses this quarter as a result of their diminishing control over status determinations and how they operate.
The results this quarter in fact reveal a dramatic decrease between Q2 2021 and Q3 2021 (from 8.2 to -2.4), returning to negative levels after initial optimism in Q2 2021 over the ending of restrictions.
The Q3 2021 Confidence Index represents the first quarter after the bedding-in period of the April 2021 IR35 reforms, likely revealing the true impact of the changes to the sector.
Looking at freelancers’ confidence in their businesses over the next three months more closely reveals that there were decreases in confidence across all three SOC groups. SOC2 professional freelancers and SOC3 associate professional and technical freelancers both experienced decreases in confidence from the last quarter (3.6 to -6.0 and 7.6 to -5.3 respectively), returning their confidence to negative levels. SOC1 managerial freelancers also saw decreases in confidence from 15.9 in Q2 2021 to 7.5 this quarter but remained in positive territory.
Freelancer confidence indices for their businesses over the next three months
Freelancers were asked to identify their confidence levels for future relative to current performance in one of five categories comprising: more confident, slightly more confident, as confident, slightly less confident, and a lot less confident. The confidence index is created by scoring each of five answers with 100, 50, 0, -50 and -100 respectively and then taking the weighted average score for the sample. The weighted average is based on the relative size of freelancers in the labour market in 2020.
Freelancer business confidence for the next 12 months had previously increased from -15.6 to 13.3 between Q1 2021 and Q2 2021, largely driven by a significant increase in business confidence amongst SOC1 managerial freelancers. This quarter, however, average 12-month business confidence has decreased from 13.3 in Q2 2021 to -2.6, returning to negative levels.
In line with the three-month business confidence levels, all three SOC groups experienced decreases in their 12-month confidence levels since Q2 2021. In fact, SOC2 professional and SOC3 associate professional and technical freelancers experienced the largest decreases, falling from 3.5 to -13.2 and 19.2 to 0.0 respectively. SOC1 managerial freelancers also reported a fall in business confidence over the next 12 months but remained in positive territory, falling from 18.5 in Q2 2021 to 8.8 this quarter.
Freelancer confidence indices for their businesses over the next 12 months
Freelancers were asked to identify their confidence levels for future relative to current performance in one of five categories comprising: more confident, slightly more confident, as confident, slightly less confident, and a lot less confident. The confidence index is created by scoring each of five answers with 100, 50, 0, -50 and -100 respectively and then taking the weighted average score for the sample. The weighted average is based on the relative size of freelancers in the labour market in 2020.
Top factors which lower freelancers’ business performance
Freelancers were asked to rate the importance of 15 factors which can affect the performance of their business in categories from significantly positive, slightly positive, no impact, slightly negative, significantly negative.
Looking at the factors that freelancers identify as having a negative influence on their business performance, we now see some interesting changes from Q2 2021. Last quarter, the Coronavirus pandemic was cited as the top factor negatively affecting freelancers’ business performance, after government tax policy relating to freelancing held the top space in the run-up to the changes (Q1 2021). However, we now see that in Q3 2021, government tax policy relating to freelancing has returned as the most detrimental factor impacting freelancers’ business performance, cited by 70.8 per cent of freelancers this quarter compared to 54.9 per cent in Q2 2021.
This can be largely attributed to the fact that IR35 reforms in the private sector have now had sufficient time to impact the sector, with many end-clients and freelancers still waiting to see the true impact of the reforms in Q2 2021.
The Coronavirus pandemic is now the third most selected detrimental factor for freelancers, with 63.0 per cent citing this factor. The fact that the Coronavirus pandemic has now been removed as the top factor suggests that the easing of restrictions and the full re-opening of the economy has lessened the impact of this negative determinant for freelancers. However, with almost two thirds of freelancers citing it as a negative influencer, it is clear that the pandemic continues to impact freelancers’ business performance.
Government regulation relating to hiring freelancers was the second most selected factor across all freelancers, cited by 64.2 per cent and driven by increases in both SOC1 managerial (62.5%) and SOC2 professional freelancers (80.8%) reporting this as a negative influencer compared to Q2 2021 (51.1% and 67.4% respectively).
Further review of SOC groups reveals that government tax policy relating to freelancing was the top factor this quarter for both SOC1 managerial and SOC2 professional freelancers (71.4% and 84.3% respectively) – the two groups most likely to be affected by the introduction of IR35 reforms in the private sector. For SOC3 associate professional and technical freelancers, the Coronavirus pandemic (70.0%) was the greatest factor negatively affecting their businesses with the state of the UK economy (58.4%) and government tax policy relating to freelancing (57.8%) the next highest cited negative factors.
In addition, the state of the UK economy was also cited by SOC2 professional freelancers (63.1%) as the third greatest factor lowering business performance whereas SOC1 managerial freelancers ranked the Coronavirus pandemic as their third most detrimental factor.
With government tax policy relating to freelancing returning to the top spot as the most negative factor impacting freelancers’ business performance – and the proportion of freelancers citing it as a negative factor increasing by 29 per cent compared to Q2 2021 – the sector is now reporting the full impact of the IR35 reforms as being deeply damaging to their freelance businesses.
The positive factors enhancing freelancers’ business performance this quarter remain unchanged from Q2 2021. The importance of brand value and reputation in the market continues to be the top factor positively influencing freelancers’ business performance, with 60.0 per cent selecting this.
The second factor most positively enhancing freelancers’ business performance was innovation in terms of the services offered to clients, with 51.1 per cent of freelancers citing this as a positive factor whilst collaboration with other freelancers and businesses to secure more work was the third greatest enhancer for freelancers (51.0%).
In terms of breakdown across SOC groups, SOC1 managerial and SOC3 associate and technical professional freelancers both cited the importance of brand value and reputation in the market as the most beneficial factor for their business performance (66.7% and 57.3% respectively). SOC2 professional freelancers, however, cited the adoption of flexible working practices by organisations as the greatest enhancer to their business performance (60.4%), and represents the first time that a SOC group has rated this as the most enhancing factor since the establishment of the Confidence Index in 2014.
Innovation in terms of the services offered to clients was cited by 58.2 per cent of SOC1 managerial freelancers and 52.8 per cent of SOC3 associate professional and technical freelancers as enhancing their freelance business performance.
For SOC3 associate professional and technical freelancers and SOC1 managerial freelancers, collaboration with other freelancers and businesses to secure more work was also considered a key enhancing factor (56.8% and 54.5% respectively).
Overall, freelancers’ brand value and reputation in the market continues to be the most important factor enhancing their business performance and all three of the top positive factors are largely attributed to freelancers adopting the right business strategies to secure work.
Top factors which enhance freelancers’ business performance
Freelancers were asked to rate the importance of 15 factors which can affect the performance of their business in categories from significantly positive, slightly positive, no impact, slightly negative, significantly negative.
Despite the Office for Budget Responsibility reporting that the UK economy is bouncing back from the pandemic more quickly than expected with earnings rising and job vacancies at a record level1, confidence in the economy is ultimately being affected by what people are experiencing – fuel shortages, rising energy prices, tax increases, stock shortages and rising inflation.
Freelancers’ confidence in the UK economy, much like confidence in their own businesses, has significantly decreased compared to last quarter – falling from 16.8 in Q2 2021 to -16.3 this quarter.
This significant decrease compared to Q2 2021, after initial optimism in the economy between Q1 and Q2 2021, closely aligns with recent findings on consumer confidence in the UK, which fell for the first time since Q4 2020 amid concerns over personal finances.2 Echoing these concerns over personal finances, diminishing confidence amongst freelancers can be attributed to the impact of IR35 and gaps in government support during the pandemic affecting freelancers’ finances. In fact, with 60 per cent of freelance businesses reporting that they have seen a decrease in turnover as a result of the pandemic3 and a further 18 per cent reporting that they are not currently working due to the IR35 reforms4, it is unsurprising that freelancers’ confidence in the economy over the next three months has decreased.
Whilst SOC1 managerial freelancers saw the biggest increase from Q1 to Q2 2021 (from -15.4 to 23.9), they also now experience the largest decrease from Q2 2021 to this quarter, falling from 23.9 to -16.4.
SOC2 professional freelancers also saw a significant decrease compared to last quarter, falling from 14.0 in Q2 2021 to -19.9 this quarter. Although SOC3 associate professional and technical freelancers experienced the smallest decrease in three-month confidence of all three SOC groups – likely linked to the fact that they are the SOC group least likely to be affected by IR35 reforms – confidence still decreased from 14.9 in Q2 2021 to -12.8 this quarter.
Freelancer confidence indices for the UK economy over the next three months
Freelancers were asked to identify their confidence levels for future relative to current performance in one of 5 categories comprising: more confident, slightly more confident, as confident, slightly less confident, and a lot less confident. The confidence index is created by scoring each of five answers with 100, 50, 0, -50 and -100 respectively and then taking the weighted average score for the sample. The weighted average is based on the relative size of freelancers in the labour market in 2020.
Freelancers’ confidence in the UK economy over the next 12 months echoes their confidence for the next three months. Again, all three SOC groups reported significant decreases in confidence with all now reporting negative scores this quarter despite positive confidence across the board in Q2 2021.
Average confidence in the UK economy over the next 12 months now stands at -13.2, a significant decrease from 22.8 in Q2 2021.
SOC1 managerial freelancers saw the greatest decrease, falling sharply from 43.5 in Q2 2021 to -14.7 this quarter whilst SOC2 professional freelancers also experienced a decrease compared to last quarter (decreasing from 21.1 in Q2 2021 to -17.1 this quarter).
Although SOC3 associate professional and technical freelancers saw the smallest decrease, with confidence reducing from 11.5 in Q2 2021 to -8.7 this quarter, this still represents a sizeable drop.
Overall, freelancers’ confidence in the UK economy over the next 12 months closely aligns with the 3-month confidence findings – significantly decreasing this quarter after rising to record levels between Q1 and Q2 2021. This could be attributed to the impact of IR35 reforms on the self-employment sector but also growing concerns over labour shortages caused by the pandemic and Brexit, as seen by the HGV driver crisis, combining to reduce freelancers’ confidence in the UK economy.
Freelancer confidence indices for the UK economy over the next 12 months
Freelancers were asked to identify their confidence levels for future relative to current performance in one of five categories comprising: more confident, slightly more confident, as confident, slightly less confident, and a lot less confident. The confidence index is created by scoring each of five answers with 100, 50, 0, -50 and -100 respectively and then taking the weighted average score for the sample. The weighted average is based on the relative size of freelancers in the labour market in 2020.
Freelancer day rates have increased dramatically across the board, with the average day rate charged by freelancers over the last three months now standing at £537. This represents the highest average day rate charged by freelancers since the establishment of the Confidence Index in 2014 and can be attributed to the impact of the IR35 reforms, with some freelancers reporting in our latest assessment on the impact of IR35 that they have two day rates, one for inside IR35 work and one for outside IR35 work.5 With 36 per cent of freelancers now caught inside IR35 since the changes6, it is perhaps unsurprising that freelancers are now choosing to charge higher day rates to cover associated costs of operating inside IR35 such as having to cover Employer’s National Insurance, and where applicable, the Apprenticeship Levy.
The increase in day rates was driven by significant increases in all three SOC groups, but particularly SOC1 managerial freelancers where day rates have increased by £205 since Q2 2021 and now stand at £656, the highest charged by this SOC group since Q3 2019.
SOC2 professional freelancers also saw an increase in their day rates, charging, on average, an extra £86 a day compared to Q2 2021 with average day rates now standing at £562.
With SOC3 associate professional and technical freelancers less likely to be impacted by the changes to IR35, you could expect their day rates to remain largely unaffected by the reforms. In fact, day rates have increased by an average of £101 compared to Q2 2021, now standing at £393 for this quarter – the highest day rate charged by this group since Q2 2017.
Overall, day rates have increased dramatically since Q2 2021 as freelancers seek to mitigate the impact of IR35 changes and the associated costs whilst also recovering from the impact of the pandemic.
Average day rates charged by freelancers over the last three months
The weighted average is based on the relative size of freelancers in the labour market in 2020.
The majority (51%) of freelancers predict an increase in their day rates over the next 12 months whilst a further 34 per cent forecast a decrease and 14 per cent predict no change. SOC1 managerial and SOC3 associate professional and technical freelancers were more likely to predict an increase (56%) compared with SOC2 professional freelancers (43%).
Freelancers now expect their day rates to increase by an average of 1.9 per cent over the next 12 months which represents a significant decrease from last quarter, where the average predicted increase was 8.7 per cent. The fact that day rates have increased across the board for freelancers over the last quarter, as we saw previously, may explain the smaller expected increase predicted by freelancers.
Whilst last quarter all three SOC groups were predicting increases in their expected day rates over the next12 months, this quarter just SOC1 managerial freelancers and SOC3 associate professional and technical freelancers now predict an increase of 8.0 per cent and 1.0 per cent respectively.
SOC2 professional freelancers, on the other hand, now forecast a decline in their expected day rates over the next year, with the predicted figure now standing at -1.4 per cent.
Freelancer day rate expected change over the next 12 months
The weighted average is based on the relative size of freelancers in the labour market in 2020. Due to rounding percentages may not total to 100.
Freelancer capacity utilisation has increased across all three SOC groups to produce the lowest average number of weeks not worked since prior to the pandemic in Q4 2019, now standing at 3.1 weeks.
This was in-part driven by SOC1 managerial freelancers who experienced a fall in the average number of weeks without work from 3.8 weeks in Q2 2021 to 3.0 this quarter.
In addition, SOC2 professional freelancers also saw a decrease in the number of weeks not worked, decreasing from 3.4 in Q2 2021 to 2.9 this quarter. Similarly, SOC3 associate professional and technical freelancers reduced their number of weeks not working from 3.9 in Q2 2021 to 3.4 this quarter.
Overall, it remains encouraging that freelancers are working more and increasing their average day rates despite the impact of IR35 reforms and continuing impact of the pandemic on confidence in both their businesses and the wider economy.
Freelancers’ spare capacity: Number of weeks not working per quarter
The weighted average is based on the relative size of freelancers in the labour market in 2020.
With a combination of increased day rates and increased freelancer capacity utilisation, freelancers’ average quarterly earnings have also seen a large increase, with average earnings standing at £24,606 this quarter – the highest reported figure since Q4 2018 and driven by increases across all three SOC groups.
SOC1 managerial freelancers have seen the largest increase to their average quarterly earnings, rising to £30,229 this quarter from £21,150 in Q2 2021 – and now representing the highest reported figure for this SOC group since Q3 2019.
Similarly, SOC2 professional freelancers also experienced an increase to their average quarterly earnings, increasing from £22,664 in Q2 2021 to £28,000 this quarter which now represents the highest average quarterly earnings for this SOC group since Q4 2019.
SOC3 associate professional and technical freelancers experienced a similar increase, jumping from £13,368 last quarter to £17,945 in Q3 2021 – the highest figure for this SOC group since Q3 2017.
The rise in freelancers’ average quarterly earnings can be attributed to the fact that freelancers have experienced increases in both their day rates and in their capacity utilisation – now earning more and working more.
Freelancers’ average quarterly earnings
Employee earnings are based on ONS data on gross weekly earnings by employees. The weighted average is based on the relative size of freelancers in the labour market in the corresponding year. *Employee earnings are based on Office for National Statistics (ONS) data on gross weekly earnings by employees from the provisional 2020 Annual Survey of Hours and Earnings, November 2020, the revised 2019 Annual Survey of Hours and Earnings, October 2020, the revised 2018 Annual Survey of Hours and Earnings, October 2019, the revised 2017 Annual Survey of Hours and Earnings, October 2018, the revised 2016 Annual Survey of Hours and Earnings, October 2017 and the revised 2015 Annual Survey of Hours and Earnings, October 2016 respectively.
The proportion of freelancers who expect their input prices to go up over the next 12 months has increased since Q2 2021, with 74 per cent of freelancers now predicting an increase compared to 68 per cent last quarter.
This is largely driven by the majority (79%) of SOC2 professional freelancers predicting an increase in input costs over the next 12 months.
Similarly, the majority (76%) of SOC1 managerial freelancers also forecast an increase in input costs over the next year and 67 per cent of SOC3 associate professional and technical freelancers predict an increase to input costs.
A further 17 per cent predict no change in input costs over the next year whereas one in ten (10%) freelancers actually forecast a decrease in input costs for the next 12 months which is largely driven by 16 per cent of SOC3 associate professional and technical freelancers predicting a decrease in costs.
Looking at the expected change, freelancers are now forecasting an increase of 12.4 per cent in input costs in the coming year which represents a small increase compared to Q2 2021 where the figure stood at 11.1 per cent.
Freelancer input cost change over the next 12 months
The weighted average is based on the relative size of freelancers in the labour market in 2020. Due to rounding percentages may not total to 100.
Just under one in three (30%) freelancers are now incurring business debt in Q3 2021, a decrease from Q2 2021 where 38 per cent of freelancers reported incurring business debt. This reduction comes after a 41 per cent increase in freelancers experiencing business debt between Q1 and Q2 2021, with fewer freelancers now reporting business debt this quarter compared to last quarter.
However, the proportion of freelancers accruing debt via credit cards issued in the name of self-employed businesses has increased compared to Q2 2021 (13% in Q2 2021 to 19% this quarter).
Similarly, debt accrued via business loans from a commercial bank has also increased from last quarter, increasing from 10 per cent in Q2 2021 to 14 per cent this quarter.
Encouragingly, the number of freelancers reporting that they have no business debt this quarter (67%) represents a small increase on last quarter (59%).
Freelancer business debt
Over the last few quarters, job-related stress levels have been decreasing quarter on quarter as we slowly emerged out of the pandemic restrictions, decreasing from 6.00 in Q4 2020 to 5.77 in Q1 2021 and in turn decreasing to 5.58 in Q2 2021. This quarter, however, we now see job-related stress levels returning to levels seen at the height of the pandemic. In Q3 2021, freelancers now report that their average job-related stress level is 5.87 (on a ten-point scale where 0 is not at all stressed and 10 is extremely stressed), which matches the figure seen in Q2 2020 – the onset of the pandemic.
The increase in job-related stress is largely driven by SOC2 professional freelancers (5.66) and SOC3 associate professional and technical freelancers (6.08) (up from 5.35 and 5.61 in Q2 2021 respectively).
On the other hand, SOC1 managerial freelancers reported similar job-related stress this quarter (5.88) compared to Q2 2021 (5.87).
Job satisfaction has decreased slightly from 5.85 in Q2 2021 to 5.68 this quarter (on a 10-point scale where 0 is not at all satisfied and 10 is extremely satisfied).
This decrease is largely driven by SOC2 professional and SOC3 associate professional and technical freelancers reporting decreases in job satisfaction. SOC 2 professional freelancers saw a drop from 5.84 in Q2 2021 to 5.71 this quarter and SOC3 associate professional and technical freelancers saw their job satisfaction decrease from 6.16 in Q2 2021 to 5.70 this quarter.
SOC1 managerial freelancers, however, actually reported a small increase in job satisfaction from 5.37 in Q2 2021 to 5.63 this quarter.
Overall, job satisfaction has decreased and has now returned to lower levels after a period of stagnation between Q1 and Q2 2021 (5.88 and 5.85 respectively) and echoes the frustrations freelancers have reported as a result of the IR35 changes – with reports of reduced control over contracts and how they operate.7
As the impact of the government’s IR35 reforms start to take hold, freelancer confidence has slumped to negative levels yet again. In fact, worries around changes to government tax policy dominate the minds of freelancers, with all three SOC groups ranking the factor as either their top or second most important concern.
Whilst it is positive to see record increases in day rates and quarterly earnings, as well as a return to pre-pandemic levels of freelancer capacity utilisation, more still needs to be done to help freelancers during the UK’s post lockdown recovery. IR35 changes are materially holding up the country’s freelance workforce, and without government clearing up the confusion and recognising the damaging impact of the reforms, freelancers will continue to have a negative outlook.
Appendix
Mission Statement
IPSE’s Confidence Index is a quarterly report that tracks the business performance and economic outlook of freelancers across the UK. It is the only established index of its kind, using rigorously tested methodology and a representative sample of the freelance sector.
The index was created both to inform policy on freelancers and to ensure that their vital contribution is understood and recognised. The aim is for the Confidence Index to be the authoritative indicator used by policymakers at the heart of industry and government.
The sample
The quarterly Confidence Index report for Q3 2021 was compiled from 754 IPSE and PeoplePerHour members who replied to an online survey. The survey is conducted every quarter. In Q3 2021, the survey composition of respondents was: 30 per cent female and 69 per cent male, an average age of 49, have been freelancing for an average of 12.1 years and are highly educated – 36 per cent have a highest qualification at the postgraduate degree level while 53 per cent have a highest qualification at the undergraduate degree level.
References
1. OBR, Economic and fiscal outlook - October 2021, 2021
2. Deloitte, Consumer Tracker Q2, 2021
3. IPSE, Lockdowns and support gaps: Counting the cost of the pandemic on self-employment, 2021
4. IPSE, Taking stock: Assessing the impact of IR35 reforms in the private sector, 2021
5. IPSE, Taking stock: Assessing the impact of IR35 reforms in the private sector, 2021
6. IPSE, Taking stock: Assessing the impact of IR35 reforms in the private sector, 2021
7. IPSE, Taking stock: Assessing the impact of IR35 reforms in the private sector, 2021
Defining freelance status
Freelancers are a sub-section of the wider self-employed workforce. For the purposes of this report, the category ‘freelancer’ includes the groups with the highest skill levels, the Standard Occupational Classification (SOC) Major Groups 1 - 3:
Managers, directors and senior officials
Individuals who have a significant amount of knowledge and experience of the production processes and service requirements associated with the efficient functioning of organisations and businesses (e.g. managers and proprietors in agriculture related services; transport and logistics; and health and care services).
Professional occupations
Individuals who have a degree or equivalent qualification, with some occupations requiring postgraduate qualifications and/or a formal period of experience-related training (e.g. professionals in science, research, engineering and technology; health; teaching and education; business, media and public service).
Associate professional and technical occupations
Individuals who have a high-level vocational qualification, often involving a substantial period of full-time training or further study. Some additional task-related training is usually provided through a formal period of induction (e.g. health and social care associate professionals; protective service occupations; culture, media and sports occupations).
Acknowledgements
IPSE would like to thank Dr Samuel Vigne, Professor of Finance at LUISS University for their support in the data analysis.
The report was written by Joshua Toovey, Senior Research and Policy Officer at IPSE.
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