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 Q4 2021
Top factors enhancing business performance in Q4 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 emergence of the Omicron variant, the mounting threat of restrictions being implemented in the new year and little sign of government support in the wake of rising infections, freelancers could be expected to be less confident in their own businesses in Q4 2021.
In fact, freelancers’ confidence in their own businesses for the next three months has fallen dramatically from last quarter, decreasing from -2.4 in Q3 2021 to -11.0 this quarter.
Looking at freelancers’ confidence in their own businesses over the next three months more closely reveals that all three SOC groups have experienced decreases, with all three SOC groups now in negative territory.
SOC1 managerial freelancers experienced the largest decrease, falling from 7.5 in Q3 2021 to -11.5 this quarter, returning to negative levels after two successive quarters of positive territory in Q2 and Q3 2021.
SOC2 professional freelancers reported the second largest decrease to confidence in their own businesses over the next three months, falling from -6.0 in Q3 2021 to -15.7 this quarter.
The decrease in SOC1 managerial and SOC2 professional freelancers’ confidence in their own businesses can be largely attributed to the fact that these two groups are most likely to be affected by the IR35 reforms in the private sector. Introduced in April 2021, these reforms have resulted in freelancers now having to contend with the unscrupulous practices of the unregulated umbrella market, reduced earnings for those now considered inside IR35 and a more complex tax system.1
SOC3 associate professional and technical freelancers also experienced a decrease in confidence from last quarter, falling from -5.3 in Q3 2021 to -6.3 this quarter.
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 2021.
Last quarter, freelancer business confidence for the next 12 months decreased from 13.3 to -2.6 between Q2 2021 and Q3 2021, largely driven by significant decreases in business confidence amongst SOC2 professional and SOC3 associate professional and technical freelancers. This quarter, average 12-month business confidence has further decreased from -2.6 in Q3 2021 to -10.5 this quarter, driven by a sharp decline in confidence from SOC1 managerial freelancers (falling from 8.8 in Q3 2021 to -13.0 this quarter).
In line with the three-month business confidence levels, all three SOC groups have experienced decreases in their 12-month confidence levels since Q3 2021.
SOC2 professional freelancers experienced the second largest decrease in confidence for the next 12 months, falling from -13.2 in Q3 2021 to -17.6 this quarter.
SOC3 associate professional and technical freelancers also reported a fall in business confidence over the next 12 months, decreasing from 0.0 in Q3 2021 to -2.3 this quarter and falling into negative territory for the first time since Q3 2020.
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 2021.
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 reveals that government tax policy relating to freelancing remains the top factor negatively affecting freelancers’ business performance, cited by 70.7 per cent of freelancers this quarter compared to 70.8 per cent in Q3 2021.
This can be largely attributed to the fact that the IR35 reforms in the private sector continue to impact on the two highest skilled SOC groups, with both SOC1 managerial and SOC2 professional freelancers ranking government tax policy relating to freelancing as the greatest factor negatively affecting their business (76.9% and 83.7% respectively).
Government regulation relating to hiring freelancers was the second most selected factor across all freelancers, cited by 63.9 per cent of freelancers and driven by small increases in both SOC1 managerial (65.4%) and SOC2 professional freelancers (81.8%) reporting this as a negative influencer compared to Q3 2021 (62.5% and 80.8% respectively).
The Coronavirus pandemic has remained as the third most selected detrimental factor for freelancers, with 62.7 per cent of freelancers citing this factor as a negative determinant this quarter compared to 63.0 per cent in Q3 2021. With almost two-thirds of freelancers citing it as a negative influencer, it is clear that the pandemic continues to impact on freelancers’ business performance in the final quarter of 2021. In fact, the Coronavirus pandemic was the top factor this quarter for SOC3 associate professional and technical freelancers (65.1%), with this group most likely to be unaffected by the introduction of IR35 reforms in the private sector.
Further analysis of SOC groups reveals that the state of the UK economy was cited by SOC3 associate professional and technical freelancers (59.4%) as the second greatest factor hindering their freelance business performance and also cited by SOC1 managerial freelancers (61.5%) as the third most detrimental factor.
Interestingly, with new customs rules due to be implemented from January 20222 and concerns over rising prices of goods3, Brexit was cited by SOC3 associate professional and technical freelancers (55.6%) as the third most detrimental factor affecting business performance, returning to the top three negative determinants of any SOC group for the first time since Q2 2020.
Now looking at the positive factors enhancing freelancers’ business performance this quarter reveals that whilst all the negative factors were external, the factors enhancing freelancers’ business performance remain largely internal.
The importance of brand value and reputation in the market continues to be the top factor positively influencing freelancers’ business performance, with 63.9 per cent selecting this quarter compared to 60.0 per cent in Q3 2021.
Innovation in terms of the services offered to clients remains as the second most positively enhancing factor for freelancers’ business performance this quarter, with 54.8 per cent of freelancers citing this factor this quarter compared to 51.1 per cent in Q3 2021.
In addition, the adoption of flexible working practices by organisations was selected as the third most enhancing factor to freelance businesses, with 52.8 per cent of freelancers selecting this and largely driven by SOC2 professional freelancers (59.3%) citing this as their second most enhancing factor.
In terms of breakdown across SOC groups, SOC1 managerial and SOC2 professional freelancers both cited the importance of brand value and reputation in the market as the most enhancing factor for their business performance (73.1% and 63.0% respectively).
On the other hand, SOC3 associate professional and technical freelancers cited innovation in terms of better processes and operations as their most enhancing factor to their business performance, with 60.7 per cent of freelancers selecting this.
61.5 per cent of SOC1 managerial freelancers selected innovation in terms of better processes and operations – their second most enhancing factor for business performance whereas 63.9 per cent of SOC3 associate professional and technical freelancers cited the importance of brand value and reputation in the market – their second most enhancing determinant.
Innovation in terms of the services offered to clients was selected by 61.5 per cent of SOC1 managerial freelancers and 46.3 per cent of SOC2 professional freelancers as having a positive influence on their freelance business.
SOC3 associate professional and technical freelancers, however, cited the targeting of new markets as their third most enhancing factor on business performance, with 54.1 per cent of freelancers selecting this.
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 reports that the UK economy grew above its pre-pandemic size for the first time in November 20214, confidence in the economy is ultimately being affected by concerns around the rising cost of living5 combining with fears about rising energy prices and a planned increase to national insurance and dividends in April 2022.
It is therefore perhaps unsurprising that freelancers’ confidence in the UK economy over the next three months, much like confidence in their own businesses, has decreased compared to last quarter, falling from -16.3 in Q3 2021 to -23.7 this quarter and driven by decreases in all three SOC groups.
SOC1 managerial freelancers experienced the biggest decrease in confidence for the next three months, falling from -16.4 in Q3 2021 to -25.9 this quarter. This represents the lowest recorded index score for this group since Q3 2020 – the height of the pandemic and lockdown restrictions.
SOC2 professional freelancers also saw a decrease in confidence for the UK economy over the next three months compared to last quarter, falling from -19.9 in Q3 2021 to -28.9 this quarter.
Similarly, SOC3 associate professional and technical freelancers reported a decrease in confidence in the UK economy for the next three months, decreasing from -12.8 in Q3 2021 to -17.4 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 2021.
When looking at freelancers’ confidence in the UK economy over the next 12 months, the results reveal a similar picture to our findings on three-month confidence. Following a significant decrease in freelancer confidence in the UK economy between Q2 2021 and Q3 2021 (falling from 22.8 to -13.2), confidence in the UK economy for the next 12 months has again fallen from -13.2 in Q3 2021 to -19.1 this quarter.
SOC1 managerial freelancers reported the largest decrease, falling from -14.7 in Q3 2021 to -37.0 this quarter, representing the lowest confidence index score for this group since Q3 2020.
Moreover, SOC2 professional freelancers also experienced a decrease in confidence in the UK economy for the next 12 months, decreasing from -17.1 in Q3 2021 to -20.4 this quarter.
On the other hand, SOC3 associate professional and technical freelancers actually saw a small increase, with confidence increasing from -8.7 in Q3 2021 to -6.8 this quarter.
Overall, freelancers’ confidence in the UK over the next 12 months largely aligns with the 3-months confidence index findings, with confidence decreasing again this quarter after significantly decreasing between Q2 2021 and Q3 2021.
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 2021.
Freelancer day rates have continued rising across the board, with the average day rate charged by freelancers over the last three months of 2021 standing at £584, increasing from £535 in Q3 2021. This represents the highest average day rate charged by freelancers since the establishment of the Confidence Index in 2014 and follows a significant increase between Q2 2021 and Q3 2021 (£397 in Q2 2021 to £535 in Q3 2021). The record high average day rates charged by freelancers can be attributed to the need to cover rising costs, not least the rising cost of living and prices of goods but also due to the impact of IR35 reforms in the private sector – with freelancers increasingly operating within IR35 and having to charge higher day rates to cover outlays such as Employer’s National Insurance, and where applicable, the Apprenticeship Levy.
The increase in the average day rates charged by freelancers was driven by increases across all three SOC groups. Notably, SOC1 managerial freelancers have experienced the largest increase in average day rates charged over the last three months, with average day rates increasing by £142 since Q3 2021 and now standing at £798, the highest charged by this group since Q2 2015. This £142 increase this quarter from Q3 2021 follows a £205 increase between Q2 2021 and Q3 2021.
SOC2 professional freelancers have seen a small increase in their day rates, charging, on average, an extra £9 a day compared to Q3 2021, with average day rates now standing at £582 for this group. This represents the highest average day rate charged by this group since the establishment of the Confidence Index in 2014.
Similarly, SOC3 associate professional and technical freelancers have also seen a small increase in their average day rates charged over the last three months, increasing by £8 since Q3 2021 and now standing at £582. This represents the highest average day rate charged by this group since Q2 2017.
Overall, day rates have again increased to a record high level following a significant increase between Q2 2021 and Q3 2021 as freelancers seek to mitigate rising costs associated with IR35 reforms and increases in the price of goods, energy and rising inflation.
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 2021.
The majority of freelancers (58%) forecast an increase in their day rates over the next 12 months whereas a further 32 per cent predict a decrease and ten per cent expect no change.
SOC3 associate professional and technical freelancers were more likely to predict an increase in their day rates over the next 12 months, with 68 per cent of SOC3 associate professional and technical freelancers forecasting an increase compared to 56 per cent of SOC1 managerial freelancers and 47 per cent of SOC2 professional freelancers.
Freelancers now expect their day rates to increase by an average of 3.6 per cent over the next 12 months, which represents an increase from last quarter, where the average predicted increase to day rates was 1.9 per cent.
This predicted increase is largely driven by SOC3 associate professional and technical freelancers anticipating an increase of 12.1 per cent in their day rates.
On the other hand, SOC2 professional freelancers and SOC1 managerial freelancers now forecast a decline in their expected day rates over the next year, anticipating a decrease of 2.6 per cent and 0.7 per cent respectively.
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 2021. Due to rounding percentages may not total to 100.
Freelancer capacity utilisation has decreased slightly since Q3 2021, falling from 3.1 weeks in Q3 2021 to 3.0 weeks this quarter, producing the lowest average number of weeks without work since Q4 2019 – prior to the pandemic.
This decrease to spare capacity was largely driven by SOC2 professional freelancers who experienced a fall in the average number of weeks without work from 2.9 weeks in Q3 2021 to 2.3 weeks this quarter.
On the other hand, SO1 managerial freelancers reported a small increase in spare capacity, increasing from 3.0 weeks without work in Q3 2021 to 3.3. weeks this quarter.
SOC3 associate professional and technical freelancers reported that their spare capacity had remained the same as Q3 2021, standing at 3.4 weeks without work for both quarters.
Overall, the decreasing trend seen with spare capacity since the height of the pandemic in Q2 2020 (5.5. weeks without work) has once again continued this quarter, with freelancers’ spare capacity returning to pre-pandemic levels and ultimately working more.
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 2021.
The fact day rates are increasing alongside decreasing spare capacity has resulted in freelancers’ average quarterly earnings rising from £25,551 in Q3 2021 to £29,574 this quarter, the highest reported quarterly earnings figure since prior to the EU referendum (Q2 2016).
This increase has been driven by rises in earnings across all SOC groups, but notably propelled by the increase reported by SOC1 managerial freelancers where quarterly earnings have increased from £30,229 in Q3 2021 to £39,512 this quarter. This represents the highest average quarterly earnings reported by this SOC group since the establishment of the Confidence Index in 2014.
SOC2 professional freelancers have also increased their average quarterly earnings on the last quarter, rising from £28,712 in Q3 2021 to £31,676 this quarter – also representing the highest average quarterly earnings reported by this SOC group since the establishment of the Confidence Index in 2014.
In addition, SOC3 associate professional and technical freelancers have increased their average quarterly earnings, rising from £19,694 in Q3 2021 to £21,413 this quarter – the highest average quarterly earnings reported by this SOC group since Q3 2017.
Overall, freelancers are now reporting that their quarterly earnings have reached their highest point since prior to the EU referendum which 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. However, freelancers are also having to contend with rising costs such as rising energy and food prices and having to increasingly cover the liabilities of working within IR35 since the introduction of the reforms in the private sector in April 2021.
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 2021 Annual Survey of Hours and Earnings, October 2021 the revised 2020 Annual Survey of Hours and Earnings, October 2021, 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 majority of freelancers (81%) now expect their input costs to increase over the next 12 months – rising from 74 per cent in Q3 2021 – and which can be attributed to the rising costs experienced throughout the UK and the increasing need to cover the related costs of working within IR35 for many freelancers.
The increase in expected input costs reported for the next 12 months is largely driven by the majority of SOC3 associate professional and technical freelancers (82%) expecting an increase in input costs – rising from 67 per cent in Q3 2021.
Similarly, the majority of SOC2 professional freelancers (80%) also forecast an increase in input costs over the next year (slightly rising from 79 per cent in Q3 2021) whilst 79 per cent of SOC1 managerial freelancers expected an increase in input costs for the coming year.
A further 12 per cent of freelancers predict no change in input costs over the next year whereas seven per cent actually forecast a decrease in input costs for the next 12 months which is largely driven by ten per cent of SOC3 associate professional and technical freelancers predicting a decrease in costs.
Looking at the expected change, freelancers are now predicting an increase of 14.2 per cent in input costs in the coming year which represents a small increase on Q3 2021 (12.4%).
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.
This quarter, almost two-fifths of freelancers (38%) are now inurring business debt with 16 per cent of freelancers accruing debt via credit cards issued in the name of their self-employed business whilst a further nine per cent are accruing debt via business loans from a commercial bank.
A further four per cent of freelancers reported that they have accrued debt via loans from government agencies.
Concerningly, the number of freelancers reporting that they have no business debt this quarter (59%) represents a decrease on last quarter (67%).
Freelancer business debt
This quarter, job-related stress levels have fallen to their lowest levels since Q3 2019, falling from 5.87 in Q3 2021 to an average of 5.50 this quarter (on a ten-point scale where 0 is not at all stressed and 10 is extremely stressed).
The decrease in job-related stress is largely driven by SOC1 managerial freelancers reporting a fall from 5.87 in Q3 2021 to an average of 5.12 this quarter.
SOC3 associate professional and technical freelancers also experienced a decrease in job-related stress levels, falling from an average of 6.08 in Q3 2021 to 5.74 this quarter.
Similarly, SOC2 professional freelancers reported a slight decrease in their job-related stress levels, falling from 5.66 in Q3 2021 to 5.51 this quarter.
Overall, job-related stress levels have fallen since Q3 2021 and now stand at their lowest levels since Q3 2019 at an average of 5.50.
Job satisfaction has increased slightly from 5.68 in Q3 2021 to 5.81 this quarter (on a 10-point scale where 0 is not at all satisfied and 10 is extremely satisfied).
This increase in job satisfaction is largely driven by SOC1 managerial freelancers reporting an increase to job satisfaction, rising from 5.63 in Q3 2021 to 6.32 this quarter.
On the other hand, SOC2 professional freelancers have experienced a decrease in their job satisfaction since Q3 2021, falling from 5.71 in Q3 2021 to 5.62 this quarter.
In addition, SOC3 associate professional and technical freelancers have also reported a decrease in their overall levels of job satisfaction, decreasing from 5.70 in Q3 2021 to 5.66 in Q4 2021.
Overall, job satisfaction has increased since Q3 2021, largely as a result of SOC1 managerial freelancers reporting a significant increase in their overall levels of job satisfaction.
As the economy slows down following the cost-of-living crisis and concerns around the Omicron variant towards the end of 2021, freelancer confidence in the UK economy has decreased significantly yet again. In fact, with the vast majority of self-employed workers predicting rising business costs over the next 12 months, it is clear that the financial hardship that freelancers faced during lockdown restrictions is only going to continue post pandemic.
While it is positive see quarterly earnings rise to their highest level since prior to the EU referendum, as well as a continued fall in the level of freelancer capacity utilisation, the impact of IR35 on the sector means that self-employment remains in a fragile state. As a result of clients implementing blanket bans and assessments, self-employed workers are now covering the associated costs of operating through an umbrella company and ultimately held back from reaching pre-pandemic levels of growth.
If the sector is going to recover, then the government needs to clear up the confusion around IR35 and solve the cost-of-living crisis. Both issues are derailing the industry and with National Insurance and dividend tax set to increase in April 2022, self-employed workers are set to face another year of financial hardship and uncertainty.
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 Q4 2021 was compiled from 560 IPSE and PeoplePerHour members who replied to an online survey. The survey is conducted every quarter. In Q4 2021, the survey composition of respondents was: 21 per cent female and 76 per cent male, an average age of 49, have been freelancing for an average of 11.8 years and are highly educated – 34 per cent have a highest qualification at the postgraduate degree level while 51 per cent have a highest qualification at the undergraduate degree level.
References
1. Taking stock: Assessing the impact of the IR35 reforms in the private sector, 2021
2. House of Commons Library, New customs rules for trade with the EU, 2022
3. https://www.bbc.co.uk/news/business-60050699 Accessed 28/01/22
4. House of Commons Library, Economic update: Economy was back to pre-pandemic level before Omicron, 2022
5. https://www.bbc.co.uk/news/business-59316544 Accessed 29/01/22
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. IPSE would also like to thank PeoplePerHour for their continued support of the FCI.
The report was written by Joshua Toovey, Senior Research and Policy Officer at IPSE.
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