It’s time we stopped treating the self-employed as an afterthought

We’re all familiar with the furlough scheme that supported nine million jobs at its peak, cost about £70 billion and is credited with staving off a catastrophic rise in unemployment. Less often remarked-upon is its (not so) little sister, the self-employment income support scheme. At more than £25 billion, it was also pretty pricey. It supported nearly three million self-employed workers. Yet, as a new report published last week by the Centre for Economic Performance at the London School of Economics shows, the self-employed have not fared well over the past couple of years. Even by the end of this summer they were still reporting incomes well down on pre-pandemic levels, with many saying that they were struggling financially. Even by this September nearly 30 per cent were reporting problems paying bills and struggling to afford essentials.

This is not a blip, nor is it of mere historic interest, nor is it a small issue. On the eve of the pandemic, the self-employed made up about one in seven of the workforce, double the proportion of a generation ago. Growth in self-employment accounted for a third of all the employment growth in the decade after the financial crisis. And, as work by my colleagues at the Institute for Fiscal Studies has shown, while employees have suffered from stagnation in their earnings, the self-employed have done much worse. Their incomes fell rapidly in the years preceding the pandemic.

The past year demonstrated once again the risks that people take when they take the plunge into self-employment. It also showed just how poorly our welfare state apparatus is designed for supporting this big and growing group.

That huge sum of £25 billion was very poorly spent. Many of the self-employed were able to claim much more in support than they had lost in earnings. They did very well, indeed, thank you very much, at our expense. But many more — the newly self-employed, those with other earnings, those with high income from self-employment — were unable to claim anything at all. Even among those who were entitled to support, the complexity of the scheme left many uncertain as to their eligibility and put off from claiming. The details of the scheme changed frequently. The LSE research suggests that uncertainty and confusion over eligibility was the main reason for not applying at all. Contrast that with the relative simplicity of the main furlough scheme.

The problem was not the total amount of cash support available. The amount spent per self-employed person was more than the amount spent per employee. It was that government had no way of distributing the cash fairly and appropriately.

Part of the problem is historic. It goes right back to the 1940s. Beveridge did not include the self-employed in his system of social insurance. Only since 2016 have they become entitled to state pensions on the same basis as everyone else. Their treatment by the means-tested benefit system has always been difficult. One of the changes made over the period of the pandemic was the lifting of the so-called minimum income floor within universal credit. That has now returned. It means that the self-employed are treated as though they are working at least 30 hours at the minimum wage, whatever their actual income.

Other recent changes have also treated the self-employed differently. They are not automatically enrolled into a pension, unlike the rest of us employees. Indeed, while we have all been brought into pensions through automatic enrolment, pension coverage among the self-employed has collapsed. Over the 20 years between 1998 and 2018, the proportion making contributions to a pension fell from nearly 50 per cent to only 16 per cent. Swift rises in the minimum wage have passed them by, too. They are becoming less like the rest of us.

They are also unlike the rest of us in the much more generous tax treatment they enjoy. They pay lower rates of national insurance contributions, and no employer NICs are payable by the companies that hire them. If they incorporate, as they do in increasingly large numbers, then the tax breaks are more valuable still. The new health and social care levy will serve only to exacerbate these differences.

But this isn’t a good deal for any of us. Lower tax payments by millions of self-employed mean higher tax payments by employees. For companies, given lower tax payments and less employment legislation, the incentives to class contractors as self-employed are strong. The complexity of determining whether someone is an employee for tax purposes is vast. And the lower tax payments are not in some sense compensation for lower benefits. State pensions are now finally aligned and there is essentially no difference in the benefits available to the self-employed and employees if they become unemployed or disabled. While support during the pandemic was scattergun, it was actually more expensive on average than that provided to employees.

The pandemic has shown us the power of the state to intervene in hitherto unimaginable ways in supporting employees. But it has also shown us that the self-employed remain something of an inconvenient afterthought. We need a new settlement that recognises the increasing role of self-employment in the economy and society, a settlement that treats all fairly, irrespective of whether they are formally employees or self-employed. It should involve a levelling up in tax liabilities and an end to the absurdity of fiscal incentives that favour one group over another. It should bring in automatic enrolment for the self-employed. It requires an urgent review of what went wrong over the past 18 months and a clear strategy for how to deal with a similar situation in the future. We can’t go on treating one in seven of the workforce as somewhere between an afterthought and an inconvenience.

This article was first published in The Times and is reproduced here with kind permission.