Comment Blog 4 June, 2019

Making Universal Credit fit for the future of work

The relationship between self-employment and social security has never been straightforward, and the overhaul of the benefits system – coinciding with the rapid rise of self-employment – has brought difficult questions to the fore. Trade-offs exist between creating a simple system and meeting the needs of a diverse group of people, and helping viable businesses flourish while ensuring unprofitable ones are not propped-up indefinitely. Given one-in-seven people are now self-employed, getting this balance right is key to ensuring Universal Credit (UC) is fit for the future of work.

The scale of the challenge

The rise of self-employment has been a standout feature of the UK labour market in recent years. Since 2001, self-employment has risen by 45 per cent. While many considered this growth to be a recessionary ‘blip’, the 2008-09 recession in fact accentuated a structural shift that was already well underway. 4.8 million people are now self-employed – almost the same size as the public sector.

Those in self-employment are as broad and diverse as the labour market as a whole and, when fully rolled out in 2022, it is estimated that UC will support around 700,000 self-employed claimants a year. Understanding how many self-employed people currently claim UC is more difficult to quantify. Parliamentary questions have failed to provide an answer.

‘Gainfully’ self-employed?

A key challenge facing policymakers is ensuring that UC supports people into self-employment when it is the best route for them to become financially self-sufficient, but does not subsidise businesses that are unlikely to become profitable. Any system must also ensure that underreporting of earnings is not incentivised: in the UK, the self-employed and partnerships have been found to be the largest contributors to the self-assessment tax gap.

UC’s answer to this difficult challenge has been the introduction of the Minimum Income Floor (MIF). This effectively limits the amount of means-tested support which a self-employed claimant can receive, by assuming a level of income equivalent to working at the National Minimum Wage each month. In months were an individual earns over this minimum, their UC entitlement is reduced accordingly. However, this flexibility does not work both ways. Where earnings fall below this level in any given month, an individual’s UC entitlement is not topped up to reach this minimum.

Assuming a certain level of income on a monthly basis does not reflect the realities of work for many self-employed people, whose incomes are likely to fluctuate from month to month. For example, a farmer who produces profits seasonally could receive up to £2,600 less UC than an employee earning the exact same amount over the course of a year. As a result, UC is penalising people based on the volatility, rather than amount, of their income.

As the Works and Pensions Committee put it, rigidly sticking to a monthly reporting system risks “attempting to force square pegs into round holes.” At worst, there have been reports of self-employed people being told they would be better off shutting down their businesses altogether and claiming the UC standard allowance (the equivalent of Jobseeker’s Allowance) . This is at cross-purposes with other government schemes, such as the New Enterprise Allowance, designed to encourage more entrepreneurship. Worse still, for some industries for whom self-employment is the norm, such as construction, or for some people for whom employment isn’t a realistic option, such as those with health conditions, these measures go against the goal of UC to incentivise work.

Ways to reform the MIF to better reflect the realities of self-employment have been proposed. One of the most common suggestions is to allow longer reporting periods of up to one year, for self-employed claimants who receive irregular monthly play. This would be decided by specialist work coaches in jobcentres, and based on evidence of need, such as invoices and accounts.

Alternatively, self-employed claimants could be granted a certain number of ‘grace’ months a year when the MIF does not apply. If a claimant went over the limit of ‘grace’ months, Jobcentre staff could revisit whether the claimant is gainfully self-employed. This would require specialist knowledge and understanding of business, but as the Work and Pensions Select Committee has noted, such knowledge “is beyond the remit of Work Coach training.”

What is clear is that the current system is not fit for purpose, but there are also no easy answers. With the government in listening mode about how best the system can be reformed – earlier this month, Amber Rudd announced important changes to the sanction regime – and the Spending Review quickly approaching, there is an opportunity to think boldly and create a welfare system that supports the way people work in modern Britain.