Policy, pensions and the future of the self-employed

Policy, pensions and the future of the self-employed

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A new Conservative government surging ahead in the polls. A new chancellor champing at the bit to prove his mettle. And one clumsy self-employment policy that undermined it all.

When Philip Hammond tried to raise National Insurance contributions for the self-employed back in Spring 2017, his humiliating climbdown was said to be one of the first – and worst – major budget u-turns of modern times. 

It is also the starting point for a landmark new report commissioned by IPSE and written by leading think tank Demos called Free Radicals: Why self-employment has risen in Britain and how we should support it.

Describing the “political firestorm” ignited by the u-turn, the report’s author Alan Lockey explains how “that infamous episode revealed much more than the growing political muscle of [the self-employed]. For what Hammond perhaps underestimated is that providing for the newly enlarged self-employed workforce is also a public policy challenge of substantial urgency.” The report addresses precisely this challenge.

Too big to ignore

So, where has this pressing policy challenge come from? Well, as IPSE and Demos’s report shows in unarguable detail, the self-employed sector has grown enormously in recent years. From copywriters and construction workers to delivery riders and doctors, there are now almost 4.8 million self-employed people in the UK – approximately 15 per cent of the entire workforce. 

In fact, today there are almost as many self-employed people as those that work in the whole of the public sector. Lockey even goes so far as to say that the rise of self-employment is “arguably the most significant labour market trend of the past two decades”.

The self-employed sector is, essentially, too big to ignore. The problem is, however, that is precisely what the majority of policymakers and industry leaders are trying to do. Or worse, as with the budget debacle, instead of supporting the growing number of self-employed, they have tried to raid them for tax. 

The fact is, as Free Radicals finds: “The worrying truth is that policy has not kept up with self-employment’s move to the mainstream of the British labour market.”

While remote working technology, a desire for freedom and flexibility and a shift in demand have pushed self-employment into the mainstream – the surging slipstream of the labour market – most policymakers still seem to see it as little more than an insubstantial eddy.

And one of the main reasons is that they view “self-employment as an ‘irregular’ or even ‘abnormal’ employment arrangement.”

Burdened by this delusion, they have simply failed to bring the UK’s employment, tax and benefits systems up-to-date. So, as the self-employed sector grows, it pushes more and more at the seams of a creaking, failing system.

Not such a bad gig

The self-employed sector is booming, and although the UK’s tax, employment and benefit systems haven’t kept pace with it, Free Radicals actually finds that at the moment, most people are happy with self-employment.

It’s a sharp contradiction of the prevailing narrative about self-employment: the idea that its rise is being driven by vulnerable workers struggling at the rougher end of the so-called gig economy.

But, as Lockey points out: “Though the two debates – rising self-employment and the emergence of the platform economy – are regularly elided, there is almost no evidence that connects the two trends.”

As IPSE has been saying for some time, the rise in self-employment is actually driven above all by the growth in the number of skilled freelancers.

And, far from struggling in vulnerable work, Free Radicals finds that 80 per cent of the sector “are happy and actively choose to be self-employed.”

What’s more, it’s clear that the idea that most are gig workers forced into self-employment for want of a full-time job is wrong, because 70 per cent of respondents said they are “content to stay in self-employment for the foreseeable future.”

Overall then, self-employment seems to be not such a bad gig after all.

Facing the future

Although most self-employed people are happy with their way of working at the moment, things may not stay so rosy – especially if nothing is done to improve support for the sector. That’s where the real policy challenge arises.

As well as the positive points about how the self-employed see their sector, Free Radicals also uncovered some serious concerns about the future. Researching self-employed attitudes to their sector, Lockey found that many have significant concerns about future financial security. In fact, 46 per cent of self-employed respondents said they were seriously worried about their lack of retirement savings.

It isn’t just pensions either: the report highlighted deep concerns about a whole range of issues, including an ineffective and punitive tax system, over-restrictive government legislation and a general lack of support.

While self-employment has been growing significantly in recent years, then – producing major rewards for the treasury and the economy – Free Radicals also makes clear that there are dark clouds on the horizon.

Unless something is done to bring the UK’s creaking systems up to date for the self-employed, there is a serious risk the sector could slow – that the economy could lose its productivity dynamo just when it needs it most. As the report argues, the self-employed urgently need a new deal.

A new deal for the self-employed

Free Radicals includes a range of recommendations to shape what this new deal should look like. One of the most pressing is its call for a halt to the disastrous changes the government has made to IR35 tax law.

The changes in the public sector have already led to a mass exodus of contractors and freelancers, exacerbating staffing shortages in the NHS and causing major delays to TfL projects and other work right across the public sector. Free Radicals rightly argues against the extension of these hugely damaging changes.

It also recommends a new ‘engagers’ tax’ for businesses using self-employed services. The idea basically addresses concerns about the discrepancy between employee and self-employed taxes (which led to the disastrous attempt to raise National Insurance contributions for the self-employed in the budget last year). It’s an innovative new way of bringing the UK’s creaking tax system up-to-date with the rise of the self-employed, and definitely deserves further consideration.

Another key recommendation – and something IPSE has been calling for – is writing a statutory definition of self-employment into law. Although the rise in self-employment is certainly not being driven by exploited workers in the platform economy, that’s not to say worker exploitation isn’t a problem.

The fact is that a small number of unscrupulous companies are using self-employment to deny workers rights. Defining self-employment in law would allow the government to root out this false self-employment and it would also protect the flexibility and freedom of the legitimately self-employed.

The report also includes several recommendations to address concerns about the lack of support for the self-employed. Perhaps the most significant is the call for far-reaching reform of Universal Credit to make it actually work for self-employed people.

One of the key things here would be extending the Minimum Income Floor exemption from one year to three to account for the length of time it often takes freelancers and the self-employed to get their businesses off the ground.

To address the crucial issue of saving for later life, the report recommends exploring several different ways of improving pension uptake among the self-employed. Perhaps the report’s most radical recommendation is extending pension auto-enrolment to the self-employed. However, a survey by IPSE has found that many self-employed people do not want such a rigid system.

The report also suggests the government should explore the so called ‘sidecar’ model currently being tested by NEST. This model allows people to draw on a ‘rainy day fund’ part of their pension at any time and would give the self-employed the flexibility they need.

Andy Chamberlain, deputy director of policyand public affairs at IPSE, said: “The Free Radicals report is a major step forward for both IPSE and the entire self-employed sector. Radical in its findings and radical in its recommendations, it not only tackles the great policy challenge facing the labour market in 2018; it also goes a long way to founding a new deal and better deal for the self-employed.”

Research